Agents' summary of business conditions - 2019 Q3

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 19 September 2019
chart-9

Weaker global growth and Brexit uncertainty weighed on output growth

Two people at a desk

Pay growth and employment intentions stabilised

Credit Card with X

Companies in some sectors found it harder to access credit

Overview

This is a summary of economic reports compiled by our Agents during July and August 2019. It generally compares activity and prices over the past three months with a year ago. The information in this publication includes a summary of information gathered by the Bank’s Decision Maker Panel survey and a survey on preparations for EU withdrawal.

Consumer demand

Consumption growth weakened. This partly reflected base effects from strong sales a year ago when there was a boost from warm weather and the football World Cup. Contacts reported that Brexit uncertainty had also weighed a little on spending recently. 

  • Retail sales values grew at a subdued pace over the past three months compared with a year ago. Contacts said that lower shopper numbers at supermarkets and shopping centres had resulted in more discounting than a year ago. 

    In food retail, slower growth in sales values followed strong growth a year ago, when sales had been boosted by the summer heatwave and the men’s football World Cup. 

    In non-food retail, there was a broad-based slowdown in sales growth. In household goods and furniture, this reflected the weak housing market. Car sales were softer as consumers became more cautious about committing to purchases of big-ticket items. Uncertainty over government policy around diesel engines and new emissions standards were also given as factors constraining car sales. 

    Growth in consumer services values also slowed, though this too reflected base effects after strong growth in summer 2018. 

    Contacts reported that consumers continued to spend on treats such as restaurant dining, leisure attractions and hotel accommodation. Indeed, the weakness of sterling had supported growth in tourist and “staycation” spending. However, there were also reports that spending on food and gifts at tourist attractions was weaker than a year ago.

    Chart 1: Retail sales growth weakened following a strong boost last year 

    Consumer goods and services values

    Three months on the same period a year earlier

    chart-1

Business and financial services

Business services continued to grow at a modest rate. Weaker demand for transaction-related services was partially offset by strong demand for IT services.
  • Business volumes were flat overall, with turnover growth largely driven by modest price increases. In professional services, there was less work related to mergers and acquisitions and asset purchases, which contacts attributed to Brexit uncertainty. 

    Contacts reported slower growth in financial services revenues, as these started to be booked in EU offices. Spending on discretionary services such as marketing and advertising continued to fall. There was also weaker demand for business associated with construction, such as consulting services.

    There was a modest pickup in refinancing, restructuring and insolvency work.  Demand for IT services remained strong, as companies continued to invest in mobile working, data analytics, cyber security, and in making back-office processes more efficient.

    Growth in exports of services weakened as a result of lower demand for professional advisory services relating to inward foreign investment. However, demand from foreign-owned private equity firms to buy UK businesses remained strong, helped by the weak pound.

Manufacturing

Manufacturing output and exports grew at their slowest rate in three years, as weaker global growth and Brexit uncertainty dampened demand. 

  • Demand for UK goods exports from the euro area was particularly subdued, reflecting softer economic growth in the region. 

    The unwinding of stocks following the extension of the Brexit deadline also contributed to weaker growth in manufacturing, though renewed stockbuilding could provide a boost later in the year. Over a quarter of respondents in the Agents’ survey on preparations for EU withdrawal said that they had scaled back their plans since March and planned to reinstate them before the end of October, either partially or in full (Box 1)

    Chart 2: Manufacturing output continued to weaken as global demand slowed

    Total manufacturing output and manufacturing exports

    Three months on the same period a year earlier

    chart-2

    Some contacts reported that EU-based customers had become more nervous about the risk of supply disruption in the event of a no-deal Brexit, leading to a small number of reports of reduced export orders. 

    Rising trade tensions were also a concern for exporters. While trade with the United States had held up – particularly in defence – contacts reported softer demand from China, for example for specialist components. 

    And UK automotive exports continued to be affected by concerns about diesel emissions as well as generally weaker global demand. 

