Agents' summary of business conditions - 2021 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 16 December 2021
Spare capacity

Activity continued to recover over the past three months, although output growth is being increasingly constrained by shortages of materials, components and labour

Labour shortages

Recruitment difficulties remained acute in many sectors even after the furlough scheme ended; pay settlements continued to rise

Elevated costs and prices

Growing reports of rising costs being passed through to prices; further upward pressure from higher pay and energy costs expected in 2022

Overview

This publication summarises intelligence gathered by the Bank’s Agents between mid-October and late November. This was largely before the emergence of the Covid-19 (Covid) Omicron variant and Government measures intended to contain the spread of the virus.

The Agents’ scores published alongside this document generally represent developments over the past three months compared with a year ago.

In November 2021, the process for producing the Agents’ scores was changed. Each score is now produced by a small group of Agents, who are specialists in the topic being scored. Previously, each score was produced by taking a weighted average of 12 separate Agency scores. As a result, scores are now produced to one whole number, rather than to one decimal place. The underlying scoring methodology is unchanged, however, so the scores remain comparable with earlier scores in the series.

Consumer demand

Consumer spending remained elevated, with steady growth in retail sales, while growth in spending on services picked up modestly.
Contacts reported increased demand for clothing, footwear, technology, furniture and appliances, though the ranges available of some of these goods was constrained by shortages. Some contacts said that Christmas spending was being brought forward, in part due to concerns about shortages. As a result, ‘Black Friday’ discounting was reported to be lower than a year ago.

Supermarket sales volumes continued to soften compared with a year ago, in part reflecting base effects from strong sales a year ago, and as consumers diverted spending to services. Contacts said that although there were continued shortages of some products, particularly imported goods, shoppers were generally content to switch to alternatives. However, there were some concerns that early Christmas buying would exacerbate shortages. Small food retailers reported suffering more serious stock shortages because suppliers tended to prioritise bigger customers.

In the services sector, demand continued to strengthen modestly, in particular in financial advice, IT services and dining out. Some contacts in the casual dining sector said demand was supported by home deliveries, which were in some cases more than 25% above pre-pandemic levels. However, contacts operating in city centres reported lower demand, particularly in London.

Contacts in the hotel sector said revenues were close to, or in some cases above, pre-pandemic levels, supported by domestic tourism and some firming in room rates. However, weak demand for business travel weighed on occupancy rates overall.

Across the hospitality sector, contacts said labour shortages had constrained growth by forcing them to restrict services, for example by reducing opening times or offering fewer menu choices.

In more recent conversations with the Agents, contacts expressed some concerns about the impact of the Covid-Omicron variant on activity in the near term, though it was too early to gauge the likely impact.

Business and financial services

Business services activity continued to improve, but growth was constrained by shortages of goods and labour.
Professional services contacts continued to report robust growth in revenues, for example in legal, consultancy, engineering and IT services. Most contacts said revenues exceeded pre-pandemic levels, allowing them to select higher-margin work and raise fees – particularly in sectors where the labour market was tight.

Contacts reported strong demand for work relating to mergers and acquisitions, and growth in insurance underwriting revenues, driven by increases in cyber and professional indemnity premia.

However, labour shortages were reported to have constrained growth among recruitment agencies and logistics firms; while ongoing semiconductor shortages held back business for some IT services companies. And many companies supplying corporate hospitality and international travel said that demand remained well below pre-pandemic levels.

Exports of services continued to improve. There were a few reports that the easing of international travel restrictions earlier in the year had made it easier for UK-based companies to provide services abroad, such as maintenance of machinery. There were also reports of a modest improvement in international tourism, although this was from a low base, and contacts said that Covid-related travel restrictions continued to weigh on demand overall.

Manufacturing

Output growth slowed even though demand was firm, due to shortages of materials, components and labour.
Contacts said that longer delivery times for components and materials were a significant constraint on output, but shortages of labour also held back activity across a range of sectors. Contacts expected supply issues to continue to weigh on output in the short term, and some thought supply chain disruption could persist into 2023, as supply bottlenecks were expected to unwind at differing paces. For example, some automotive and electrical manufacturers expected semiconductor shortages to last into 2023, and some commodity-related supply issues might take a while to be resolved.

Demand for household goods and chemicals was strong, but contacts reported output being held back by shortages of some raw materials as well as skilled workers. Shortages of labour also contributed to output levels flattening off in the food and beverages sector. Supply constraints and weaker demand weighed on the production of construction-related goods. Output volumes in the transport sector overall remained well below pre-pandemic levels. However, automotive output fell over the past three months, as parts and labour shortages led to increased production stoppages. In contrast aviation output picked up slightly as carriers began to upgrade their fleets.

