Overview
This publication summarises intelligence gathered by the Bank’s Agents between mid-April and late May. The Agents’ scores published alongside this document generally represent developments over the past three months compared with a year ago.
Agency contacts in some sectors, such as business services as well as some manufacturers, continued to report strong demand, with output growth constrained by shortages of goods and labour. However, there were also signs of squeezed household real incomes starting to weigh on demand, for example for consumer goods and for house purchases.
Contacts expected supply-chain issues to persist into next year, possibly longer and were taking actions to minimise disruption, such as switching suppliers and using alternative inputs.
Companies' hiring intentions remained positive and recruitment difficulties continued to be acute. Consequently, pay settlements had increased further and a significant minority of contacts thought they might have to offer interim pay settlements this year to retain staff.
Energy and other commodity prices remained elevated. In response to increased cost pressures, many contacts said they expected to raise prices to rebuild or protect margins, which remain below normal, on average. But some consumer-facing contacts planned to limit the extent of price increases in order to retain market share.
Consumer spending
Annual growth in the value of consumer spending continued to be supported by higher prices; while retail sales volumes fell, demand for consumer services remained more robust.
There were growing signs of pressure on real incomes starting to weigh on demand for goods. Contacts reported a modest contraction in sales volumes of durable goods, such as furniture, electrical equipment and home-improvement products.
Discount fashion retailers reported stronger sales than those in the higher-priced segment of the market, which might also reflect consumer caution. Supermarket contacts reported customers trading down to lower-priced alternatives, while discount stores reported gaining market share.
By contrast, contacts in the hospitality and leisure sectors reported robust demand. For example, leisure companies said revenues were close to pre-pandemic levels and those in domestic tourism expected staycation demand to remain solid, and reported early signs of overseas tourists returning. Air passenger volumes also continued to recover, and contacts said summer bookings were positive.
Hospitality contacts also reported solid demand, though stronger sales growth among fast food outlets relative to other parts of the sector suggested that consumers were starting to economise.
Business services
Contacts continued to report strong growth in turnover, supported by higher volumes and fees, but growth was constrained by labour shortages.
Professional and financial services firms continued to report strong demand, in particular in litigation and employment law. Insolvency and restructuring activity increased from low levels. Demand for IT services continued to grow, in particular for cyber risk management, and recruitment firms reported robust demand. However, staff shortages continued to limit the pace of growth for many contacts.
Contacts in logistics and shipping also reported strong demand, and companies offering corporate hospitality reported a significant improvement in advance bookings.
By contrast, merger and acquisition activity appeared to be slowing from its previously high rates.
Manufacturing
Manufacturing output growth weakened slightly as shortages of materials and components constrained output.
Companies in the food, electrical and electronics sectors reported strong demand, but some consumer goods manufacturers reported a softening in demand.
Contacts said that supply shortages had worsened since Russia's invasion of Ukraine and following Covid-related lockdowns in China. Labour shortages also remained acute, leading to increased backlogs of work and longer delivery times, in particular in the automotive sector.
Products such as steel and other metals, agricultural and food products, semiconductors, electric vehicles, IT equipment, boilers, resins and fibreglass were reported to be in short supply.
Companies reported taking a variety of actions to minimise supply-chain disruption, for example switching suppliers, adapting their inputs or holding more stock. Disruption was expected to persist into next year, possibly longer.
Construction
Construction output growth weakened modestly as rising materials costs and labour shortages caused projects to be delayed or cancelled.
Delays and cancellations were most commonly reported for commercial projects; contacts said housebuilding activity was also held back by planning delays.
By contrast, construction of public and private infrastructure, and health and education projects had been less impacted. Demand for the construction or refurbishment of office space also remained robust, supported by demand for premises that meet environmental requirements and are suitable for hybrid working. Construction of warehousing and data centres also remained strong.
Contacts expected the pipeline of construction projects to slow as cost increases result in more projects being put on hold. And many expected rising costs and squeezed household budgets to weigh on demand for new homes and home improvements this year and next.
Investment
Investment intentions remained positive overall, with contacts reporting a modest easing towards normal levels.
Companies continued to spend on improving their IT and automation and refurbishing premises to facilitate new ways of working. Contacts were also increasingly considering investing in energy-saving measures, especially in manufacturing.
