This publication summarises intelligence gathered by the Bank’s Agents between mid-January and late February. The Agents’ scores published alongside this document are based on information gathered over the same period but they generally represent activity over the past three months compared with a year ago.
During the early stages of the pandemic in 2020, 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 quantitative outcomes.
Although activity has recovered relative to the troughs in early 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.
Spending on consumer goods and services continued to be weaker than a year ago, as stores and venues remained closed due to Covid-19 (Covid) restrictions, but there were signs of demand re-emerging in some sectors.
In-store sales for non-essential retailing were affected by lockdown restrictions in place to contain the spread of Covid, although online sales continued to grow. Sales of clothing and cars were particularly weak.
Sales of household, technology, home-improvement and sports and leisure goods continued to be stronger than a year ago. And demand for outdoor furniture and gardening equipment also appeared to be picking up, perhaps in anticipation of restrictions on socialising being eased in the coming months.
Supermarkets and convenience stores also continued to report stronger sales than a year ago, reflecting consumers trading up to higher-priced products and increased alcohol sales. But contacts expected sales growth to fall back when the hospitality and leisure sectors reopen, and consumers switch to more social forms of consumption.
With much of the UK consumer services sector closed due to lockdown restrictions, sales in February remained markedly weaker than a year ago. Nonetheless, contacts in the travel and tourism industry reported a sharp pickup in domestic holiday bookings for this year following the UK Government’s announcement of plans to ease restrictions in the coming months.
Looking ahead, most contacts expected there to be a gradual recovery in spending on consumer services when currently closed companies are permitted to reopen, though demand could be tempered by consumer uncertainty about the economic outlook. And companies operating outdoor activities or venues were generally more optimistic about their near-term prospects than those operating in enclosed spaces.
Business and financial services
Overall, business services activity remained weaker than a year ago. Activity in some sectors held steady or improved, though Covid-related restrictions and the adjustment to new trading arrangements with the EU weighed on activity in some areas.
Logistics activity weakened due to Covid-related factors and an unwinding of strong demand in 2020 Q4, when customers had brought forward Brexit-related stockbuilding and deliveries to avoid disruption when new trading arrangements with the EU came into effect. There were reports of some business services firms, for example legal and financial services, moving some staff to the EU.
Covid restrictions continued to weigh heavily on corporate hospitality, events and travel, as well as on wholesalers supplying the hospitality sector. Activity supporting the oil and gas sector remained considerably weaker than a year ago, and revenues relating to commercial property transactions were also subdued.
However, contacts in banking, insurance and asset and financial management said revenues remained broadly stable over the past few months and accountants and legal firms reported good levels of demand for advisory services relating to EU withdrawal and corporate transactions. Contacts also reported strong business in corporate restructuring, a significant factor in low insolvency levels.
Growth in IT services revenues continued to be supported by demand for digitisation and remote working.
And recruitment consultants reported a modest pickup in business, albeit from a low base, reflecting demand for executives and skilled workers.
Following the announcement of the UK Government’s plans to lift Covid restrictions, some contacts were cautiously optimistic that conditions would stabilise from mid-2021, and a few expected a return to modest growth as the vaccination programme progresses and restrictions are loosened.
Manufacturing output remained markedly weaker than a year ago, reflecting a variety of factors relating to EU withdrawal and Covid.
Output was particularly depressed among contacts that had been most exposed to the pandemic, such as those supplying the food services sector; petrochemicals; civil aviation and utilities. But these sectors also expected output to improve over the coming 12 months.
Automotive output remained weak, partly due to disruption to supply chains – for example a shortage of semiconductors – but appeared to be stabilising.
And some sectors, such as industrial chemicals, pharmaceuticals, and mining and quarrying reported modest output growth compared with a year ago.
Contacts attributed some of the recent weakness in output to the unwinding of stockbuilding that had taken place in late 2020 ahead of new trading arrangements with the EU coming into effect, and freight delays that had resulted in materials shortages.
There were also reports of output growth being affected by non-tariff barriers to trading with the EU, such as issues relating to customs declarations and freight, rules of origin and product-labelling requirements. Smaller firms generally reported experiencing more severe disruption than larger companies. However, contacts said disruption was starting to ease, and companies were also becoming accustomed to the new requirements. Although contacts continued to report severe disruption to the flow of goods from Great Britain to Northern Ireland.
There were few reports of contacts being unable to trade with the EU at all, some said they had relocated distribution hubs to the EU from the UK in order to continue selling to EU countries.
Construction output continued to be lower than a year ago, partly due to subdued demand from sectors worst affected by Covid, though public projects continued.
Contacts said that private commercial work remained substantially down on the previous year, in particular for office, hospitality and leisure developments. By contrast, there was strong growth in industrial developments such as logistics and warehousing.
Public infrastructure projects continued to support output, in particular school and transport developments, and contacts reported a good pipeline of publicly funded work. Looking ahead, contacts also expected green energy projects to support growth.
In house building, demand for private housing remained strong, although output was lower than a year ago due to supply chain issues and lower productivity as a result of social distancing rules. Construction of social housing had picked up less quickly due to the postponement of some projects, though housing association developments appeared to be strengthening more recently.
Demand for home improvements, repair and maintenance continued to be strong, though some activity may have been delayed as a result of lockdown. And contacts said that public repair and maintenance work had also held up.
Corporate financing conditions
Demand for credit increased slightly; credit availability tightened for sectors most affected by the pandemic.
