Agents' summary of business conditions - 2019 Q1

We regularly publish a summary of reports compiled by our twelve regional Agents following discussions with at least 700 businesses across the UK every reporting period.
Published on 21 March 2019
Bar and line chart

Activity has softened further over the past few months

Shopping bags

Retail sales growth continued to slow

United Kingdom and European Union flags

Brexit uncertainty hit manufacturing investment

Three box files

Most contacts are planning in case of a “no deal” Brexit

Overview

This is a summary of economic reports compiled by our Agents during February 2019. It compares activity and prices over the past three months with a year ago. It includes the views of our Decision Makers’ Panel of senior business executives.

Consumer demand

Growth in the value of retail sales weakened, as uncertainty about Brexit and the wider economy weighed on spending.
  • Read more on consumer demand

    Over the past three months, annual growth in the value of retail sales weakened (Chart 1), and remained below its long-run average. This mostly reflected softening activity in store-based retail. Demand for furniture and household appliances slowed, which contacts attributed to rising uncertainty related to Brexit and subdued housing market activity. Spending on essential items held up. For example, supermarket contacts reported better-than-expected food sales, possibly reflecting lower spending on restaurant dining. However, there were isolated reports of smaller basket sizes and trading down.

    Annual growth in consumer services values remained modest — even compared with a year ago when activity was adversely affected by the severe winter weather. 

    Chart 1: Consumer goods and services values

    Three months on the same period a year earlier

Business and financial services

Business and financial services activity slowed a little, reflecting caution in the run-up to Brexit and wider economic and political uncertainty.
  • Read more on business and financial services

    Business and financial services activity slowed a little but grew at a modest rate (Chart 2). Activity began to soften in some areas where growth had previously been strong, such as professional services and mergers and acquisitions. The stalling of some commercial property deals had a negative impact on businesses in the legal, consultancy and financial sectors.

    Contacts said weaker demand reflected Brexit uncertainty and concerns about UK political stability as well as worries about trade tensions between the US and China, which could have a knock-on effect on professional services. However, contacts thought that activity could pick up again if Brexit-related uncertainty cleared.

    To date, there has been limited evidence of business service contacts or their customers moving activity out of the UK. Where changes have been made, this has usually involved replicating a modest proportion of the UK business in continental Europe, for example distribution or regulatory approvals processing.

    Some firms, such as those offering professional advice on Brexit-related planning, reported stronger activity. Employment agencies benefited from continued tightness in the labour market, corporate restructuring and the relocation of some roles to continental Europe. This had generated activity and allowed some contacts to increase their fees. Difficulties in the retail sector and corporate distress more broadly had generated some additional business for insolvency-related services.

    Chart 2: Business and financial services turnover

    Three months on the same period a year earlier

Exports of services

Growth in exports of services slowed, in part due to weaker demand for consultancy services.
  • Read more on exports of services

    Growth in services export values eased to below average rates, due to slower global demand and Brexit-related uncertainty.

    Demand for consultancy services weakened. Higher education organisations found it harder to attract foreign students due to Brexit concerns and visa issues. There were signs that demand for UK assets from foreign investors had eased, albeit from a high level.

    There has been little evidence so far of a marked shift away from UK services by EU customers, however. Indeed, some Europe-based firms have sought to secure access to UK markets post-Brexit by investing in UK businesses, infrastructure and commercial real estate, which has supported exports of services. And inbound tourism continued to grow, helped by the weakness of sterling.

Manufacturing

Growth in domestic manufacturing output slowed. This reflected a fall in output in the automotive sector and weaker construction output growth, which was only partially offset by growth generated by stockbuilding. The latest Agents’ survey on preparations for EU withdrawal showed that around two fifths of all respondents have been building inventories (Box 1).

Weaker demand from Europe and China weighed on growth in exports of manufactured goods, with the Agents’ score for this measure falling to its lowest level in more than two years.

  • Read more on manufacturing

    The Agents’ score measuring growth in domestic manufacturing output weakened to its lowest in around two years (Chart 3), but remained above its long-run average.

    Although stockbuilding by companies provided some support to output growth, this was offset by weakness in other areas. The Agents’ latest survey on preparations for EU withdrawal showed that around two thirds of manufacturers were building inventories (Box 1).

    Contacts in the automotive sector and in related supply chain businesses reported declines in output compared with a year ago. And output is expected to fall in 2019 Q2 as a result of extended shutdowns scheduled by some manufacturers.

