Overview
This publication summarises intelligence from the Bank’s Agents considered by the Monetary Policy Committee at its June meeting. The intelligence was gathered in the six weeks to mid-May. The Agents’ scores published alongside this document generally represent developments over the past three months compared with the same period a year earlier.
Sentiment regarding demand continues to wane across retail, manufacturing, construction and business services, with contacts now not expecting to see a material recovery in demand until 2026. Investment intentions remain subdued but are not quite at the lows seen in previous months. Contacts’ expectations for export sales have weakened as tariffs, shifts in global trade flows and ongoing uncertainty all reduce demand. Tariff uncertainty continues to worry contacts with many still in ‘wait and see’ mode.
Employment intentions remain mildly negative, unchanged from the last round. There is more evidence that recruitment difficulties are easing to towards more normal levels. There is little news on pay settlements. Recent company visits continue to suggest average pay settlements for 2025 of 3.5%–4%.
As anticipated, the combination of cost pressures that came in on 1 April – labour regulations including National Insurance Contributions (NIC) and Extended Producer Responsibility (EPR) regulations – has put pressure on firms to recover them via price increases, but success is mixed. Although pass through of the increased costs to prices is underway, it is more advanced in goods than in consumer services. As well as price increases, contacts continue to report using a combination of measures to mitigate the increased costs including reducing headcount, hours, wage settlements and margins. Inflation in raw materials and imported finished goods is slightly positive, and there is no evidence yet of tariffs impacting supply chain pricing.
Consumer spending
Contacts generally report that consumer confidence remains weak and given this, most expect another weak year with low volume growth. While some contacts report that sales have grown more strongly in the spring given the good weather, it is too early to judge whether this will be sustained.
Supermarkets report slightly positive annual volume growth, with premium lines still growing strongly as customers substitute away from eating out. Retailers report flat volumes on last year – increased footfall is being offset by fewer purchases per customer. The post-pandemic shift in consumer preferences is said to be becoming more permanent, with consumers spending less on furniture, fashion and beauty.
Sales of new and used cars have been broadly flat over the past year. Some contacts speculate that the post-covid trend of maintaining cars for longer and extending leases has become a new norm. Others think that tariffs in the US could lead manufacturers to send more vehicles to the UK, weighing on prices, which could support sales in 2025.
Eating out remains subdued following a weaker than expected Q1 as consumers continue to visit restaurants less often and spend less when they do. More recently, warm weather has improved demand at pubs. Hotels are seeing low growth on a year ago, but the broader picture is mixed, and many bookings continue to be last minute. Demand for overseas holidays continues to grow on last year, while demand for domestic holidays is flat at best.
Investment
Investment intentions seem subdued but broadly stable and not quite at the lows seen in previous months. There are fewer references to significant cuts in the year ahead.
Several uncertainties are weighing on the confidence needed to commit to future investment plans, raising the bar for return on investment and leading to increased scrutiny of capital expenditure plans. Contacts cite fragile demand, trade developments, government tax and labour policies, squeezed profitability and costs of capital goods as factors. One bright spot is that the cost and availability of credit features less in conversations with contacts.
Capacity, automation and artificial intelligence (AI) are mentioned to some extent as a motivation for investment. This is more so in manufacturing and professional services, but also in some consumer-facing businesses. There are considerably fewer major IT infrastructure programmes underway now, although investment in AI, cybersecurity and moves to the cloud, remain.
Trade
Expectations for export sales have softened as tariffs, shifts in global trade flows and ongoing uncertainty impact demand.
Professional and financial services contacts report some slowing in exports of their services as global uncertainty delays decisions on some deals and investments. Tourism from the US and Asia is lower compared to the same period last year, impacting London hotel demand.
Contacts report an easing in the rate of decline in exports of goods to the EU. Growth to the US continues, although this may reflect a temporary boost in March as some companies used inventory to increase US stocks to avoid tariffs. Exports to the Middle East, Africa and Asia are up modestly on a year ago.
Tariff uncertainty continues to concern contacts, and many remain in ‘wait and see’ mode. The most common reported response has been to increase US stock in anticipation of tariffs. Others report they are diversifying export markets, transferring UK production to existing US operations, or pausing exports to the US. Contacts expect weaker global demand and tariff uncertainty to impact further on exports overall. While many anticipate a slight pickup in goods exports to non-US markets, some worry that increased Chinese competition may reduce demand for UK goods.
