Agents' summary of business conditions - 2020 Q2

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 18 June 2020

More companies are reopening as lockdown restrictions ease, but activity remains very weak

Some businesses will need to borrow more when they reopen. Government schemes are helping to support that

Redundancies are likely to increase in the coming months as demand remains weak and the Job Retention Scheme is phased out

Overview

This publication summarises intelligence gathered by the Bank’s Agents between mid-May and mid-June. The Agents’ scores published alongside this document are based on information gathered between late April and late May.

A summary of information gathered by the Bank’s Decision Maker Panel is also published alongside this document.

Consumer demand

Spending on consumer services and non-food goods was significantly weaker than a year ago, though online sales of some products were strong.

Most store-based retailers of non-essential goods remained closed. Although online sales of homeware, furniture, computing and audio-visual equipment were strong, clothing sales were very weak and retail sales over the quarter as a whole are still significantly lower than a year ago (Chart 1).

Clothing retailers reported cancelling or reducing orders, in some cases by as much as a third. Some contacts said they planned to carry over up to half of their stock to next year in order to limit the need for discounting.

However, those stores that have been permitted to reopen in different parts of the UK, such as garden centres, DIY and homewares stores and car dealerships, reported strong demand.

And supermarkets and convenience stores continued to report stronger sales compared with a year ago. Food supply chains have mostly returned to normal and the availability of products has improved, though a few contacts said there were ongoing shortages of some goods, such as baking ingredients.

Chart 1 There has been a sharp drop in retail sales and consumer services

Consumer goods and services values

Three months on the same period a year earlier

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Other non-essential retailers in England are preparing to re-open on 15 June. Some contacts said they planned to reopen stores on a phased basis, starting with out-of-town locations. A few retailers have gone into administration and will not be reopening.

In general, contacts expect concerns about the economic outlook and social distancing measures to weigh on shopper numbers for several months after stores reopen, though a few thought there might be a short-lived boost to footfall when stores reopen initially.

Lockdown restrictions for consumer services are being eased to varying degrees around the UK. For example, in some parts of the UK, outdoor leisure attractions and some hospitality businesses are preparing to reopen on a phased basis from July.

Leisure industry contacts said quarantine restrictions on visitors to the UK and social distancing measures were likely to constrain activity for several months, with a few not expecting activity to return to normal levels for two to three years.

Airlines are planning to resume operations from mid-June and expect to reach around a third of normal capacity over the summer. The operation of international flights will depend on quarantine rules in the UK and other countries. Contacts said that as a result, any recovery in activity was likely to be slow.

In hospitality, a large number of restaurants, fast food outlets and coffee shops have already reopened for takeaway or delivery. However, contacts said that social distancing measures would make it unviable for some smaller restaurants to reopen for customers dining in, in future. Some restaurant chains plan to close some branches permanently.

Business and financial services

Activity weakened further overall, but developments across sectors were mixed, with demand holding up in restructuring, audit and IT.

Contacts reported a sharp fall in transactional business, such as mergers and acquisitions and property-related services. Demand for marketing, advertising and recruitment services also weakened markedly as companies cut discretionary spending and put hiring on hold (Chart 2).

By contrast, activity held up in corporate restructuring, audit, debt management, employment and probate law, IT and telecommunications. Insurance activity was also maintained and demand for banking and financial services remained strong as companies sought finance to bridge the lockdown.

Most contacts who had seen falls in demand for their services expected only a very limited pickup in business over the coming months, so revenues in 2020 were likely to be considerably weaker than a year ago.

Chart 2 Business services activity has weakened as corporate transactions were put on hold

Business services and services exports

Three months on the same period a year earlier

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The outlook was particularly uncertain for companies involved in business travel, due to lockdown restrictions as well as the potential for increased remote working after the pandemic. Contacts who provide onsite servicing of plant and machinery or construction services overseas said that activity was being held back by international quarantine restrictions.

Haulage and shipping volumes of non-food goods were also significantly lower than a year ago, though there were a few early signs of improvement as more companies resume operations.

In the professional services sector, many contacts reported less disruption to their business activity than in other sectors, since many employees have been able to work from home during lockdown. A number of companies said they don’t expect to return to onsite working until the autumn, and even then only to a limited extent to ensure social distancing.

Manufacturing

Output continues to be significantly weaker than a year ago, though there has been a modest improvement in recent weeks as more companies reopen.

A growing number of manufacturers are resuming production, though many are operating well below full capacity due to social distancing measures (Chart 3), and a high proportion of workers remain on furlough or reduced hours.

Contacts said they expected social distancing and weak demand to constrain output for several months. The most common central expectation among companies was that output would still be around a fifth below normal levels by the end of the year.

Chart 3 Widespread shutdowns caused manufacturing output to fall sharply

Total manufacturing output and manufacturing exports

Three months on the same period a year earlier

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The aerospace, automotive, heavy engineering and oil and gas industries have been most severely affected by economic disruption caused by the pandemic, leading to redundancies.