Exports of manufactured goods also eased, mainly due to a decline in automotive output caused by semiconductor shortages. There were ongoing reports of companies losing EU-based customers due to post-Brexit trading arrangements, and some reports of production being moved from the UK to the EU.

Construction

Construction output slowed as materials, labour shortages and cost increases weighed on activity.
There were widespread reports of output being constrained by supply-chain issues that affected the availability of materials and labour shortages.

Demand for new build private housing remained strong and supported activity, though some housebuilders said shortages and planning delays had led to slower build rates.

And some contacts said that there was caution about committing to new developments due to the uncertainty caused by supply bottlenecks, rising materials and labour costs, lack of availability of land and planning difficulties.

There were also reports of construction projects being postponed due to higher materials costs, and a few instances of companies going into administration, due to the impact of higher costs on their margins.

By contrast, some contacts reported positive demand for renovation work for residential and commercial properties. Public infrastructure projects also continued to support construction output, though there were also some reports of slowing demand from this source.

Capacity utilisation

A growing number of contacts reported activity being held back by materials and labour shortages; some shortages were expected to persist into late 2022 or beyond.
Contacts said that the shortage of drivers was particularly acute and had deteriorated over the past few months. Labour shortages in the food processing industry had resulted in intermittent product shortages at supermarkets and restaurants. And staff shortages in the hospitality and retail sector meant that some companies had to restrict opening hours.

Many contacts in the manufacturing and construction sectors reported output being constrained by shortages of raw materials, components and finished goods. This was partly due to shipping delays, which had made lead times considerably longer. In some cases, contacts had been forced to reduce production, for example in the automotive sector.

Contacts in some sectors were concerned that materials shortages could persist into late next year or even into 2023, as supply bottlenecks were expected to ameliorate at differing paces. And problems were reported to be more acute for smaller firms than for big companies that tend to have larger supply networks, longer-term supplier contracts, better purchasing power and are able to hold large amounts of stock.

Some contacts reported that they still had significant amounts of spare capacity, however, including companies reliant on business from overseas tourism, corporate travel or office commuters.

Investment

Investment intentions continued to recover, as companies sought to alleviate capacity constraints and increase efficiency.
In manufacturing, contacts reported investing in automation, upgrading machinery, expanding facilities and in research and development. In some cases, investment projects were intended to address skills and labour shortages, though a few contacts said that labour and materials shortages had delayed investment plans.

In business services, investment was mostly focused on digital and information technology. Some contacts increased investment in office refurbishment as employees returned to onsite working; some contacts focused investment on staff or acquisitions.

Investment remained strong among consumer services firms. Contacts reported increasing capacity, such as: showrooms and warehousing; refurbishing and reconfiguring premises; and upgrading digital systems to improve the efficiency of customer service, or to enhance marketing and business management systems.

Corporate financing conditions

Demand for new bank credit was subdued, but supply-chain issues and rising input costs have led to increased demand for working capital finance among small companies.
Demand for new bank credit among small companies was reported to have been weak, reflecting large cash reserves and a limited appetite among firms to take on more debt. Demand for the Government’s Recovery Loan Scheme remained subdued.

However, there was strong demand for other forms of credit, such as asset-based finance. There was also increased demand for working capital finance, to cover the rising cost of raw materials and support inventory building.

Medium-sized and large corporates continued to report strong investor appetite for issuance in debt and equity markets. As a result, demand for bank credit from large corporates remained subdued.

Bank credit was reported to have become more readily available to smaller companies, except for those in sectors that had been most affected by the pandemic. However, challenger banks were reported to be more willing to lend to those companies.

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, such as retail, hospitality, travel, construction and office real estate, said that credit availability remained tight. Credit continued to be readily available to large corporates.

Contacts said that payment terms across supply chains were generally normal, though there were reports of some suppliers requiring upfront payment for customers in sectors that were deemed to be more vulnerable, such as construction, hospitality and retail. Insolvencies and bad debts remained low. However, some anticipated a pickup when Covid-related government support measures were fully withdrawn, for example the moratorium on rents. And Trade Credit Insurance cover was expected to become more costly for vulnerable sectors.

Property markets

Demand for housing continued to outstrip supply; further recovery in investor demand for commercial property.

Housing market

Contacts reported ongoing strong demand for housing and a shortage of properties for sale in most parts of the UK. This supported house price inflation, though contacts expected house price growth to soften in the coming months with pressure on household finances thought to weigh on demand, and potential buyers deterred by the lack of properties available.

Demand for rental property remained strong in most parts of the UK, and was boosted by sellers who had been forced to rent while trying to find a property to buy. Contacts reported an acute shortage of supply in the rental market, exacerbated by smaller landlords choosing to exit the market.

In the mortgage market, contacts reported higher demand for fixed-rate loans in anticipation of an increase in interest rates.

