Agents' summary of business conditions - 2018 Q4

Over the past three months, annual growth in consumer goods values weakened, but was close to its long-run average (Chart 1). Demand for furniture and household appliances slowed, which contacts attributed to rising uncertainty related to Brexit and subdued housing market activity. There were some reports of falling demand for luxury foods, while grocery discounters continued to grow market share.

Contacts said early evidence suggested that ‘Black Friday’ sales had failed to meet many retailers’ expectations. This was attributed to several factors. There was more discounting in early November. Some retailers limited their discounts to safeguard profits. The timing of the Black Friday weekend was earlier than usual. And consumers were more cautious, with average purchase baskets reported to be lower than a year ago. Some contacts thought the disappointing Black Friday sales could just indicate that less spending had been brought forward from December, although they were generally cautious about the outlook for sales over the Christmas period.

Growth in consumer services values remained somewhat muted, with weaker activity in housing-related services offset by modest growth in leisure services, albeit in lower price brackets.

Chart 1: Consumer goods values and consumer services turnover

Three months on the same period a year earlier

Demand for business and financial services continued to grow at a modest rate (Chart 2). Contacts in sectors such as commercial property, recruitment and business advisory services reported that demand had been more resilient than they expected.  

Mergers and acquisitions (M&A) activity continued to hold up, though there were some signs of slowing following a period of robust growth, and demand remained strong for IT services. But demand had weakened in sectors reliant on discretionary spending, such as hospitality and marketing. 

A number of contacts warned that if Brexit uncertainty continued, activity could slow in Q1, potentially quite sharply, as businesses were likely to avoid completing large transactions close to the date of EU withdrawal.

Growth in services export values was steady and remained around its average over the past year (see Box 1). Most professional and financial services firms continued to report modest growth in demand from overseas clients, as did contacts in other business services, such as those related to oil and gas.  

Companies in the IT sector, for example those specialising in gaming and animation, reported particularly strong growth. However, demand related to corporate transactions eased, and a few contacts said they had decided to cease providing some services to EU clients temporarily due to Brexit uncertainty. Overseas demand for services associated with outbound cargo and car volumes from UK ports weakened slightly.  

Student numbers from the EU to UK universities were lower than a year ago. By contrast, intakes of students from outside the EU held up well, particularly from Asia. And inbound tourism continued to grow strongly compared with a year ago, notably from Asia and the US.

Chart 2: Business and financial services turnover

Three months on the same period a year earlier

Chart A Agents’ score points to continued growth in services exports

Three months on the same period a year earlier

Growth in domestic manufacturing output was broadly steady in the most recent period (Chart 3). Contacts in the electronics, aerospace and food and beverages sectors reported robust growth. A few contacts benefited from UK customers reshoring some production in order to manage their post-Brexit supply chains. There were a few reports of contacts expecting to accelerate precautionary stockbuilding in 2019 Q1. However, active contingency planning for Brexit tended to be concentrated among larger companies that generally had better access to working capital, and could therefore invest in planning and stockbuilding. Many contacts had not yet implemented contingency plans, consistent with the recent Agents’ survey on preparations for EU withdrawal.

Suppliers to the construction sector reported mixed demand. Some contacts reported continued growth in demand for construction materials for new warehousing, student accommodation and home improvements, but weaker housebuilding activity in some areas reduced demand for other materials.  

In the automotive sector, declining output by some manufacturers fed through the supply chain, including to UK steel producers. And Brexit uncertainty weighed on demand for capital goods and consumer durables, as businesses and households became more cautious about committing investment and making large purchases.

Growth in the volume of manufactured goods exports eased to a modest pace (Chart 3). The slowdown reflected a combination of a waning boost from sterling’s 2016 depreciation and weaker demand for diesel cars, rail and marine goods, notably from Asia. In addition, sales of construction equipment to some emerging economies slowed. There was some evidence of weaker demand from Turkey and Argentina. Growth in exports to the US was generally stronger than to the EU. That said, contacts reported steady growth in some exports to the EU, such as food, engineering and machine tools.

