Agents' summary of business conditions - 2020 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 17 September 2020

Activity has picked up but is expected to remain below pre-Covid levels for some time

Pay freezes relatively widespread and redundancies expected later this year

Little movement in prices due to subdued demand and reduced capacity

Overview

This publication summarises intelligence gathered by the Bank’s Agents between early August and early September.

The Agents’ scores published alongside this document are based on information gathered between mid-July and late August. During the early stages of the pandemic, economic activity fell at an unprecedented pace, reflected in some Agents’ scores moving to the extremes of their range, where scores can be consistent with a wide range of outcomes. Although activity has recovered in recent months, it is still markedly weaker than a year ago, so a number of the Agents’ scores have remained very low.

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

Consumer demand

Retail sales strengthened during August; services demand remained weak.

Sales of consumer goods over the past month or so recovered from their lows during lockdown: contacts reported faster growth in online sales, while store-based sales also improved, though to a lesser extent. Many retail contacts said they delayed opening less profitable stores, and some chains closed stores permanently. Contacts noted that sales at out-of-town shopping centres were stronger than in town centre stores.

Demand varied for different types of goods. Contacts reported strong demand for household goods, furniture and garden-related items, possibly reflecting an accumulation of savings and people spending more time at home. By contrast, sales of clothing and footwear were still markedly weaker than a year ago, though sales were boosted after stores reopened in June.

Contacts reported strong growth in sales of used cars compared with a year ago, though demand for new cars was more muted. Contacts were cautious about how long demand would be sustained.

Supermarkets said sales growth had eased somewhat from its peak during lockdown, as some consumers returned to eating out. However, online orders for home delivery and in-store collection remained strong. Convenience stores also continued to report strong sales growth.

Consumer services turnover remained significantly lower than a year ago. This reflected the widespread cancellation of hospitality bookings, weak demand for air and rail travel, indoor leisure and sports, and the fact that many entertainment venues remained closed.

However, restaurant contacts reported strong demand, supported by the Government’s Eat Out to Help Out scheme, and many reported positive trade on days when the scheme did not apply. Nonetheless, revenues were constrained because restaurants had to limit customer numbers in order to maintain social distancing — in some cases by as much as half. And some restaurant chains kept certain outlets closed, especially in locations reliant on business from office workers.

Some outdoor attractions, such as theme parks, reported strong domestic visitor numbers, boosted by a ‘staycation’ effect, though attractions that rely on overseas tourists fared less well. Revenues were also constrained by the need to limit visitor numbers.

Business and financial services

Activity levels picked up modestly in August though they were still well below normal levels for most companies.

Demand for business travel, hotels, conferencing and corporate entertainment remained particularly weak, and contacts saw little prospect of a material improvement. Some customers planned to permanently cut much of this spending. Advertising and marketing and recruitment companies reported a modest pickup in demand, though it was still considerably lower than normal.

By contrast, activity continued to be strong among firms in IT and telecoms, employment law, audit, debt management and corporate restructuring. Insurance and corporate banking activity continued to hold up. Contacts offering Brexit planning advice reported activity starting to pick up again.

Contacts said there were some early signs of corporate transactions and commercial real estate deals resuming, though activity remained weak. Some architectural and engineering consultancies said that while new work from the private sector had slowed, this had been partially offset by an increase in public sector work. Companies that provide onsite services, such as plant servicing, said activity was being constrained by quarantine measures and lack of accommodation.

Contacts in England where many staff had moved to working from home said that onsite working was starting to resume, but at a slow pace in order to maintain social distancing. Some said they had started reopening large city centre offices from early July to give employees the option to return to the office. However, take-up had been very low. And a growing number of companies said they did not expect staff to return to offices until 2021.

Manufacturing

Manufacturers have largely resumed production, but activity is still weak in some sectors.

The majority of manufacturing contacts said they had restarted output, though many were operating below capacity in order to maintain social distancing, and demand remained subdued.

