Overview
This publication summarises intelligence from the Bank’s Agents considered by the Monetary Policy Committee at its December meeting. The intelligence was gathered in the five weeks to mid-November. The Agents’ scores published alongside this document generally represent developments over the past three months compared with the same three months a year ago.
In areas such as trade and credit conditions the overall story remains much as it did at the time of the last update, summarised in the November Monetary Policy Report (MPR), Box D. Overall export activity remains similar to this time last year. Credit demand is still weak for firms of all sizes, while lenders’ concerns about affordability continue to constrain loan supply to smaller firms.
Business service revenue growth continued to be sustained by price increases with volumes slightly weaker than a year ago. While contacts remain cautious on the outlook, some expect that transactions have troughed and that we may see a muted pickup in 2024 owing to a stabilisation in funding conditions. Contacts in the commercial real estate and secondary housing markets offer similar messages on transactions.
Manufacturers continue to produce less and construction output continues to fall, trends that contacts expect to continue into 2024.
There are some signs that the outlook for demand may be slightly weaker than Agents were seeing at the time of the last update. Consumer spending growth continues to slow, held up only by prices with volumes flat or falling, and contacts expect it to slow further in the near term. Contacts also seem more cautious on investment plans than at the time of the last update.
Employment intentions have softened again since early October, consistent with low or no employment growth. Contacts are reporting easier recruitment, lower vacancies and reduced churn compared to 6–12 months ago, though some significant skills shortages remain.
Agents see clear evidence of consumer goods prices unwinding faster than for services, particularly in food and consumer durables.
Consumer spending
Consumer spending growth continues to slow. While still positive, it is being held up by price increases. Volumes are flat or falling. Consumer services saw spending growth weaken markedly since the last update. Contacts report a weak near-term outlook.
Contacts report demand for goods from affluent consumers is steady, while those serving the value end of the market are seeing significant decline in volumes. Poor weather affected retail demand over the summer. And though the recent colder weather has increased demand for winter clothes, at the value end consumers are buying less. This is despite discounts, which for retailers with high stock levels have started early.
Purchases of large ticket items such as furniture and white goods continue to fall, at least in part owing to the slowdown in the housing market. Spending on home improvements such as new kitchens, windows and conservatories has also fallen.
Demand for new and used cars is holding up, largely due to order backlogs, though order cancelations have increased.
Consumers continue to closely manage food spend by buying more value brands or frozen food and supermarkets have increased promotions to support demand.
After a strong summer, accommodation and restaurants generally report flat or falling volumes. The mid-market has been particularly squeezed and the value end is now increasingly reporting softening demand. Bookings remain very last minute.
Visitor numbers are lower to attractions and entertainment, but it is uncertain whether this reflects poor weather or weaker underlying demand. Bucking this trend, demand for events remains strong.
Arrears have risen on consumer credit loans, albeit from a low base. Consumers are also extending terms and making greater use of payday loans and buy now pay later products.
Investment
Contacts are now planning to spend less on investment over the coming year than we were seeing at the time of the last update.
More contacts are starting to feel margin or cash-flow pressure and are cutting their investment plans in the face of elevated financing costs and tighter financial conditions. There remains a divide between those who depend on borrowing and those with cash to fund their investment.
Cost inflation, particularly for construction projects, continues to have a two-way impact on investment plans. Some contacts intend to spend more as costs increase. Others plan to reduce their volume of investment to stay within fixed budgets.
Investment stories vary by sector. Many in consumer services have completed post-Covid refurbishment of their premises, so their rates of investment have slowed. Uncertain demand prospects are also dampening intentions. Some, often larger, retailers can look through the cycle and continue to invest, while others are cutting back in the face of increasing uncertainty over demand.
Manufacturing contacts are scaling back investment plans. Those continuing to invest are driven mainly by efficiency and automation, or climate and energy considerations, as highlighted in the October Agent’s survey (see Box D in the November MPR).