Food producers have also been hit by loss of food service business and a drop in demand for pre-packaged food, which has been only partially offset by higher demand from supermarkets. Contacts estimate it could take two to three years for food service demand to return to pre-pandemic levels.

By contrast, producers of chemicals, technology and healthcare and personal protective equipment (PPE) have reported strong demand.

Contacts said supply chains were generally stable, with only a few reports of shortages, for example in the materials used in the production of PPE. However, some contacts were concerned that bottlenecks for other materials could emerge as output picks up and suppliers’ inventories run down.

Construction

Construction sites are reopening in some parts of the UK but output is still significantly lower than a year ago due to weak private sector demand.

Construction activity resumed on a phased basis in May and June, though mainly on sites where building had already started or was close to completion. Contacts reported that activity was being constrained by social distancing measures as well as by shortages of materials as more sites reopen.

Lower construction activity and repair and maintenance work, is likely to have a detrimental effect on other sectors, such as companies that provide furnishings and fittings.

Some contacts said that maintaining social distance on sites would lower productivity, squeezing thin margins and increasing the risk of failures in the sector. But other contacts expect output to pick up gradually as demand recovers, though it was likely to remain somewhat below pre-crisis levels for the next 12-24 months.

Contacts were concerned about the outlook for commercial work over the next two years as enquiries and orders have collapsed. In particular, some thought that changes to working habits as a result of the pandemic could have a detrimental effect on office developments.

However, public sector projects were holding up, and housebuilding activity was resuming slowly. Though house builders expected output to remain well below normal levels for some time, due to limits on capacity from social distancing requirements and until there is more certainty about demand.

Corporate financing conditions

Demand for credit is high and expected to increase as companies start to reopen over the coming months.

Many companies across different sectors continued to report high demand for credit – either in the form of existing facilities or new loans – to address cash flow issues or finance working capital.

Government schemes have helped to increase the supply of credit, but availability remained tight for some larger companies in vulnerable sectors.

Among larger firms, take up of the Government’s Coronavirus Large Business Interruption Loan Scheme (CLBILS) has been low so far.

Among small companies, demand for the Coronavirus Business Interruption Loan Scheme (CBILS) continues to be high, though it may be tailing off slightly. Demand for the Bounce Back Loan Scheme (BBLS) has been very strong. Nonetheless, many small companies are reluctant to increase their borrowing, often because they already have high levels of debt, are concerned they will struggle to repay loans or are reluctant to encumber their assets.

In terms of credit supply, contacts said that banks continued to offer flexibility on covenants, payment holidays and rolling over existing facilities. However, banks were reported to be wary of increasing their own exposure by extending new loans to companies in vulnerable sectors. Lending under the BBLS, which is fully guaranteed by the government, is growing rapidly.

Large investment-grade businesses welcomed the Covid Corporate Financing Facility (CCFF). Some said that it helped to bolster confidence and helped them to access bank and market finance. By June, they typically reported good access to market finance, and noted that there had been a high level of bond issuance in recent months. Some medium-sized contacts reported issuing equity to help improve their balance sheet.

By contrast, the availability of non-bank finance remained constrained, partly due to tight funding conditions for providers.

Contacts reported that the availability of trade credit has also tightened slightly. Although some stronger companies have accelerated payments to their suppliers, payment delays have increased in stressed sectors, such as civil aviation, car production, construction and fashion retail.

The availability of trade credit insurance was also reported to have tightened and in some cases had been reduced, particularly for companies in these vulnerable sectors. However, contacts said that the Government’s planned guarantee scheme for trade credit insurance was already helping to stop existing cover being withdrawn.

So far there have been relatively few reports of insolvencies, which contacts attributed to government support measures and recent legal changes. However, insolvency practitioners and lawyers expect business failures to increase in the coming months as the Government’s Coronavirus Job Retention Scheme (CJRS) is phased out.

Property markets

Housing market activity is gradually resuming in England, and there are early signs of demand returning for some commercial real estate properties, but the outlook for both markets remains highly uncertain.

Housing market

Estate agent contacts in England reported strong demand from buyers and a modest increase in instructions to sell. Agents around the country noted an increase in interest from buyers looking to move out of London, and in properties that are more suitable for home-working.

However, there was uncertainty whether the increase in demand would be sustained as the CJRS is phased out, and contacts were concerned that a rise in unemployment could hamper a recovery in the market.

Prices on the secondary market and for new build homes were reported to be broadly unchanged compared with before the pandemic.

Contacts said that although the availability of high loan to value mortgages had improved somewhat, it was still more limited than before the pandemic. This had prevented some purchases from going through. Difficulties in carrying out on-site valuations were also reported to have constrained the market.

Reports from house builders were mixed: some have only reopened sites that are close to completion and expect sales volumes to be constrained, whereas others report strong demand and no impact on prices. Overall, house builders report operating at up to 80% of normal capacity, with very little downward pressure on prices and only a small increase in cancellations.