    Many producers of building materials reported a slowdown in output growth due to weaker construction activity. Suppliers to the retail sector also reported weak demand, particularly for furniture and household appliances.

    In the food sector, manufacturers of low-cost products reported growth as consumers traded down. However, there was strong growth in vegan products.

    Contacts in aerospace and high-tech engineering said demand remained strong.

    The score for growth in the volume of manufactured goods exports was also its lowest in around two years (Chart 3). The slowdown was concentrated in the consumer goods and automotive sectors, largely due to weaker demand from Europe and China.

    Suppliers to the aerospace and automotive sectors reported a small boost to demand from stockbuilding by overseas customers, but they expected it to be short-lived. In addition, some contacts reported building stocks of finished goods in continental Europe to mitigate the risk of outbound delays in the event of a ‘no deal, no transition’ Brexit.

    There was little sign to date of European customers pulling away from UK products, though most contacts expected this would only become visible over the medium term.

    There was robust demand from US-based customers for a range of UK-manufactured products. And demand from the oil and gas sector also continued to strengthen.

    Chart 3: Manufacturing output

    Three months on the same period a year earlier

Construction

Construction output growth eased as weakening housing market conditions and business investment weighed on activity.
  • Read more on construction

    Output growth in the construction sector weakened. Some of the large developers have scaled back planned projects due to the softer housing market, though this was less the case for smaller developers.

    Heightened caution around business investment has resulted in some commercial developments being paused or delayed. However, demand for repair and maintenance work remained steady. Continuing demand for distribution warehousing was also providing some impetus to commercial construction output.

    On the supply side, planning delays and rising costs added further challenges. And reports of a weaker pipeline of projects suggested that the year ahead could be more challenging for the sector.

Investment

Investment intentions fell sharply in manufacturing, mostly due to Brexit uncertainty. There was a modest decline in investment intentions in the services sector.
  • Read more on investment

    The Agents’ score for investment intentions in the manufacturing sector for the next 12 months fell to its lowest in nine years (Chart 4). Contacts mostly cited Brexit uncertainty as the main reason for holding back investment, with some choosing instead to build cash reserves or inventories (see also Box 1).

    However, companies continued to invest in replacing essential kit, or in projects with a short pay-back period. Contacts in some companies, particularly those with overseas owners, said that investment was being diverted outside the UK. But many contacts believed there could be a rebound in investment if a Brexit deal was agreed.

    Investment intentions edged down in the services sector but remained positive. Investment in IT and digital capabilities continued to grow. Many professional and financial services firms continued to invest in artificial intelligence and automation, often in response to tight labour market conditions.

    Some contacts in the logistics and transport sectors reported investing in additional capacity. But investment in the retail sector remained mostly weak.

    Chart 4: Investment intentions

    Over the coming twelve months.

Corporate financing conditions

Demand for credit from corporates softened. Credit availability tightened a little, particularly for contacts in the retail and construction sectors.
  • Read more on corporate financing conditions

    Corporate credit demand continued to slow as contacts sought to reduce leverage and strengthen their balance sheets ahead of Brexit. Contacts said that banks remained cautious about lending to the retail and construction sectors.

    Contacts in most other sectors said they had not experienced constraints on credit but felt its availability was gradually tightening. For example, there were some reports of banks applying tighter lending criteria to loan applications from companies exposed to Brexit uncertainty.

    Large companies — which usually have easier access to credit — have also signalled that credit conditions have become somewhat less favourable in recent months. For example, some believed that raising bond finance might be more expensive at present due to Brexit uncertainty.

    Some contacts said that availability of supplier finance was tightening and trade credit insurance cover was being reduced. However, providers of asset finance continued to compete aggressively.

Property markets

There was slower demand for commercial real estate from both domestic and overseas investors, but demand continued to outweigh supply.

Housing market activity weakened for new-build homes as well as for second-hand properties, but the rental market remained buoyant.

  • Read more on property markets

    Commercial real estate

    Demand for UK commercial property from domestic and overseas investors slowed more sharply than in previous months, reflecting heightened uncertainty ahead of Brexit.

    The weakening in demand had become more broadly based across the commercial real estate (CRE) market and UK regions. However, there was still some appetite for UK CRE from high net-worth overseas investors and overseas funds. And overall demand for CRE continued to marginally outpace supply — supply growth had softened in recent months.