Contacts in the aviation sector said output continued to be well below normal levels, reflecting the drop in demand for commercial flights and less maintenance for existing fleet. In addition, uncertainty about the outlook for commercial air travel had depressed new orders for aircraft.

Automotive manufacturing picked up, especially for electric vehicles — but was still significantly below normal. This had a knock-on effect on other companies in the supply chain, such as steel producers, who reported that demand from the automotive sector remained very weak. Contacts supplying the oil and gas sector also reported a reduction in orders.

By contrast, manufacturers of construction goods, such as doors, windows and paving, said that demand had recovered and demand for DIY products remained a little above normal. And output in the rail sector was supported by large public sector projects.

Suppliers to the food service sector reported a modest recovery in demand as restaurants reopened, but contacts said they were not expecting order levels to return to normal until next year.

Demand for some chemicals, healthcare and personal protective equipment remained strong, though sales of some pharmaceuticals had been depressed by prioritisation of Covid-19 treatments.

A growing number of manufacturing contacts that trade with the European Union expressed concern about the arrangements for the end of the transition period. A few companies said they were seeking to onshore supply chains to limit disruption.

Construction

Construction sites have mostly reopened around the UK, but the pipeline of new work is subdued.

Contacts reported strong demand in public sector work, in part supported by a government scheme to fund infrastructure projects, which resulted in some projects being brought forward. Housebuilding activity was also reported to have picked up, though mostly to complete projects, rather than start new ones. While housing market activity had recently picked up, contacts were uncertain about how long that upturn would be sustained, and so were cautious about the outlook for housebuilding.

Smaller builders said there had been an increase in home maintenance and improvement work, as households reassessed their living and working space during lockdown. By contrast, demand for office-related work was muted as companies considered the return to onsite working and their need for office space in future.

Many contacts said that they were operating at near full capacity in order to catch up on time lost during the pandemic and complete projects. They reported taking a variety of measures to maintain operating capacity while observing social distancing requirements, such as extending site working hours and providing personal protective equipment. Nonetheless, turnover this year was still likely to be lower compared with a year ago.

Corporate financing conditions

Demand for credit remains strong among SMEs; some companies may need to reschedule debts.

Contacts reported that demand for credit from small and medium-sized enterprises (SMEs) has softened since the initial surge in applications for government-backed loans. But credit demand remains strong, mainly to cover working capital and cash-flow needs as companies reopen after lockdown. By contrast, demand for bank credit from big corporates was subdued, as companies were able to raise credit on financial markets or from elsewhere. As a result, their demand for bank credit had reduced.

Although the availability of finance has improved overall, a growing number of contacts said that their pre-Covid-19 business model was under review — for example companies in hospitality, travel and steel production. Therefore, as repayment holidays draw to an end, some companies, in particular SMEs, may need to reschedule their debts. There were a few reports of larger companies (with a turnover of greater than £45 million), in sectors that had been most affected by the pandemic — such as civil aviation, hospitality and leisure — having difficulty borrowing on financial markets and from banks. Some companies with a high degree of leverage also reported difficulty in accessing bank finance.

Government support and recent legal changes had helped to limit corporate failures to date. However, contacts in restructuring and insolvency reported signs of an increase in activity, which was expected to pick up through the remainder of the year.

There were some continued reports of trade credit insurance cover being reduced, especially in the casual dining and construction sectors. The availability of new cover was constrained, but less so for companies that could demonstrate strong cash flow.

Property markets

Housing market and rental activity strengthened; investor demand for commercial property remained muted.

Housing market

Estate agent contacts reported buoyant activity, especially in England, supported by pent-up demand from lockdown, the temporary cut in stamp duty, and the Help to Buy scheme for first-time buyers. Contacts were cautious about the outlook, however, and some noted that activity in parts of the market had been constrained by a lower availability of high loan to value mortgages.

Contacts also reported strong demand in the lettings market. This was the case in all parts of the UK except central London, where supply continued to outweigh demand. Rental arrears have increased only slightly, but some contacts were concerned they could rise further when the Government’s Coronavirus Job Retention Scheme (CJRS) ends.