Business services are scaling back investment plans, marginally, for the first time, although most continue to invest in technology. The trend for capital expenditure to become operational expenditure continues as firms migrate to cloud services.
Trade
Conditions remain similar to those at the time of the last update. The volume of manufactured goods exports is around the same as it was a year ago with declining exports to the EU offset by growth in other markets. The value of export services continues to grow.
Frictions in trade between the UK and EU continue to crystallise as existing rules are applied more rigorously and new processes come online. But it is mainly softer demand that is driving markedly lower exports to the EU. Strong growth to the US continues and demand from the Middle East remains robust despite the situation there. Demand from China remains lower than it was pre-Covid. The defence and medical sectors continue to enjoy strong demand. Contacts’ outlook is for export volumes to remain flat at best due to higher costs of finance impacting demand.
There is sustained growth in the value of services exports, driven mostly by increasing prices. Demand for business services is holding up, for example consultancy work linked to construction projects in Asia and the Middle East. Inward tourism numbers and spend remain higher compared to last year, especially from the US, Middle East, and Asia. Contacts expect maintained growth in services export values.
Supply chains are still an issue for some with continuing issues sourcing electronics. A few firms are trying to find sources elsewhere in Asia due to security concerns in China. Offshoring to Asia is rising again as shipping costs normalise. Universities are trying to target student markets other than China, such as Africa.
Consistent with the lower consumer spending, the seasonal uplift in consumer goods container volumes is more subdued this year.
Business and financial services
Business services revenues have seen sustained growth driven by prices. While contacts remain cautious about the outlook, they expect that transactional activity has now reached a trough.
Business services volumes remained slightly weaker than a year ago, but increasing prices have meant continued growth in revenues.
Revenue growth in accountancy, law and consultancy continued to soften, though demand for audit and environmental consultancy remains strong. The number of corporate transactions is slowing, and clients remain circumspect on discretionary investment and IT spend. Contacts report weaker activity in logistics, advertising, marketing and recruitment.
Some areas of financial services continue to hold up. The corporate insurance market is supported by rising premiums, and in banking net revenues increased due to higher interest rates, despite lower new lending.
Corporate events, travel and accommodation continued to recover but remain below pre-Covid levels. Insolvency and restructuring activity continued to tick up.
A few contacts are concerned that turnover growth could slow further in the winter, in part due to slowing fee inflation. But others think activity has now troughed with some expecting a muted pickup in demand in the first half of 2024 as funding costs stabilise.
Manufacturing
As expected, manufacturing output continued its slight fall relative to last year and demand remains soft. Contacts expect a slowing in orders and paused investment to reduce volumes further in the coming year.
Demand continues to weaken for construction products and homewares as well as capital equipment. Some manufacturers of engineered components, valves and textiles reported reductions in demand and output due to customers reducing stocks to normal levels post-pandemic.
Food and drink production was similar to this time last year with the usual seasonal pre-Christmas boost, though consumers are still trading down to value products. There is continued growth in the areas of automotive, aerospace and defence, although public sector budgets are a concern for the latter. While demand for chemicals is in general poor, there is growing demand for chemicals, packaging and machinery that reduce or replace the use of petrochemicals and fossil fuels. Office refurbishments have stimulated demand for office furniture and flooring.
A slowing in orders suggests manufacturing volumes will fall further in 2024. This is especially the case for those supplying the construction and consumer goods sectors and is consistent with what we are hearing from contacts in those areas.
Construction
Construction output volumes continue to fall. Some of the slack from lower new housing and commercial development is being taken up by repair and maintenance. Order books continue to weaken but contacts expect this to stabilise during 2024.
Private and social house-building activity has slowed over the last year, by up to 30% in some locations. Higher price units in the South were impacted the most by increased mortgage costs. Social landlords carried out more remedial work and some private landlords invested to achieve higher rents.
Commercial development has continued to slow due to current yields being too low. But cash-funded and pre-let projects continued. Existing large infrastructure projects remain one area of strength, with energy, water and defence contracts growing. Contacts cite planning and utility connections as key constraints.
