Overview
This publication summarises intelligence from the Bank’s Agents considered by the Monetary Policy Committee at its November meeting. The intelligence was gathered in the six weeks to early October. The Agents’ scores published alongside this document generally represent developments over the past three months compared with the same period a year earlier.
Intelligence continues to paint a picture of a flat economy, with contacts uncertain about potential announcements in the upcoming Autumn Budget. Retailers continue to see little volume growth. They consider that consumer confidence is weak, leading to low expectations for improvement into 2026. Investment plans are limited. US tariffs are constraining goods exports and, with weaker global demand, continue to dampen exporters’ expectations for a recovery in 2026.
Manufacturing output is under further pressure, apart from defence and aviation. Contacts’ order books and expectations remain subdued, though the extent varies by sector. Construction remains under pressure from weak demand, planning delays, increased costs, and regulatory constraints, although public and infrastructure projects are expected to yield some positive growth in 2026. Business services volumes are virtually flat, and increased uncertainty about the upcoming Autumn Budget means contacts do not expect demand to pick up until at least part way through 2026.
Employment intentions remain cautious and lower than normal, although more firms are maintaining rather than reducing headcount than in previous rounds. Recruitment difficulties are now around normal for most roles having fallen over recent rounds. Pay pressures are expected to ease in 2026. Contacts’ actual pay settlements for 2025 look to be averaging 3.9%, a touch above the Agents’ expected pay survey of 3.7% reported in January, while early indications for 2026 are averaging somewhere around 3½%. The Agents’ pay survey, launching in December, will provide a more comprehensive and timely view of contacts’ pay expectations early in 2026. Spare capacity overall remains modest, mostly in physical capacity, though a few report they are hoarding skilled staff.
The inflation outlook is largely unchanged, with disinflation anticipated to resume in 2026 input cost pressures abate. Consumer goods inflation is modest except for persistent food price rises. Consumer services inflation remains elevated due to high labour and food costs. Profit margins are squeezed across most sectors, especially consumer services, with contacts aiming to rebuild margins mainly through cost control and as demand recovers.
Consumer spending
Annual sales volumes of consumer goods and services continue to grow slowly. With no sign of increasing consumer confidence, most contacts expect demand to remain subdued, with flat to low growth into 2026.
On the goods side, consumers remain cautious, focused on value, and prefer saving to overspending. Supermarkets report strong food sales growth, driven by price inflation, while volumes stay flat. Furniture and home improvement sales have stopped falling, with 2025 flat on last year. Fashion retailers report falling sales due to competition from the second-hand market. Retailers who saw an increase in demand earlier in the year amid good weather now report that this likely reflected sales brought forward and not the beginning of sustained growth. Used car demand remains strong, but supply remains tight as consumers hold on to existing vehicles longer.
Consumer services firms report fragile consumer demand, held up by innovation, promotions, and discounts. Accommodation providers continue to see shorter stays and late bookings, relying on discounts to boost demand during quiet periods. Hotels have struggled to offset weaker international tourism outside London with domestic bookings, though some report better forward bookings for next year. Restaurants face weak demand, with lower spend per visit and reliance on discounts to maintain volume. Overseas holiday demand growth is slow year on year, with later bookings and shorter trips.
Investment
Contacts report subdued investment intentions, similar to the previous update.
Uncertainty, subdued demand, and financial constraints remain the main limiting factors on investment intentions. Fewer contacts than in the last round mentioned UK labour cost pressures from the changes to National Living Wage (NLW) and employer contributions to National Insurance (NICs), suggesting the impact is settling. Mentions of international trade uncertainty also declined. Despite this, some multinationals still prioritise non-UK investment, citing fiscal policy uncertainty, energy costs, planning delays, and labour costs as deterrents to UK-based investment.
Larger firms are continuing with regular replacement and necessary update investment. Public infrastructure spending is beginning to rise, but many projects face delays or remain in planning, so a material pickup may take over a year. Climate-related policy uncertainty is leading some firms to cut sustainability-related investment, despite its overall positive outlook.
Trade
Manufactured goods export volumes fell further on last year as US tariffs continue negatively to impact goods exports with contacts downbeat about significant improvement in 2026. Moderate services export values growth continues.
The weakness in manufactured goods exports is due to US tariffs and the recent troubles in the automotive sector. Aerospace and defence remain strong. Services export values continue to grow with professional, financial, and IT services reporting positive revenue growth on last year. Overseas student intake remains lower, as therefore does spending by students from abroad. Tourism is holding up, with fewer US visitors but more from China, Asia, and the EU.
The immediate impact of US tariffs on export volumes should lessen with further restocking by US customers in coming months, but global demand and tariffs are still dampening hopes for recovery in 2026.