However, shortages of materials, components and labour, along with rising costs continued to hold back investment activity relative to investment intentions.
In addition, some of the investment activity that had been delayed or stimulated by the pandemic had now been completed. And some contacts reported reassessing investment plans as the risks around generating return on investment had grown due to increased economic uncertainty, in part as a consequence of the war in Ukraine.
Corporate financing conditions
Credit conditions tightened a little for small companies. Credit demand continued to increase, driven by demand for working capital and asset finance. Insolvencies rose, albeit from a low level.
Contacts said that credit conditions had tightened a little, especially for small and medium-sized enterprises and for companies in the automotive, retail, construction and hospitality sectors. However, credit conditions remained broadly accommodative for lower-risk borrowers and asset-backed lending.
Demand for working capital increased among companies in the agriculture, manufacturing, energy, construction, wholesale and transport sectors, due to rising input costs and supply-chain delays.
Contacts reported signs of payment terms starting to lengthen as companies sought to preserve cash and delay payment. Trade credit insurance terms had also become tighter. Compulsory liquidations remained low, but insolvencies more generally had risen and were expected to pick up further over the year as pressure on real incomes intensifies and demand slows.
Employment and pay
Employment intentions continued to be strong and recruitment difficulties remained acute; a growing proportion of companies thought they would have to increase pay further to retain staff.
Companies' hiring plans over the next year remained positive, with a sizable proportion of contacts reporting that they expected demand to continue to grow and were struggling to fill vacancies. Despite increased economic uncertainty, most companies planned to replace leavers.
Recruitment difficulties remained acute across most sectors and skills levels, with job turnover and vacancy rates much higher than normal for many companies. In addition, there were widespread reports of staff being offered significantly higher pay to switch company, and of counteroffers being made – in particular in professional services. Starting salaries were reported to have increased by around 10%. Many companies said they expected recruitment difficulties to persist for at least the next 12 months due to structural shortages of labour and skills.
As a result, pay settlements continued to be much higher than a year ago, with average pay settlements a little above the 4.8% expected by companies in the Agents' pay survey earlier this year. In addition, a significant minority of companies said they were considering mid-year top-ups to pay settlements, and there were reports of some companies awarding one-off bonuses to compensate workers for higher inflation and to retain staff. This was particularly the case for lower-paid and skilled workers, and in sectors where there was strong demand for skills.
Companies said that pay negotiations were more challenging than normal, with some unionised firms in the private and public sector facing the threat of strike action.
Costs and prices
Input price inflation remained high as a result of the war in Ukraine. Companies mostly continued to pass on increased costs into prices to protect margins, which remained below normal, on average.
Material and commodity price pressures remained elevated, with the biggest impacts felt in metals, energy and some agricultural commodity prices. Price pressures for imported finished goods also remained high, in particular for food, medical supplies, and many durable consumer goods.
In manufacturing, output prices continued to rise sharply, as companies passed on their increased costs to customers. This was particularly the case for companies in energy-intensive sectors, such as food and chemicals, whose energy costs increased as fixed-price contracts expired. Some contacts reported that their energy costs had trebled on renewal of contracts.
Business services companies, such as those in transport, wholesale and professional services, reported being able to increase prices by more than normal, reflecting strong demand and continuing cost pressures.
Retailers also reported rising input cost inflation, some of which would be passed on to consumer prices. For example, clothing prices for the autumn and winter collections were expected to be between 7% and 10% higher than a year ago.
Supermarkets said they expected food price inflation to rise to between 5% and 8% over the coming months. However, several said they did not plan to fully pass on increased costs into prices, in order to retain market share. Retailers of household goods expected to make small price increases, with some reporting weaker-than-expected demand, which could lead to discounting in the coming months.
In the services sector, the majority of contacts in the hospitality and leisure sectors said they planned to raise prices over the coming months to cover cost increases, with some larger firms expecting to raise prices by around 8%.
Housing market
Demand for housing remained strong, but supply has started to increase in the owner-occupier market.
Contacts reported a modest increase in the availability of properties for sales across the UK, with instructions to sell picking up, and house price inflation starting to moderate in some areas. Contacts expected house price inflation to continue to slow over the coming months as the squeeze on real household incomes weighs on confidence.
However, demand for rental properties continued to exceed supply, with contacts reporting double-digit increases in rents in most parts of the UK.