In the rental market, contacts said volumes and transactions had been supported by lower rents, though there were concerns that lower numbers of overseas students would depress rental demand in some cities.

Rental arrears increased only slightly, which some contacts attributed to the CJRS. Provisions to prevent landlords from evicting tenants have also helped.

Commercial property

Investor demand for commercial real estate remains subdued overall, but there are some signs of activity picking up for distribution, industrial sites and data centres. By contrast, uncertainty about the rental outlook is deterring investment in office and non-food retail premises.

Contacts were concerned about a significant fall in rental income on retail premises when quarterly payments fall due in June, and about the possibility of evictions over the coming months. Retail property values have been depressed by expectations that rental returns will be significantly lower than before the pandemic and increasingly linked to turnover. Contacts said there were some concerns about the exposure of local authorities to retail property. However, as yet there have been very few reports of distressed sales, possibly due to forbearance by landlords and banks.

Rental returns on office space are also below normal, and contacts continue to report that they will need less office space in future. Both factors are adding to uncertainty about valuations of secondary office space.

Investment

Companies have mostly cancelled or postponed non-essential investment to preserve cash buffers, and many are uncertain when or whether investment plans will be reinstated.

In general contacts said they had cut investment spending by around half, or more for companies most severely affected by the pandemic (Chart 4). However, some contacts redirected investment to finance social distancing measures and facilitate remote working, and a few contacts, for example in IT and pharmaceuticals, continued with investment projects.

Chart 4 Many companies have substantially reduced investment and the outlook is highly uncertain

Investment intentions over the next 12 months

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A number of companies said they planned to review their investment plans next year. Decisions will depend on how their finances have been affected by the pandemic, as well as other factors, such as Brexit. Some contacts said they expected to have to streamline their business to adjust to a new normality, though others thought there might be opportunities to make acquisitions. For contacts in hospitality, tourism, leisure and transport, the outlook for investment is particularly uncertain.

Investment in real estate is also likely to be depressed for some time as firms revisit plans for office expansion or relocation in light of successful remote working during lockdown.

Employment and pay

A large number of workers remain on furlough, though increasing numbers are returning to work as companies across sectors reopen. However, redundancies are also picking up.

A number of contacts anticipate having to lay off workers if demand does not recover sufficiently once the CJRS is phased out (Chart 5). For some companies, social distancing measures will limit output, and therefore the need for workers. And some contacts have been able to improve productivity during lockdown, reducing their need for staff. Contacts in recruitment say that the number of vacancies being advertised has fallen sharply.

Chart 5 Redundancies are likely to pick up as demand remains weak

Employment intentions over the next 12 months

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In the retail sector, while the majority of workers remain on furlough for the time being, some contacts have said there will be permanent store closures, and therefore job losses. Some smaller retailers are reluctant to take staff off furlough until there is more clarity over how demand will evolve.

In travel and tourism, major operators have already announced thousands of redundancies, and many smaller contacts in the sector also expect to cut jobs, particularly given uncertainty over whether they can reopen over the summer. By contrast, some leisure and fast food companies reported a small reduction in the use of furloughing as outlets begin to reopen.

In manufacturing, an increasing number of workers are returning to work. However, there have been redundancies in the automotive and aerospace sectors, and contacts said that more are likely in these and other sectors as the CJRS is phased out.

In construction, although sites are slowly reopening, demand remains weak, particularly from the private sector, which means that redundancies are likely. Contacts said that redundancy consultations were already underway at some companies.

Pay pressure has fallen sharply, as companies have deferred pay deals, cut pay or reduced working hours. There are also reports of sharp declines in bonus and commission payments.

Costs and prices

Input price inflation remains limited overall and contacts see little scope to raise prices, due to uncertainty about demand.

Most contacts say that input price inflation has remained relatively benign on the whole. Manufacturers continue to report lower fuel, energy and commodity prices and little change in the cost of imported materials. These factors have helped to offset an increase in some freight costs due to capacity constraints and a sharp rise in the cost of personal protective equipment and the materials used to make it.

Contacts across sectors see little scope to raise prices or fees, with some reporting that planned increases have been deferred or cancelled.

Companies in sectors that are still in lockdown – such as hospitality and leisure – are not reporting prices. Many contacts in these sectors expect that when they do reopen, they will need to offer discounts and promotions to stimulate demand, despite pressure on margins.

Clothing retailers continue to offer large discounts online and some expect to have to offer discounts of at least a fifth once stores reopen in order to clear stock. However, some retailers plan to hold back some stock until next year and do not plan to offer discounts when they reopen.

Competition in the supermarket sector is helping to contain food price inflation, though some price pressure is building from higher costs relating to transport, labour, social distancing and the depreciation of sterling.

A few tourism contacts thought there might be scope to increase prices this summer if demand is boosted by a ‘staycation’ effect, because capacity is likely to be constrained by social distancing measures.

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