Business and financial services
Revenue growth on last year slowed with volumes virtually flat but price inflation continuing. Most anticipate demand to recover from 2026 Q2 although uncertainty about the upcoming Autumn Budget remains a concern.
Mergers and acquisitions and other high-value transactions remain weak. Professional services, especially audit, restructuring, and tax advice, report strong demand. Corporate events and hospitality are slightly improved. Within IT services, there is continued growth in demand for AI and cyber with other discretionary spend being delayed.
Staff development services face falling demand as training budgets shrink, and recruitment slows. General haulage and logistics activity remains broadly flat. Services into construction and property remain weak, with some growth from data centres and energy infrastructure. Cyber insurance is holding up, while broader corporate insurance premiums have fallen on last year.
Manufacturing and production
Manufacturing output has weakened further on last year as subdued automotive activity added to already weak order books. Except for defence and aviation, contacts do not expect output growth to turn positive until next year.
Output remains down on last year in the automotive sector as temporary closures added to existing issues of global electric vehicle (EV) competition, the restriction of combustion powered vehicles output to meet EV targets and US tariffs. Automotive contacts do not expect recovery until next year. Construction-facing manufacturers report flat or falling output, although some see early signs of 2026 orders improving, supported by government-funded infrastructure projects.
Consumer goods and food and drink output remains broadly stable or slightly down, as caution persists. Defence and aviation manufacturing continues to grow, though staff availability limits aviation output.
Construction
Construction output remains modestly down on last year. Weak demand, planning delays, rising costs, and regulatory constraints continue to hinder activity. Contacts expect public infrastructure investment to support modest growth in 2026.
Larger contractors report that they are shifting focus to public projects owing to weak private sector demand. Planning delays show slight improvement but contacts report that they are still a hindrance. Higher safety and environmental standards, along with rising labour costs, have increased build costs. Office and high-rise residential projects, especially in London, are down on last year. The Building Safety Act, intended to improve building safety and quality, especially for high-rise residential buildings, is slowing new developments but boosting repair and maintenance spending.
House-building output is up slightly on last year. Weak household demand has led house builders increasingly to sell to landlords and housing associations, though the latter report funding challenges. Some report using incentives to support sales, including part-exchange and bulk deals. House builders say stronger demand and improved planning and labour supply are needed to accelerate build rates.
Corporate credit conditions
There has been little change lately. Corporate credit conditions are modestly improved for smaller firms and remain better than normal for larger firms. Demand is a little below normal. Distress remains elevated for small firms.
Large and medium-sized firms report good access to credit from a range of sources. High street banks are trying to grow market share and have become less risk-averse toward smaller firms. But the hospitality, construction and higher education sectors still report that lenders are reluctant. Startup finance is said to be improving from a low base.
Credit demand remains a little below normal for large corporates and has edged down for others. Many firms remain cautious about increasing their borrowing owing to high interest rates and weak planned investment. Some private equity sponsored firms are overindebted and urgently paying down debt when they can, with some now in distress. But there are also many examples of rising loan demand, especially from firms thinking of making acquisitions. Some need more working capital, for example due to new tax treatment for partnerships, or due to cost inflation, including NICs.
Insolvency practitioners say the business failure rate is elevated and likely to remain so. But high street banks continue to report low bad debts, probably because failures are concentrated in small firms and in sectors to which they have been cautious about lending.
Employment and capacity utilisation
Employment intentions remain lower than normal and cautious. More are holding employment flat this round having already made significant headcount reductions, with future cuts likely to be smaller. Recruitment challenges persist for certain skills but are generally holding steady at normal levels seen in the previous update.
Over half of contacts intend to maintain their current employment levels, with marginally more of the remainder increasing headcount than decreasing. Even among contacts planning to increase headcount, most report only modest growth and a cautious approach to hiring, owing to high labour costs. Firms continue to leverage technology, automation, and AI to boost productivity and limit headcount growth as or when demand rises, while some are also turning to offshoring as an additional way to manage costs and maintain flexibility. Firms are now reporting more tangible cost savings from these strategies, which have helped partially offset some of their labour cost pressures.
Recruitment difficulties are around normal for most roles, well below pre-Covid levels. Many firms report better response rates to job adverts, though a small number still note concerns about candidate quality. Employee churn has fallen, reflecting both fewer external opportunities and greater reluctance to move jobs amid uncertainty. Persistent skills shortages remain in areas such as engineering, finance, hospitality, and logistics, but even here some firms note improved availability.
Contacts report modest spare capacity emerging over the recent rounds, largely reflecting weak demand in production and consumer-facing sectors. It tends to be concentrated in physical capacity, but a few are hoarding skills that are in short supply. Some others are creating extra capacity on the back of automation and technology.