    Manufacturers of construction products said that domestic demand had fallen due to a lack of major infrastructure and commercial projects. But contacts in aerospace, chemicals, plastics and food processing reported strong demand. 

Construction

Construction output growth weakened further, due to subdued public and commercial activity.  
  • Contacts said uncertainty was one of the main constraints on construction activity. This had resulted in delays to public and commercial schemes, with some projects still to enter the construction phase. By contrast, construction of industrial and warehousing premises continued to grow. 

    In residential construction, the development of lower-priced properties remained strong, supported by the Help to Buy scheme. However, some larger house builders had cut their build-rates in response to weaker demand as well as Brexit uncertainty. Construction of social and affordable housing was supported by increased funding from central government. 

Investment

Investment intentions weakened a little further and remained at a nine-year low. Brexit uncertainty continued to dampen companies’ appetite to invest. 
  • A large proportion of companies were holding off investments, even for projects where payback times were short. And a sizeable proportion of companies reported reducing, postponing or cancelling projects. There were reports of some larger companies diverting investment to EU subsidiaries and factories. 

    However, some contacts reported that if a no-deal Brexit were avoided, there could be some bounce-back in investment, though the timing of that was unclear. 

    Distribution and logistics were the main sectors in which investment was being made to increase capacity. More generally, investment was driven by the desire to remain competitive, generate efficiencies, protect margins or because it was required by regulation or suppliers. 

    Chart 3: Brexit uncertainty dampened investment intentions 

    Investment intentions over the coming 12 months

    chart-3

Corporate financing conditions

Credit conditions tightened for more sectors. Demand for working capital picked up. 
  • While bank credit had generally remained accessible, contacts reported that conditions had tightened in the automotive and metal sectors, in addition to construction, retail and casual dining. Large corporates in particular continued to have ready access to cheap credit from banks and capital markets, although there were isolated reports of short-term finance becoming tighter due to Brexit uncertainty.

    Some other forms of finance, such as asset based lending and peer-to-peer lending, also remained readily available. However, some larger peer-to-peer lenders had tightened lending criteria. The availability of trade credit insurance tightened further in the retail and construction sectors. In recent months, availability had also tightened for companies in the food supply chain, automotive supply chain, metals and recruitment. 

    There was some stress in retail, construction and consumer-facing sectors such as restaurants and car dealerships. This was leading to increased debt restructuring work and insolvencies, which nonetheless remained at low levels. 

    Demand for credit remained subdued among small and large companies, reflecting uncertainty about the economic outlook and some de-risking. 

    However, among small and medium-sized enterprises (SMEs), there was a pickup in demand for working capital in the form of unsecured borrowing and short-term overdrafts to support cashflow. 

    There were some reports of external funding being required to finance stockbuilding. The Agents’ Brexit survey suggested that Brexit contingency planning had increased the working capital needs of just over one-third of respondents, although most firms had financed that internally (Box 1)

Property markets

Activity continued to slow in both the commercial property and housing markets, reflecting reduced interest from overseas investors and Brexit uncertainty. 
  • Commercial property

    Activity slowed in both investor and occupier markets. Contacts in many parts of the country reported reduced interest from overseas investors. 

    Investors were particularly cautious about retail property, amid concerns about a correction in values. Rents on retail premises fell further and vacancy rates rose in many areas.

    By contrast, demand for industrial and warehouse property remained strong. Values and rents were boosted by the lack of supply. 

    Housing market

    The housing market continued to soften, reflecting deteriorating supply and demand. Contacts said buyers were taking longer to make decisions and expected lower prices or other incentives before committing to purchase. 

    Larger housebuilders reported frequently having to offer incentives, discounts or part-exchange in order to complete new-build sales. Developers noted an increase in buyers pulling out of transactions in London and southern England, sales taking longer to complete and prices falling. A number of them cited Brexit uncertainty as the main reason for this. 