Business and financial services
Business services contacts report that their clients are managing budgets more closely and delaying spending decisions because of cost pressures and greater uncertainty. Contacts now expect activity to pick up in 2026 with less uptick in 2025 H2.
Price inflation for business services is slowing as is annual growth in the volume of business, owing to domestic and global uncertainty. Demand for audit, advisory and tax services remains strong, supporting professional services revenue growth, and financial market volatility has boosted revenue for investment banks. Restructuring and insolvency activity continues to edge up on the same period last year, particularly in consumer services. Demand for IT services is more mixed, growing for AI and cybersecurity, but slowing for larger projects. Merger and acquisition activity is more subdued owing to higher uncertainty. Recruitment agencies continue to report declining activity as their clients look to cut costs in the face of rising NICs. Demand for construction services remains weak.
Manufacturing and production
Contacts report that increased uncertainty is causing manufacturing output to contract more quickly, compared to the same period last year, than described in previous rounds. Softening in demand is affecting key sectors, notably automotive and metals where contacts are reducing output expectations.
Food and drink producers report flat to falling output growth. Demand for other consumer goods continues to fall as consumers reduce discretionary spend. Overall production of construction products remains down on the same period last year, although it is up a little for housebuilding. In other sectors, uncertainty is reducing orders, exacerbating existing challenges. For example, automotive producers face weak demand for electric vehicles and increased competition from Chinese models. Energy intensive producers face rising costs and loss of market share to overseas competitors; here contacts also note a further reduction in output owing to capacity closure. Output and sentiment remain more positive in defence, aviation and renewable energy.
Construction
Construction output remains modestly down on the same period last year. Uncertainty is weighing more on contacts’ expectations, with any meaningful pickup in output now expected in 2026.
New private commercial development is slowing on last year owing to increased uncertainty, as are publicly funded schemes, where tighter budgets and slow planning processes weigh on output. Industrial development such as datacentres, renewable energy and waste-to-energy schemes continues. The infrastructure sector remains subdued, but water and defence projects are a source of growth. Despite uncertainty, private house building is gradually improving and marginally ahead on last year. Public residential activity remains focused on repair and maintenance. Commercial renovations, including office refurbishments, remains positive. Contacts continue to cite planning, utility connections, and costs relative to expected returns as constraints on future growth.
Corporate credit conditions
Credit supply continues to improve gently, despite recent heightened financial market volatility. Credit demand remains weak due to low capital expenditure but has risen for working capital.
Most contacts report gently improving access to credit supply from banks and non-banks, and increased competition in bank lending across sectors. Lending from private debt markets remains strong.
Demand for credit remains weak. Some firms have already secured all their current funding requirements and refinanced, while others are actively reducing debt. Demand for working capital has risen for firms incurring higher costs such as those related to changes to NICs and National Living Wage (NLW), and those exposed to tariffs who need more funding.
Bad debts remain low. However, contacts worry about the risk of higher business failures given the weak growth outlook, high cost inflation and increased trade uncertainty.
Employment and pay
Employment intentions remain mildly negative as higher labour costs and demand uncertainty weigh on contacts’ recruitment plans. Recruitment difficulties continue to normalise.
The rise in employers’ NICs is the main factor weighing on employment decisions, compounded for consumer-facing businesses by further increases in NLW rates and demand uncertainty. Some firms have instigated recruitment freezes or are scrutinising hiring decisions much more closely. Many are focused on productivity improvements to enable headcount to flatten or gradually decline through natural attrition. Some, typically larger firms, are offshoring more work, leading to redundancies in manufacturing and professional services.
There are more frequent reports of recruitment conditions having eased, with a few contacts saying it is now easier than normal. Churn is down, in some cases below normal rates, reflecting fewer opportunities and hesitancy to move jobs due to uncertainty. There is further evidence of a little spare capacity opening across sectors reflecting subdued demand.
Pay settlements for 2025, based on cumulative Agents’ intelligence so far this year, continue to average 3.5%–4%. Most contacts are making lower awards than in 2024, most notably due to higher NICs, but also lower inflation, a looser labour market and affordability concerns. The main upside risk to wage settlements continues to relate to the NLW and the maintenance, or restoration, of differentials for staff whose pay is above it. Some unions are also reported to be pushing for above-inflation pay increases for their members.