Commercial real estate

Investor appetite for industrial and logistics-related property continued to be strong. The supply of warehousing premises was reported to be insufficient to meet investor demand, and there were growing reports of properties being built speculatively and sold off-plan. Demand from tenants also remained strong for the time being.

Contacts reported a pickup in demand for office space among occupiers and investors. Demand was mostly focused on modern and flexible space in locations with good transport links. However, there was still a high degree of uncertainty over the outlook for demand in the office sector as more companies adopt a hybrid working model.

Demand for retail property remained weak overall. However, there was strong demand from investors and tenants for out-of-town retail parks and supermarkets. And prime high street premises in commuter towns were in greater demand than retail premises in city centre locations, as more people work from home.

Employment and pay

Even after the end of the furlough scheme, recruitment difficulties became more widespread and employment intentions picked up, leading to further upward pressure on pay.
Even after the end of the furlough scheme, recruitment difficulties were reported to have become more widespread and acute, particularly for experienced hires. Companies in a wide range of sectors reported severe shortages of staff, and staff turnover and vacancies remained higher than normal for many companies. Demand for staff was particularly strong in professional services, hospitality, logistics distribution and warehousing, construction and engineering.

Contacts said there had been little evidence that labour supply had improved materially since the Government’s Job Retention Scheme ended in September. Many staff had been taken off furlough before the scheme ended. And workers still on furlough at that point tended to be those employed in sectors most severely impacted by the pandemic, such as airlines, international tourism and hospitality. Contacts said that the vast majority of these workers had been retained.

Companies attributed labour shortages to a combination of factors, such as structural shortages in professional services, IT and engineering. Some reported a reduction in the availability of EU workers due to travel restrictions relating to EU withdrawal and Covid. Many migrant workers were not expected to return to the UK due to travel restrictions and improved opportunities in their home countries.

There were also reports of lower participation, particularly among older workers or people wanting to work more flexibly. This had affected sectors, like haulage, which has an ageing workforce and often involves working unsociable hours. However, there were a few reports of HGV drivers being incentivised to return to the sector with higher wages.

Pay settlements continued to increase, with awards, to date, typically around 2%–3.5% compared with 1%–2% earlier this year.

There were reports of companies making mid-year salary adjustments to retain staff, and some instances of pay settlements of 5%–7%, especially among companies where pay had been frozen over the past couple of years.

And contacts reported significant upward pressure on pay for skills in short supply, such as construction, hospitality, IT, accountancy and legal, with staff being offered pay increases ranging from 10% to 40% to switch firm. One-off retention bonuses were also reported to have become more common.

A number of contacts expected further upwards pressure on pay growth next year, as the labour market was expected to remain tight, while the recent and expected further increase in consumer price inflation could encourage workers to demand bigger pay settlements.

Costs and prices

Input price inflation remained elevated, mostly reflecting global factors, and companies appeared to be more willing to pass through higher costs to prices. Contacts expect further price increases next year driven by pay and energy costs.
Contacts attributed input price pressures mostly to global factors, such as a strong recovery in demand, and supply-chain disruptions caused by plant shutdowns and adverse weather. Most contacts expected material and component costs to remain high in 2022; though costs of some inputs, as well as for shipping and transport appeared to be stabilising.

Companies also reported significant upward pressure on costs from energy prices, with some reporting increases ranging from 50%–70% as existing contracts came to an end. This meant that a degree of pass-through to prices would be unavoidable, particularly among those in energy-intensive sectors. Contacts expected energy to be a significant factor driving higher output price inflation in the first six months of 2022.

In manufacturing, output price inflation continued to increase, reflecting lags in the pass-through of some input costs. Construction contacts reported passing through increased materials costs in full to new contracts, but much less so on work already in progress.

In business services, fee inflation varied depending on demand and the extent of competition. Distributors reported passing through higher transport and logistics costs as a result of increased fuel prices. And wholesalers continued to pass on higher product prices. Contacts in sectors where demand is high and labour constraints are most acute, such as professional services and distribution, said they expected fee inflation to remain elevated, in part driven by upward pay pressure in 2021 Q1.

Retailers also reported rising inflation. Food price inflation was rising to 3%–4%, and some contacts expected further increases in the coming months as retailers appeared to be more willing to accept price increases from suppliers in order to avoid product shortages. Car prices continued to pick up, especially for used vehicles.

Overall, reports from consumer services contacts were consistent with moderate increases in prices. Some contacts in the hospitality and leisure sector reported increasing prices in response to high demand and rising costs. But prices were flat at cultural and sporting venues. Nonetheless, service price inflation was expected to pick up in the coming months amid growing pay pressure in the hospitality, leisure and retail sectors. Contacts said that much of the phased restoration of Value Added Tax for companies in hospitality and tourism was also likely to be passed through to consumer prices in order to support margins.

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