There is growing evidence of construction firms failing, causing delays.
Commercial development is likely to contract further until confidence increases and rates of return improve. House builders expect current build rates to continue through 2024. The outlook for repair and maintenance work remains stable.
Corporate credit conditions
The credit story is little changed from the last update – credit supply is good for most large firms but constrained for small and medium-sized enterprises (SMEs) by lenders’ concerns around affordability. Credit demand is weak across all firm sizes.
Successful investment-grade bond issuance and refinancing of bank credit shows large firms continue to be able to access credit. For SMEs, while there is competition to finance perceived good credits, for others, typically consumer-facing or property-related firms, credit availability continues to be tempered by concerns over their ability to repay. Private and venture capital finance remain tight. In contrast, ‘green finance’ is readily available.
A wide range of firms continue to pay down debt and avoid new borrowing, reflecting higher interest rates and a subdued outlook. New debt demand is typically linked to automation, digitisation, green initiatives and to support working capital (consistent with the Agents’ recent investment survey). Larger firms are more likely to refinance existing debt, typically maintaining or reducing gearing levels.
Trade credit has continued to tighten modestly along supply chains as higher interest rates increase the benefit of holding cash. Insolvencies are expected to continue to rise gradually. Distress and company failure are still concentrated among small firms, often linked to pandemic-related debt. Contacts most commonly cite property-related and consumer-facing firms as vulnerable.
Employment and pay
More contacts are reporting softer employment intentions than in the previous update, and the overall picture is still consistent with low or zero employment growth. Early indications of pay settlements for 2024 suggest that average wage growth will be lower than in 2023 owing to lower expected inflation, a looser labour market and concerns around the affordability of pay offers.
The balance of employment intentions points to low or zero employment growth over the coming year. Since the last round, we have seen an uptick in reports of planned headcount reductions in response to weaker demand in construction, real estate, business services, retail, and distribution. However, most contacts intend to maintain employment at current levels.
Contacts continue to report that recruitment difficulties have eased, compared to 6–12 months ago. This easing is now also happening in some skilled areas such as real estate and related business services, areas which until recently were still tight. Churn has fallen in recent months, reflecting increased uncertainty and firms are holding fewer vacancies. But there is an ongoing mismatch between the labour needs of employers and the available supply in some local labour markets, occupations and sectors. Contacts are offshoring roles to ease constraints and/or investing in automation, including AI, to boost productivity.
Pay settlements for 2023 have averaged lower in the second half of the year than the first half reflecting declining headline inflation across the year. Contacts expect this to continue into 2024 with a looser labour market and profitability/affordability concerns cited as reasons as well as lower expected inflation.
Many contacts with a high proportion of lower-paid workers are concerned about the increase in the National Living Wage and its impact on differentials. Contacts report that the ripple effect of statutory or voluntary (Real Living Wage) increases in minima reach quite a way up the pay distribution.
Unlike 12 months ago, most contacts do not expect to make ‘cost of living’ payments to employees. Many companies continue to enhance total reward packages to aid recruitment and retention. For some firms, regular bonus payments will be lower this year in response to poorer financial performance.
Costs and prices
There is clear evidence of consumer goods prices unwinding faster than for services, particularly in food and consumer durables. With many retailers going into Christmas with a large stock overhang, further easing in goods prices is likely.
Input cost inflation continues to moderate and for many inputs is either at or below normal, with some costs having fallen. More firms are benefitting from factors such as repriced energy contracts, falling raw material prices and freight rates. Any impact from the conflict in the Middle East is yet to be felt in firms’ input costs, although energy market volatility suggests a risk to the outlook.
Manufacturers’ domestic price inflation continues to ease relative to the last update. Further falls are expected as costs ease and firms return to fewer and smaller price increases. A few contacts feel pressure to reduce prices following gains from lower input costs, to remain competitive.