Consumer-facing firms are seeing a significant upward impact on total labour costs with the combined effect of increased NICs/NLW on their wage bills of around 10%. Firms are using a combination of measures to mitigate the impact. The most common response is to reduce pay awards for those above the NLW by 1–2 percentage points. The next most popular responses are to reduce headcount, reduce hours worked, raise prices, and accept reduced margins. Other strategies include reducing investment, adjusting non-pay benefits and seeking other cost efficiencies. Many contacts are still working through what the policy changes mean for their business, so there is a sense that the full extent of firms’ responses is yet to come.
Costs and prices
Inflation in raw materials and imported finished goods is modestly positive, but there is limited evidence yet of tariffs having an impact on supply chain pricing. The wave of cost increases that arrived on 1 April such as NLW, NICs, and EPR put more pressure on contacts to recover them via output price increases. This pass-through is more advanced in goods, than in consumer services presenting a small upside risk to the expected easing in consumer prices in 2025 H2.
Where demand allows, manufacturers’ domestic prices are increasing as they pass on some of their higher labour and input costs, including taxes and regulated prices.
Business-to-business price inflation is easing gradually but the pace of unwind differs across sectors. Contacts continue to report elevated inflation for cybersecurity, legal and audit services, but pressure is lower in logistics and corporate hospitality. Where demand is weak, such as for recruitment services, prices are unchanged or in some cases falling.
The cost increases that took effect on 1 April have created additional squeeze on margins. Coupled with weak demand this has led many contacts to look inward at cost controls given how difficult it can be to recover margin through output prices.
The pass-through of higher labour and EPR costs to consumer goods and service prices is underway. Pass-through is more advanced in goods, particularly food, than in consumer services. Underlying inflation in consumer goods prices is rising modestly reflecting retailers’ supply chains and their own higher costs being passed through. Contacts expect food price inflation to peak at 4% this summer. The major supermarkets are all facing margin pressure, so there are limits to how much they can absorb. Non-food inflation remains modest, largely reflecting soft input costs and weak demand and while there are concerns about global tariffs, as yet evidence on supply chain impact is limited.
Consumer services inflation has picked up. The downward inflation path reported by contacts over recent rounds has been disrupted in the short term by companies passing on higher labour and other cost pressures. Where demand is weak, such as for UK holidays and casual dining, there is less evidence of pass-through and increased pressure on margins, but equally there are some service providers that have no choice but to pass on cost increases to protect the bottom line, even it means further damaging demand.
Property
Sentiment in the housing market continues to improve overall. Investors in commercial real estate remain cautious in the face of further economic uncertainty.
Housing market
Although buyers are taking longer to make a decision to purchase, demand seems to be firming up and house prices are growing by mid-single digits in percentage terms. The exception is London and the south where market sentiment remains gloomy, demand is weak and there is some evidence of falling prices.
Rental inflation continues to moderate but is still above historical averages. It is supported by the continued exit of small landlords from the buy-to-let market which is reducing supply.
Commercial real estate
Investors and occupiers continue to demand prime space, while less desirable locations continue to struggle. There is some optimism that investor conditions will improve with property values close to their floor and banks indicating increased willingness to lend. Contacts expect occupier demand for prime office and industrial space to continue.
Outreach engagement
The cost of living is still front of mind for households and charities.
On top of their existing cost of living challenges, participants in the Bank’s outreach events are concerned about the recent rises in utility bills and council tax since these are difficult for them to control. Many also worry that businesses will pass on the increased costs arising from the changes to NIC and National Minimum Wage to consumers. Despite the relatively bleak outlook expressed by many, there were some signs that sentiment about the economic outlook is beginning to improve – some participants note that prices, though high, have started to stabilise over the last few months.
Charities note that salaries, both for their staff and service users, have not increased, or have not kept in line with inflation – many are struggling, even those on ‘good’ salaries. Charities are also struggling with a lack of donations from households and businesses. Many attribute this to the higher cost of living and a weaker economic outlook.
Grant-giving charities are finding that while the amounts they have available for grants has increased, demand is significantly higher forcing them to reject more applications than in previous years.