    Estate agents reported softer demand in the secondary market, though demand for lower-priced properties was more resilient.

Capacity utilisation

Capacity constraints eased, reflecting weaker activity in manufacturing and construction. 
  • In manufacturing, some contacts reported holding on to labour until there was more clarity over Brexit, even though activity had weakened. Capacity constraints also eased in construction, as availability of materials returned to more normal levels and demand remained subdued. 

    In the services sector, contacts said capacity utilisation was slightly tighter than normal due to continuing recruitment difficulties. 

    Capacity constraints were most marked in warehousing and transport, due to stockbuilding and the on-going shortage of lorry drivers. 

Employment and pay

Contacts expected staff numbers to be flat or slightly lower over the coming year; pay growth stabilised, while recruitment difficulties had stopped increasing.
  • Employment intentions for the next twelve months were very slightly negative. Contacts attributed this to slower economic growth, uncertainty about the economic outlook and a desire to improve productivity to protect profit margins.

    In manufacturing, contacts said they were recruiting only to replace skilled labour and were increasingly using temporary staff to handle peaks in demand. Some companies in the automotive sector said they were planning to reduce headcount. 

    Professional services firms expected to increase staff numbers modestly over the coming year. This was also the case for convenience retailers. However, some large retailers expected to continue to reduce employment numbers to cut costs.

    Chart 4: Labour market conditions appeared to be stabilising

    chart-4

    (a) Three months on the same period a year earlier.
    (b) Over the next twelve months.
    (c) Three months on the same period a year earlier.

    Recruitment difficulties remained at an elevated level, though they have eased slightly in recent months. This reflected the tight labour market, lack of candidates with appropriate skills and fewer EU workers coming to the UK, which had made it more difficult to fill vacancies in unskilled roles in some sectors. The issue was exacerbated by uncertainty about the economic outlook, which had reduced employment churn compared with a year ago.

    Contacts reported shortages of engineers, care workers, nurses, lorry drivers and experienced candidates in professional and financial services. Some employers said they planned to address labour shortages by training apprentices and graduates, though this was likely to drag on productivity in the short term.

    Pay growth steadied at between 2% and 3%. Contacts said this reflected a moderation in basic pay increases as well as an increase in deferred pay settlements and temporary wage freezes due to economic uncertainty. 

    However, pay growth continued to rise in sectors experiencing labour shortages, such as IT, engineering and professional services. And pay growth for lower-paid employees had been supported by the rise in the National Living Wage. Contacts also reported increasing non-wage benefits to support staff retention.

    Nonetheless, contacts said they expected pay pressure to ease in the coming months, reflecting weaker employment intentions; lower staff churn; economic uncertainty and budget constraints, and a moderation in consumer price inflation.

Costs and prices

The cost of materials continued to rise at a gradual pace and consumer price inflation also rose modestly.
  • The prices of consumer goods and services rose at a modest rate. The recent depreciation of sterling had pushed up food prices, but otherwise the impact on consumer price inflation had been limited so far. 

    Subdued sales of clothing and other seasonal goods led to increased discounting by retailers. And while new car prices had edged up, used car prices fell markedly.

    Many consumer services contacts reported being able to implement moderate price increases. Some contacts said they were able to raise prices to help cover higher labour or other input costs prices. But this was less likely to be the case for companies in more competitive markets. 

    Companies’ input costs continued to rise, though commodity price inflation had eased slightly due to slower global growth. There were some signs that the recent fall in sterling was pushing up the cost of imported goods, but this was expected to feed through with a lag due to hedging and the negotiation of contracts with suppliers.

    Contacts reported slightly more downward pressure on profit margins in recent months, with many saying they remained slightly lower than normal. This reflected an inability to pass through higher labour costs as well as ongoing competitive pressures in food and automotive supply chains. 

Related content and downloads

This page was last updated 19 September 2019
Was this page useful?
Add your details...