While EU clients have continued to source goods from the UK, contacts reported concerns about future prospects. This was partly due to Brexit-related issues such as tariffs and product approvals, but also amid concerns that China would seek to shift the focus of its exports away from the US towards the EU.  Some contacts expressed concern that demand from the US could weaken, if US customers decided to source more domestically produced goods. A few contacts said that this had been experienced by their Chinese subsidiaries.

Chart 3: Manufacturing output

Three months on the same period a year earlier

Output growth in the construction sector remained modest. Following a period of strong growth, there was a slight slowdown in housebuilding activity in some parts of the UK, particularly among larger housebuilders, who had become more cautious. However, this was partially offset by stronger demand for refurbishment and improvement work in housing, and for private rental developments. Construction of private non-residential property slowed, especially of retail premises and offices. Growth in civil engineering and infrastructure work held broadly steady, but contacts said larger projects remained vulnerable to delays, and contacts were concerned that some projects might be scaled back.

Investment intentions for the next 12 months continued to ease (Chart 4). Contacts reported a reluctance to commit to capital investment in the short term, preferring to wait for more clarity on the UK’s future trading relationship with the EU. However, contacts continued to invest in projects aimed at increasing efficiency and productivity, particularly when faced with growing labour constraints and rising costs. There was increased investment in contingency infrastructure, such as warehousing, logistics and port capacity. And business and consumer services contacts invested in compliance-related IT upgrades.

 

Chart 4: Investment intentions

Over the coming twelve months

Corporate credit demand continued to soften, reflecting subdued investment intentions, and a slowdown in refinancing. There was some evidence of a slight softening in M&A activity, which had previously been boosted by activity being brought forward to avoid the period around Brexit. Contacts reported a general reluctance to increase borrowing, due to  uncertainty about the economic outlook. However, some contacts expected to increase their working-capital and/or cash-flow borrowing to support stockbuilding.

Bank and non-bank credit remained readily available on the whole. However, the availability of credit and trade credit insurance continued to tighten for companies in sectors more vulnerable to an economic slowdown, such as construction, procurement and consumer-facing businesses. There were some reports that banks were asking more detailed questions about the anticipated impact of Brexit on businesses that applied for loans. 

According to accountancy and insolvency practitioner contacts, restructuring activity and administrations ticked up in most sectors over the past three months, albeit from low levels, and could continue to rise in 2019. Companies in retail, casual dining, car dealership, further education and contract services continued to be vulnerable to distress. There were reports that delays to some construction projects were causing cash-flow difficulties in construction supply chains.

Commercial real estate

Investor demand for UK commercial property remained modestly ahead of supply, reflecting a search for yield and the low supply of available stock in many areas. Investor appetite was weakest for retail properties, where vacancy rates continued to pick up, with demand most buoyant for distribution sheds and warehouses, in part reflecting the structural shift to online retail.

Contacts reported that investor demand for prime retail and office properties in London had held up better than expected. And demand from foreign investors for developments in major UK cities remained good. However, there were also growing concerns about the impact of Brexit on the commercial property market, and there were signs that development activity was starting to weaken, with some projects being delayed or put on hold.

Contacts in the property sector continued to report limited UK warehousing capacity for stockbuilding ahead of Brexit, though some capacity was likely to become available after Christmas. Some contacts reported rising rents for bonded warehouses and refrigerated storage in south east England. 

Housing market

Estate agent contacts reported a general weakening in activity levels in the housing market, as the usual autumn pickup in activity failed to materialise in a number of regions. Although the stock of houses for sale remained low, contacts indicated that demand was also falling.

For example, there had been an increase in the number of purchases falling through due to uncertainty among potential buyers. More viewings were required before a sale could be achieved. And buyers were taking longer to reach a decision to purchase.

In addition, the difference between asking prices and offered prices had widened. Housing activity in southern England was muted, which contacts said was due to uncertainty among buyers and sellers, who were postponing transactions until after EU withdrawal. 