Credit demand among small and medium-sized companies was reported to have risen slightly due to Covid-related restrictions. And demand was expected to increase further in the coming months as deferred payments, such as rents, fall due. Government lending schemes were continuing to support lending, though loan applications have been falling in recent months.
Medium and large corporates reported strong investor appetite for issuance in debt and equity markets. As a result, demand for bank credit from large corporates remained subdued. Medium-sized companies in stable or growing sectors said that bank credit was readily available. However, contacts in sectors that had been most affected by the pandemic reported some tightening in credit availability, regardless of their size.
Availability of trade credit insurance was mixed. Contacts reported premiums rising by between 10% and 30% on renewal but cover had been restored for some firms, helped by the extension of the Government’s support scheme until the end of June. Nonetheless, insurers remained cautious about providing coverage to retailers, hospitality and construction firms.
Demand for housing remained strong, but investor demand for commercial property was mixed.
Contacts said the outlook for the housing market had improved, with activity supported by the extension of the property transaction tax holiday and of the Coronavirus Job Retention Scheme (CJRS). Estate agents expressed concern about a shortage of properties for sale and said buyers appeared to be less price sensitive than normal. Mortgage lenders expect demand for home loans to remain high.
Demand for rental property also remained strong in most parts of the UK, causing rents to increase. Rent arrears were reported to have increased only slightly, though there was uncertainty whether that would continue to be the case once the temporary increase in Universal Credit ends later this year.
Investor appetite for commercial property remained below its pre-pandemic level, in particular for retail premises. Contacts reported a significant over supply of retail property and said values and rents were falling. There were also significant rental arrears and a few reports of loan covenants being breached.
By contrast, demand for office space in prime locations appeared to be holding up, despite widespread reports of businesses expecting to reduce their office footprint as a result of increased demand for remote-working. There were some reports of interest from overseas investors for property in prime locations or prime office or industrial premises, especially those with existing tenants.
Demand for industrial, distribution and science-related premises continued to be very high, leading to an increase in speculative developments.
Companies’ investment intentions picked up modestly but remain weak, with plans mostly conditional on demand recovering over the coming months.
Contacts attributed some of the improvement in sentiment to the Covid vaccination programme and the UK Government’s plans to ease lockdown restrictions, although considerable caution remains about the strength of a future recovery. Fewer contacts said that they were cancelling or postponing investment and more said they were reinstating investment to increase efficiency and capacity. The degree of confidence varied by sector, with manufacturers reporting the strongest investment intentions and consumer services firms the weakest.
In manufacturing, several contacts reported plans to invest in technology, research and development or to expand their physical capacity, though some also expected to continue to pause investment.
Business services companies reported investment in IT and digitalisation to improve efficiency, develop e-commerce and facilitate remote working. Logistics companies said they were continuing to invest in lorries, port facilities and warehousing and storage.
By contrast, heavily reduced revenues and depleted cash positions continued to hold back investment plans for many consumer-facing contacts, for example in retail, hospitality and travel. However, food and retail delivery services continued to invest in capacity.
Employment and pay
Employment intentions remained weak but are improving; pay growth was subdued but some contacts plan modest increases this year.
Contacts in sectors most affected by the pandemic – hospitality, leisure and non-essential retail –remained concerned about the need for large-scale redundancies when the CJRS ends later this year. Use of the CJRS in these sectors increased again during the latest social distancing restrictions, though the number of workers on furlough was lower than in spring 2020 as more businesses had adapted to enable some trading.
However, a majority of contacts expected headcount to stabilise, having already completed job cuts. And a growing minority of contacts in other sectors reported recruiting again following some recovery in demand, or replacing leavers with more highly skilled staff. There were reports of shortages of experienced professionals and specialist skills, in part due to a reluctance of employees to change jobs in an uncertain environment. And there were concerns about shortages of seasonal migrant labour in agriculture over the coming months.
Pay growth remained subdued. Sectors that have been most affected by the pandemic expected to freeze pay again this year and a few contacts planned to defer pay decisions until there is more clarity over the economic outlook. The increase in the National Living Wage (NLW) would also limit pay rises for companies that employ a large proportion of staff on the NLW. However, some businesses expected to raise pay this year, either because they froze pay last year, their business is doing well or they are concerned about retaining skilled staff.
Costs and prices
Contacts reported significant increases in raw materials costs, but so far there is limited evidence of higher costs being passed on to customers due to competition and uncertainty about demand.
Contacts said that the rise in input costs was widespread. Freight costs for sea, air and road transport had increased over the past few months, as had warehousing costs. And the new trading arrangements with the EU were likely to exert further upward pressure on costs.
There were also reports of large increases in material and commodity prices, for example steel, timber, copper and agricultural commodities, reflecting a recovery in global demand. In addition, insurance premia have increased across many sectors, including professional indemnity insurance. However, many businesses also reported sharp declines in some other cost elements, such as spending on travel and corporate entertainment.
So far there has been only limited evidence of higher costs being passed through to prices, however. Although more manufacturing firms reported putting up prices slightly, output price inflation overall remained low. In business services, many contacts said they were wary of increasing fees due to competition. In construction, intense competition has led some firms to bid for contracts at very low profit margins, even though costs have risen.
Some retail contacts reported being able to increase prices of products in high demand, such as furniture and home furnishings, in order to cover higher materials costs. But there were also reports of retailers holding stock until next year to avoid heavy discounting. And supermarket food prices are lower than a year ago due to intense competition. However, building cost pressures for some contacts may lead to price increases later this year.