Business services price inflation is starting to ease, even in previously elevated areas such as professional services. In other areas such as marketing, public relations and logistics, fees are flat and sometimes coming under pressure where demand has softened.
Aggregate profit margins remain squeezed as many companies have not been able to pass on all cost increases into output prices. In some cases, that reflects already weakening demand or concern that further price increases would deter customers. Producers hope that easing cost pressures will allow them to rebuild some margin, but that may take some time to work through.
Consumer goods inflation continues to ease across a broad range of categories. Non-food goods inflation is returning to levels contacts consider ‘normal’. Estimates of new car inflation in 2024 are now low single digit. Prices are falling for some bulky retail items, such as furniture, where input costs such as freight have unwound significantly and/or demand has softened. Several retail contacts report going into the Christmas period with a large inventory. This suggests a period of deep discounting to clear their stock position will likely be needed if Christmas trading is poor.
Consumer services inflation is moderating but more slowly than for goods. This often reflects a higher labour content, and is particularly evident at leisure attractions, in menu prices and hotel room rates. Contacts report limited scope for continued price increases given the fragility of consumer demand.
Property markets
House builders report weak confidence and increased development costs weighing on the sector. In commercial real estate, the perceived stabilisation of the interest rate outlook has very recently improved investor sentiment about the likelihood of increased transaction activity in 2024.
Housing
Confidence in the secondary market is still fragile, but a handful of contacts suggest that it has reached a trough. Contacts anticipate prices over the next year may decrease by less than expected at the time of the last update.
House builders report minimal price reductions currently, but incentives to cut prices are increasing across the sector. Falling material costs are helping partially to protect margins.
Housing associations plan to focus on repairs and maintenance of current stock, which will put a squeeze on development budgets.
Some contacts consider the lack of affordable rental properties may actually be stimulating demand from first-time buyers for purchases or shared ownership.
There has been minimal increase in mortgage arrears or requests for forbearance from mortgage lenders. More customers are staying with their current provider due to difficulty passing affordability tests with other providers.
Commercial real estate
Investment purchases and development activity are significantly lower compared to last year due to higher interest rates. But a perceived stabilisation of the outlook for interest rates has very recently improved sentiment, with an expectation of increased transaction volumes in 2024.
There continues to be infrequent reports of forced sales on top of those mentioned in last month’s update, as well as signs of increasing financial pressures with a few contacts now also mentioning equity injections or asset sales to manage refinancing risks and avoid fire sales.
Excess supply has emerged for industrial property, apart from life science buildings where there remains excess demand and increased investor activity. Rents are increasing and values are steady for newer property compared to last year, but under pressure for older or less favourably located buildings.
In the retail sector, excess supply is reducing for shopping centre space but remains high for high streets. Values are considered to have broadly reached a level that should increase investor interest in purchases over coming months.
Excess demand to occupy and own newer offices remains, supporting steadily increasing rents and values compare to last year. But a large and growing surplus of older property remains, where further decreases in values are expected, as well as pressure to offer more flexible lease agreements.
Outreach engagement
Affording essentials remains difficult for many. Potential first-time house buyers are concerned that interest rates have taken away the opportunity of home ownership.
Households report that pressures on household budgets persist with food and energy costs continuing to dominate concerns. Reports from charities reinforce this message with record numbers of people seeking help with energy and prepayment meter issues. Food banks also report record demand with one food-bank network citing 1.5 million food parcels distributed between April and September, an increase of 16% on the same period last year.
Several charities reported that in-work poverty is getting worse and that the continuation of zero-hour contracts makes it extremely difficult for people to budget and plan their finances. Charities that provide financial support to those in short-term difficulties are seeing a large increase in applications, a growing number of which are from people in work.
First-time home buyers report that increased interest rates have meant they have had to secure higher deposits or lower their expectations on the home they could afford. There are additional costs for those with disabilities, as they need both to save a deposit and, in addition, to have cash available to adjust properties since lenders will not provide loans for such adjustments.