Labour costs
Pay pressures are expected to ease in 2026.
With wage settlements having been implemented for the year at most firms, contacts’ actual pay settlements for 2025 look to be averaging 3.9%, a touch above the Agents’ expected pay survey of 3.7% reported in January. Contacts have yet to firm up 2026 pay settlements, though early indications are averaging somewhere around 3½%, a little below 2025. The Agents’ pay survey, launching in December, will provide a more comprehensive and timely view of contacts’ pay expectations early in 2026. Upside risks to pay cited include higher inflation, particularly in unionised workforces, catch-up following previous freezes/low pay awards, and a higher NLW increase than the Low Pay Commission’s central estimate of 4.1%.
Firms continue to mitigate the impact of NICs/NLW via a combination of measures including lower awards for higher-paid staff, reduced heads and/or hours, higher prices and other spending reductions such as investment. Much of the adjustment has already taken place but there is potential for further action into 2026 where there are lags in contracts or pay deals being renewed/bargained.
Costs
While non-labour input cost pressure remains modest, labour cost pressures mean that manufacturing price inflation is around normal, and business services price inflation is elevated. Lacklustre demand means it may take some time to rebuild squeezed profit margins.
Materials cost inflation remains modest overall but with sharper movements for some individual commodities. Imported finished goods inflation is also low, helped a little by the strength of sterling and some spare capacity in the Far East, reflecting slower world demand.
Manufacturers’ domestic price inflation remains around normal, consistent with modest material inflation and some companies able to pass on at least some of the increase in labour costs. Business-to-business price inflation is elevated, with labour cost inflation being easier to pass through where demand remains stronger. Professional services price inflation has moderated somewhat from recent high rates but remains higher than for most discretionary services. Other services prices have tended to rise fastest where many staff are paid NLW or close to it.
Profit margins have been squeezed by cost inflation and subdued demand, with ongoing but limited mitigation from cost control. The squeeze affects most sectors but is probably most acute for consumer services. Fuller margin rebuild may well take some time and depend mostly on cost control and recovery in demand. Price increases may play a modest supporting role, alongside some businesses refocusing on profitable areas. Contacts worry that the upcoming Autumn Budget may add further challenges to their costs and profit margins.
Consumer prices
The overall picture remains one of consumer price disinflation pausing in 2025 H2 before resuming next year as input cost pressures abate.
Consumer goods inflation remains modest for most components other than food inflation, which is likely close to its peak but expected to remain high this year. Elsewhere, limited materials pressure and low demand combine to hold inflation down. Most contacts expect food price inflation to subside in 2026, typically to around 3%, but that is dependent on no further shocks to input costs. Inflation is expected to remain low for most other goods.
Consumer services inflation remains elevated as higher labour and food costs are passed through, where possible. Many contacts are reticent to raise prices further in the face of weak or uncertain demand.
Although consumer services inflation is expected to recede gradually, there is still much uncertainty about the likely rise in labour cost next year, which will be key.
Housing market
Contacts report a flat housing market, and that the upcoming Autumn Budget is weighing on confidence. Any increase in activity is unlikely until well into next year.
Estate agents consider that demand and supply are broadly balanced, with more activity at the lower end of the market. High rental prices are helping to drive demand from first-time buyers, with prices stable in the owner-occupier market. Some contacts consider uncertainty about the upcoming Autumn Budget is weighing on activity. Fragile confidence is seen as more of a constraint on demand and supply than affordability or mortgage availability.
Supply is still tight in the rental market, but demand has also cooled in most areas of the UK due to affordability constraints. Rental price inflation is now in the low single digits and is expected to be close to zero in the coming months. Positive announcements in the spending review for housing associations are unlikely to translate into higher build numbers in the near term, as the focus continues to be on bringing existing stock up to regulatory standards.
Outreach engagement
Concerns about rising food costs and utility bills still dominate conversations.
Households continue to change their shopping habits to reduce spending, such as buying more vegetables and reducing meat consumption. Water bills have risen sharply for many. Childcare costs and caring obligations are leading some to reduce their hours or even stop working to fulfil these responsibilities. Charity organisations with front-line services are seeing more customers with increased debt, and negative budgets. Many are falling behind on bills, and some are taking loans to pay for essentials.
Despite tepid real-wage growth, many choose to prioritise job security over pay, given the current uncertain environment. Job seekers report stiff competition, while employers in the care and manufacturing sectors report elevated recruitment difficulties.
Despite increased pressure on budgets owing to NLW/NIC uplifts and increased costs, some larger charities have been able to weather the challenging operational environment. However, many stressed that this is not sustainable, and some are concerned about what impact the upcoming Autumn Budget will have on the sector.