Demand for new-build homes remained stronger outside London, although housebuilders reported having to offer more incentives and undertake more viewings in order to complete sales. Labour shortages continued to constrain supply. 

Mortgage activity was mostly concentrated in refinancing deals and homeowners moving from floating-rate deals to fixed-rate loans, with mortgage tenors often increasing to five years. 

Contacts said that subdued demand for mortgages, combined with the entry of new lenders to the market, had resulted in intense competition. In turn, this has led to tighter pricing and improved availability of higher loan to value and loan to income mortgages, as challenger banks competed for higher-risk loans in order to grow market share.

Capacity constraints remained above normal across the economy as a whole. Contacts reported that widespread labour shortages placed the biggest constraint on output. Constraints had eased slightly in manufacturing, but were tighter than in services, and remained above normal (Chart 5). Some food processors and packaging companies, for example, have had to increase shifts in order to meet demand. In contrast, there was excess capacity and staff cuts in parts of the automotive sector.

The slight increase in capacity constraints in services mainly reflected skill shortages within professional services and distribution, especially for drivers. There was very little spare capacity in warehousing and logistics. By contrast, contacts in consumer-facing services reported excess capacity. 

Chart 5: Capacity constraints

Over the coming six months

Employment intentions were little changed in manufacturing. They picked up slightly in business services and weakened a little further in consumer services.

Recruitment difficulties intensified further (Chart 6) and became more widespread. Contacts in areas including IT, professional services, construction, engineering, hospitality, health and social care and logistics reported that the inability to recruit sufficient numbers of staff was constraining output growth. They also reported that a lack of availability of EU migrant workers had exacerbated recruitment difficulties. In order to address the issue, companies were increasing intakes of apprentices and graduates, upskilling existing employees and investing in automation and technology.

Some contacts said that labour shortages had prompted them to be more selective about bidding for contracts, and to target work with higher margins. Staff turnover rates generally remained low, with employees cautious about moving jobs due to Brexit-related uncertainties. But there were reports that poaching of key staff and skills was becoming more prevalent in some sectors.

Pay settlements continued to be slightly higher than a year ago, and remained in a range of 2½%–3½%. Despite the tightening labour market, many contacts managed to contain pay bill growth by targeting pay awards at key skills or staff. The Agents’ scores for total labour costs per employee held broadly steady (Chart 6).

Companies with a high proportion of low-paid staff concentrated pay increases on staff who were on or just above the National Living Wage. Alongside pay awards, many companies enhanced other elements of their overall packages, for example by offering flexible working and private healthcare. They did this partly to mitigate higher wage inflation, but also in response to employees’ demands for improvements in their work-life balance.

Chart 6: Recruitment difficulties and total labour costs

In the past three months “relative to normal”

Material cost inflation slowed for some commodities, including meat and dairy products. But it continued to rise for building materials and energy, where contacts reported increases of up to 25% when renewing two-year contracts. Costs of electrical components and paper continued to rise, driven by strong global demand and restricted supply from European mills, respectively.

Manufacturers experienced less resistance to raising output prices to cover the rising cost of inputs, such as materials, labour and energy (Chart 7). However, suppliers of commoditised services continued to experience difficulty in implementing price increases. Many are seeking to stem the erosion of profit margins by focusing on higher-margin work, and taking measures to improve productivity.

Consumer goods price inflation remained elevated relative to its historical average. Growth in fuel prices eased slightly but was still higher than a year ago. The pace of household electricity and gas price rises also picked up. Competitive pressures in food retail were likely to restrict the degree to which increases in producer prices would be passed through to consumers, with contacts expecting only modest inflation.

Consumer services price inflation was a little below average. Contacts reported modest price increases in sectors such as leisure facilities, tourist attractions, and social care. But often these increases did not fully cover rising labour and other costs.

Chart 7: Manufacturing and services prices

Three months on the same period a year earlier