Commercial property

Investor appetite for commercial real estate remained subdued. There were some reports of interest from overseas investors, but very few reports of distressed sales.

In the retail sector, rental income was significantly lower than normal. Some landlords have been renegotiating rental terms, and the shift towards rents linked to turnover continued, reflecting uncertainty over future rental growth in the sector due to structural change.

Rental returns in the office market were reported to be just a little below normal. However, there was significant uncertainty over the outlook for demand, as some businesses were actively considering giving employees the option to work remotely on a permanent basis.

By contrast, demand for industrial space remained strong, particularly for distribution and logistics premises, supported by the shift towards online retail. Demand for healthcare premises and data centres was also robust.

Investment

Widespread reports of investment being cancelled or postponed due to uncertainty, especially in the aviation, automotive and oil and gas industries.

Investment intentions remained significantly weaker than a year ago, and there were widespread reports of investment being postponed or cancelled to preserve cash. Most contacts remained cautious about the economic outlook and their cash positions. As a result, investment tended to be limited to essential equipment or maintenance, rather than discretionary or strategic projects.

Contacts in the automotive, aviation and oil and gas extraction sectors were particularly cautious about investment due to the uncertain outlook for demand. And companies generally reported delaying investment in office relocation, workplace expansion and replacement of machinery.

Some contacts said they were resuming Brexit planning, which in some cases could lead to investment being delayed further.

However, there were also several reports of investment being reinstated or accelerated. For example, some contacts made use of the lockdown period to refurbish premises, or purchase vehicles to fulfil increased demand for online orders. Contacts also invested in developing digital capability to provide online services and embed remote working.

And some investment was redirected towards measures to protect against Covid-19 transmission, particularly in consumer services and manufacturing.

Employment and pay

Companies continue to adjust staffing levels; pay growth is likely to be subdued in 2021.

Given the uncertain outlook, many companies reported freezing pay, and a large proportion of contacts said they planned to delay or cancel pay settlements this year. Companies in a number of sectors reported introducing temporary pay cuts, though these were mainly at management level.

Contacts said they had brought most furloughed workers back to work. Nonetheless, some companies across all sectors reported plans to reduce headcount, particularly in the second half of this year as the CJRS unwinds. Job losses were expected to be particularly severe in the hospitality, retail, aviation, automotive and oil and gas sectors. Some companies planned to see how demand evolves in the coming months before making headcount decisions.

There were some reports of headcount being increased in sectors where demand has been stronger than normal, however, such as food processing and retail; IT and digital services; medical and scientific development, and some financial services.

Costs and prices

Contacts reported little movement in prices, as uncertainty about demand and constrained capacity limited the desire to move prices up or down.

Manufacturing contacts reported barely any input price inflation and little scope to increase prices due to competition. Business services contacts also saw little scope to increase fees. In fact, there was likely to be downward pressure on prices in some sectors as clients focused on cost-cutting.

Contacts in hospitality, leisure and tourism said that a combination of ‘staycation’ demand, the government’s Eat Out to Help Out scheme, and constrained capacity due to social distancing measures meant that they planned to hold prices steady. Many contacts had not passed on the cut in VAT, in order to offset higher operating costs associated with Covid-19 safety measures, or to help them cover revenues lost during lockdown.

Some contacts thought that offering discounts was unlikely to boost demand among consumers concerned about Covid-19 transmission. By contrast, some hotels and venues in city centres, whose revenues rely on events and international travellers, have been discounting to attract domestic tourists. They were concerned about further downward pressure on prices over the winter season.

In the retail sector, contacts reported offering fewer discounts to clear summer stock, and said that their stock for the autumn/winter season was more aligned with current demand.

However, in the supermarket sector competition meant that some discounting was starting to re-emerge. And while there were some cost pressures building from higher transport costs and Covid-19 safety measures, supermarkets did not expect to be able to fully pass these on to prices.

New car prices were reported to be flat, but used-car prices were boosted by strong demand and limited supply.

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