    Demand continued to be strongest for build-to-rent apartment buildings, flexible office space and distribution warehousing for online retailers. By contrast, investors have tried to limit their exposure to secondary and tertiary retail property. Although valuations for retail property have already fallen, contacts believed they could fall further.

    Housing market

    Sentiment in the housing market continued to weaken a little. Contacts reported that Brexit-related uncertainty had deterred many buyers. And excess supply, particularly in southern England, had led to a widening gap between asking and offered prices.

    Sales of new-build homes also slowed, causing housebuilders to offer significant incentives in order to complete sales. Lettings remained buoyant, though contacts said that some tenants had been seeking shorter leases and break-clauses.

    Mortgage activity was mostly concentrated in refinancing deals for home-owners switching to fixed-rates and longer mortgage tenors in order to lock in low interest rates. 

    Contacts said that weaker demand for mortgages combined with high competition among lenders was keeping down mortgage rates.

Capacity utilisation

Capacity constraints remained above normal, particularly in the logistics sector, partly due to stockpiling activity.

  • Read more on capacity utilisation

    Capacity constraints stabilised but remained above normal across the economy as a whole. Contacts in logistics and warehouses reported tight capacity, reflecting the structural shift towards online retailing, as well as some Brexit-related stockpiling.

    Contacts in professional services cited labour and skills shortages as major constraints on output. In contrast, contacts in the retail sector continued to report excess physical capacity, despite consolidation in the sector.

Employment and pay

Recruitment difficulties continued to intensify and remained widespread. Employment intentions weakened a little, however, and pay growth appeared to be levelling off.

  • Read more on employment and pay

    Employment intentions weakened a little further and were broadly flat across the economy, reflecting caution due to slower output growth and Brexit uncertainty.

    Employment intentions were modestly positive in business services, driven by job creation in IT, professional services and logistics.

    But employment intentions continued to fall in consumer services, as retailers responded to weakening trading conditions and sought to mitigate the effect of the annual increase in the National Living Wage.

    In manufacturing, the Agents’ employment intentions score fell to its lowest in more than two years. Job losses in sectors such as automotive were only partially offset by employment growth in aerospace and other high-tech industries.

    Despite weakening employment intentions, recruitment difficulties increased a little (Chart 5). Contacts reported labour shortages across a broad range of sectors and skill levels. They continued to report particular shortages in IT, professional services, engineering and haulage. Many contacts said recruitment difficulties was one of their biggest challenges.

    They also said that a lack of EU migrant workers had exacerbated conditions in some sectors, such as food-processing, logistics, hospitality, agriculture, horticulture and health and social care.

    However, some reported that recruitment difficulties had eased in sectors undergoing consolidation or experiencing weaker demand, such as property-related services.

    Pay settlements remained on average in the range 2½% to 3½%, and pay growth appeared to be flattening off after past rises. Nonetheless, contacts continued to give targeted pay awards to address skill shortages. And companies with a high proportion of low-paid staff concentrated pay increases on staff who were on or just above the National Living Wage. 

    Some contacts said that the increase in employer auto-enrolment pension contributions this year would add to total labour cost growth.

    Chart 5: Recruitment difficulties and employment intentions

    (a)Over the coming six months.
    (b)In the past three months, 'relative to normal'.

Costs and prices

Consumer goods price inflation slowed sharply but consumer services price inflation moderated less, partly due to wage-driven price increases in some sectors.

  • Read more on costs and prices

    Consumer goods price inflation slowed sharply as a result of lower fuel prices and the new cap on some energy tariffs (Chart 6).

    Food price inflation also eased, despite issues with the 2018 harvest. Competition in the retail sector was reported to have limited margin growth at all stages of the supply chain.

    In consumer services, contacts said that some sectors, such as leisure, tourism and private domestic care, had scope to pass through higher wage costs via price increases. However, the ability of contacts in the food and beverage sector to raise prices was limited by overcapacity in the sector.

    Material cost inflation eased slightly but remained close to its long-run average. Contacts said this was mostly linked to the depreciation of sterling falling out of year-on-year comparisons and an associated slowdown in imported finished goods price inflation. It was also attributed to a slight easing in commodity price inflation.

    Chart 6: Consumer goods and services prices

    Three months on the same period a year earlier.

This page was last updated 12 April 2019
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