Agents' summary of business conditions - 2020 Q4

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 December 2020

Social distancing rules weighed on consumer spending overall, but some retail sales were strong

Employment intentions remained negative and pay growth subdued

Companies reported limited scope to move prices up or down

Overview

This publication summarises intelligence gathered by the Bank’s Agents between mid-November and early December.

The Agents’ scores published alongside this document are based on information gathered between mid-October and late November. 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 relative to troughs earlier in 2020, a number of the Agents’ scores have remained very low. In part, that reflects activity in some areas remaining consistent with the extremes of their distribution, despite the recovery — especially as most scores compare the current situation with a year ago. However, some scores appear to be providing a somewhat weaker steer than other data sources on this basis too.

Consumer demand

Retail sales weakened in November due to restrictions to suppress the spread of Covid-19 (Covid).

Retail sales declined in November, but the fall was less severe than during the first lockdown. This was because more companies were making online sales and more shops had been permitted to stay open for the collection of online orders. A number of contacts said they planned to extend opening hours in December to help recoup some of the sales lost due to the restrictions in November.

Demand for household and electrical goods, technology, furniture and home improvement goods remained strong, reflecting some consumers spending accumulated savings or substituting away from spending on socialising.

Supermarket sales continued to be higher than a year ago, with demand for home delivery picking up after social distancing restrictions were tightened. Contacts said they expected spending on food and drink to be stronger this Christmas than in previous years, because more people are likely to stay at home during the festive period.

However, sales of clothing and footwear remained markedly weaker than a year ago, with social distancing restrictions limiting demand for formal clothing in particular.

Consumer services turnover remained significantly lower than a year ago, mostly due to the influence of social distancing measures, which impacted on the hospitality, leisure, travel and tourism sectors. However, companies offering UK-based holidays reported strong bookings for 2021.

In the hospitality sector, sales were materially lower than before the restrictions were imposed even though many pubs, cafes and restaurants were able to offer takeaway options. And contacts expect that turnover will be significantly lower than a year ago over the Christmas period, with bookings weak even before the announcements of the restrictions applying in December.

Business and financial services

Activity in some sectors improved modestly in November though it was still well below normal levels in aggregate.

Contacts in banking and insurance reported revenues holding up well due to increased financial market activity, resilient demand for insurance, and strong lending activity — mainly arising from government-backed loan schemes. Accountancy firms reported good demand for advisory and corporate transaction work, some of which had been delayed by lockdown earlier in the year. Contacts offering services in financial planning and tax were busy ahead of anticipated tax changes. Demand for advice on employment law remained strong; insolvency activity was slow.

IT companies continued to perform well, and there were reports of continued strong demand for IT hardware, software and other office supplies in order to support remote working.

Activity in the logistics sector was mixed, with strong demand for home delivery services offset by weak demand in sectors that had been most affected by the pandemic, such as food service supply to hospitality businesses.

Contacts at UK container ports reported congestion and said it was becoming more widespread. This stemmed from lockdown restrictions being eased in China as restrictions were being tightened in other major economies, which in turn had caused imbalances in inbound trade. And further disruption to freight transport was likely to occur between the UK and continental Europe from 1 January when new trading arrangements with the EU come into effect.

Demand for business travel, hotels, conferencing and corporate entertainment remained depressed, resulting in some closures in the sector.

Manufacturing

Manufacturing activity remained weak overall, even though production continued during November.

Output levels continued to be significantly lower than a year ago, particularly in aviation, while automotive output softened again in Q4. Weakness in these two sectors had a knock-on effect on demand for steel. Oil and gas production was also down on the year.

Suppliers to the food service sector reported a decline in output due to the restrictions on activity in November, with increased demand from supermarkets not sufficient to make up the shortfall.

However, contacts in some sectors reported a modest pickup in activity levels in recent months.

Manufacturers of computers and electrical goods reported steady growth, supported by consumer demand for home electronic products and by businesses to facilitate remote working. Production of household goods and furnishings was also strong, as was output of items relating to Covid-security.

Clothing and textiles production was broadly flat on the year, supported by online retail and by some contacts switching to manufacturing medical supplies.

Although preparations had continued for the introduction of new trading arrangements with the EU, a portion of businesses – in manufacturing and other sectors – were not yet ready. A few contacts reported a boost to output from stockbuilding activity ahead of the end of the transition period on 31 December, though this was less than for previous deadlines.

A number of contacts said they expected other preparations, such as making arrangements for border checks and obtaining necessary certifications, to continue until the end of the year, though planning has been complicated by Covid and uncertainties surrounding the future trading arrangements.

Reports indicated that preparations for new UK-EU trading arrangements among smaller companies may be less well advanced than among larger corporates. For example, small and medium-enterprises (SMEs) said that they have more stockbuilding left to do by the end of this year — possibly reflecting cash constraints. And a number of SMEs said they were planning to close their operations in order to avoid potential disruption in early January.

Construction

Construction activity improved slightly in recent months but remained lower than a year ago.

Activity picked up in most areas except for commercial development, with output mostly supported by infrastructure projects. Contacts reported that public sector repair and maintenance work was holding up, and demand for household repair and maintenance work was strong. This had resulted in shortages of some materials, constraining output.

Construction of private new build housing was reported to be close to normal levels, driven in part by strong consumer demand. However, contacts said they expected demand to slow in the coming months when government support measures, such as the temporary reduction in stamp duty and the current form of the Help to Buy scheme, come to an end. And construction of social housing was weaker than for private housing due to the postponement of projects.

Contacts expressed concerns about the weak pipeline of commercial projects, such as office and retail development, which could weigh on output in 2021. There was also some concern that public projects could be delayed due to budget constraints. However, there were hopes that investment in green projects would support activity further out.

Corporate financing conditions

Demand for credit increased; credit availability continued to tighten for sectors most affected by the pandemic.

Credit demand among small and medium-sized companies was reported to have increased in some cases as Covid-related restrictions came into effect. Contacts thought credit demand could rise further in the coming quarters as deferred payments, such as rent and tax, fall due in the first six months of 2021.

Medium-sized companies reported an increase in merger and acquisition activity and banks were reported to have been willing to underwrite and provide credit for deals in certain sectors. Demand for bank credit from large corporates remained subdued, as many companies were able to raise finance elsewhere, for example in debt and equity markets.

Although the government-backed loan schemes are supporting credit availability, especially for the smallest companies, there have been some reports of bank credit conditions tightening, particularly in sectors that had been most affected by the pandemic, and where insolvencies were expected to rise. There were also reports of trade credit insurance being reduced for companies in those sectors.

Property markets

Early signs of housing market activity slowing; investor demand for commercial property remained muted.

Housing market

Following several months of buoyant housing market activity, contacts reported a modest slowdown in November. This was mainly due to Covid-related restrictions introduced in various parts of the UK. However, demand was supported by buyers wanting to agree house purchases in order to complete transactions before the temporary cut in stamp duty ends in March 2021.

Contacts reported an increase in mortgage rates and said furloughed workers continued to have difficulty getting mortgages from some lenders. However, there were also some signs of mortgage conditions becoming slightly easier, with some lenders extending mortgage offers to the end of 2021 to accommodate longer completion times. There were reports of some high loan to value loans being made available again.

Demand for rental property remained strong in most parts of the UK, though rents were reported to have weakened in London and other large cities due to a lack of demand from students and increased demand for larger properties and outdoor space.

Commercial property

Investor appetite for commercial real estate remained below its pre-pandemic level, though there were some reports of interest from overseas and UK investors in industrial and distribution property.

In the retail sector, rental income continued to be significantly lower than normal. Contacts said that new leases were increasingly being linked to turnover so that landlords and tenants each bear a portion of risk, and there were reports of newly negotiated contracts resulting in significantly lower rents than before. Expectations of lower rental income was leading to a fall in retail property values.

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 a large proportion of contacts expect to reduce their office space as more staff work remotely on a permanent basis.

Demand for industrial space remained strong, particularly for distribution and logistics premises, supported by the shift towards online retail.

Investment

Investment intentions remained subdued overall, though some contacts are beginning to reinstate projects.

Investment intentions remained very weak amid concerns about the strength of the recovery, uncertainty about the outlook, and cash positions. As a result, investment tended to be limited to essential equipment or maintenance, rather than discretionary or strategic projects. Nonetheless, a few contacts said they hoped to reinstate investment plans if their cash positions allow.

Some manufacturing contacts reported postponing investment, citing the uncertainty caused by the pandemic and EU withdrawal. However, others said they had resumed or continued investment, for example in expanding factory capacity, replacing equipment, or in automation to improve productivity.

Investment intentions among many consumer services firms were held back by weak revenues and cash positions, though there were some reports of contacts investing in digital capability in order to sell online.

By contrast, business services firms continued to invest in IT hardware, software and infrastructure to facilitate remote working, improve efficiency and increase their online presence. And there were reports of companies investing in haulage vehicles and expanding warehousing and storage facilities.

Employment and pay

Companies remained reluctant to hire staff and pay growth continued to be subdued.

Employment intentions improved slightly, reflecting reports from many contacts that they had largely completed headcount adjustments. However, the outlook remains negative, and further job cuts are expected in retail, hospitality and leisure, and construction once the Government’s Job Retention Scheme unwinds. Nonetheless, there were a few reports of companies increasing staff numbers in certain sectors, such as pharmaceuticals, IT and professional services.

Contacts reported that pay growth remained subdued. There were continued widespread reports of pay being frozen or settlements deferred. Bonus payments were also lower compared with a year ago. However, temporary pay cuts made earlier in the year have largely been reversed. Most contacts expected pay growth to be restrained in 2021.

Recruitment difficulties have eased significantly, particularly in sectors worst affected by the pandemic. Contacts recruiting unskilled and junior staff reported an increase in the quantity and quality of applications. However, shortages persisted for highly skilled and experienced professionals, particularly in health and social care, IT, engineering, agriculture and finance. This was probably a reflection of the gap in skills between those sectors shedding labour and those wanting to recruit. Contacts said that lower staff turnover and EU nationals returning home might also be curbing the availability of labour.

Costs and prices

Inflation remained low, with uncertainty about demand and constrained capacity limiting scope to move prices up or down.

Manufacturing contacts reported increases in some raw material costs, but they held prices broadly steady. Only a few business services contacts saw scope to increase fees. In some sectors, there was likely to be downward pressure on prices due to competition and as clients focused on cost-cutting.

Contacts in hospitality, leisure and tourism reported some reduction in the scale of discounting in order to protect margins, and where demand was strong relative to capacity. In addition, a number of contacts felt that discounts would provide little incentive to consumers concerned about Covid transmission.

For areas where demand was strong, such as homewares, DIY and gardening supplies, retailers reported reducing the level of discounting. However, as the Black Friday sales mostly took place online, contacts expected some heavy discounting if stores reopen after lockdown with lots of unsold stock. Conversely, used car prices were reported to have risen due to a combination of strong demand and limited supply.

Supermarkets said that competition was gradually increasing, but not by enough to eliminate positive food price inflation. Nonetheless, contacts said they did not expect to be able to fully pass on higher costs for transport and social distancing measures into prices.

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