Overview

This publication summarises intelligence from the Bank’s Agents considered by the Monetary Policy Committee (MPC) at its December meeting. The intelligence was gathered in the six weeks to late November. The Agents’ scores published alongside this document generally represent developments over the past three months compared with the same period a year earlier.

The easing in output growth referred to in the previous update continues, but expectations are still for activity in all the main sectors to pick up in 2025. However, contacts lately seem less confident of the extent and pace of recovery. The prospective increase in labour costs from higher National Insurance Contributions (NICs) from next April, announced in the Budget, is currently weighing heavily on sentiment.

Consumer spending remains weak, but there are signs of improved demand for goods. Investment intentions remain subdued owing to a sense of uncertainty and caution, driven by a range of factors. Trade in services remains robust, but trade in goods is marginally down on last year. Expectations are for a pick up in activity across all these spending areas in 2025, though tempered by increased concerns around potential trade barriers for exports.

On the output side, manufacturing output has eased further and is now at a similar level to a year earlier. The rate of decline in construction output continues to ease. Business services volumes, flat on a year earlier, are slightly worse than expected.

Contacts report that they are likely to take a range of measures to mitigate the upward impact on their labour costs from the employer NIC increases. These include lower headcount, hours and pay and higher prices than otherwise. Pay intentions for 2025 currently indicate an average in the range of 3%–4%. While a little higher than the 2%–4% reported in the previous November MPR, it is still lower than the 5.5% average settlement for 2024, reflecting a looser labour market and lower inflation. NICs and/or National Living Wage (NLW) changes are material for most firms with NICs likely to push down on pay settlements but up on total labour costs next year.

Early reactions to the Budget suggest a risk of greater upward pressure on CPI inflation than in the November MPR, although most contacts are still deciding on their pricing response.

Consumer spending

Consumer spending remains subdued across goods and services, with annual volumes likely growing modestly. There are signs of an improvement in demand for goods, partly at the expense of services. Contacts expect higher real incomes and lower interest rates to strengthen the recovery in 2025.

Demand for consumer goods appears to be improving, with many contacts reporting modest annual volume growth. But some contacts are puzzled that the recovery has not been stronger, given improving real incomes and report that confidence remains weak. Supermarkets report strong annual volume growth for food and non-durables. Durable goods demand also appears to be recovering, with growing shopping centre footfall, and electrical goods retailers reporting modest annual volume growth. Spending on home improvements, furniture, and white goods continues to fall, however.

Discretionary spending on consumer services remains subdued, dampened by inclement weather. Sales volumes are generally flat or slightly lower on a year earlier, especially in the hospitality sector, although the pace of volume contraction has slowed there. Sentiment in the pubs and restaurants sector remains weak as consumers economise more. Accommodation occupancy levels are holding steady, with moderate volume growth. Contacts at theatres and other entertainment venues report audience numbers are mixed, closer to pre-pandemic norms for well-known shows, but weaker than usual for less-prominent acts. In general, booking numbers for Christmas entertainment and accommodation look to be on a par with last year’s. Spending on health-related services is growing, with gym membership numbers rising above pre-pandemic levels.

Investment

Investment intentions remain subdued, with a marginal balance towards increasing investment in the coming year.

Many contacts express a general sense of uncertainty and caution driven by a mix of factors, such as uncertainty about demand, high borrowing costs, higher capital expenditure costs, squeezed margins and access to finance. There was limited reference to the Budget having a direct impact on investment plans at this stage.

Labour-saving automation (machinery and digital) remains a focus, to reduce costs and expand capacity. A growing minority of contacts is mentioning investment in AI. Usually intended to handle administrative and back-office kinds of tasks, it is expected to improve productivity rather than reduce headcount. But there is quite a bit of caution around adoption of AI as risks are appraised.

Contacts are tending to revert to regular replacement and maintenance cycles, rather than stepping up investment with major new projects. Some are stretching replacement timelines out a little.

Trade

Overall, exports continue to grow at a moderate rate, but are constrained by geopolitical uncertainty and economic weakness in some main trading economies, especially the EU. Demand from the US and the Middle East remains strong.

Annual growth in the value of services exports continues at a robust pace and is expected to continue. Goods export volumes were marginally down on the same period last year, however, and while expectations are still for a modest pick-up in H1 2025, concerns around potential trade barriers have increased.

Exports of professional services, especially legal and consulting, continue to grow. Overseas tourist numbers over the summer were slightly up on the same period last year. Manufactured goods export volumes are marginally down on last year with weak demand from the automotive and construction sectors. Consumer goods exports remain weak, especially for more luxury goods. There are further reports of increased global competition from cheaper Chinese products.

Business and financial services

Business services output was flat on the same period last year, a little weaker than contacts expected, with price increases driving modest revenue growth. Contacts still expect some increase in output during 2025 but are less certain of the pace of that growth given weaker sentiment following the Budget.

Circumstances differ across sectors. Professional services report steady revenue growth, mostly from price increases made earlier in the year. Financial and IT advisory activity remains strong and corporate financing transactions are increasing from low levels. Restructuring and insolvencies work continues to be a little higher compared to the same period last year. Logistics companies report stable volumes. Recruitment agencies continue to report volumes down compared to last year. CRE advisory activity was picking up from low levels and architects reported marginally more projects progressing again. However, services into construction continue to report weaker volumes on last year.

Manufacturing and production

Contacts report that weakening demand has resulted in annual manufacturing volume growth easing further to around zero. Following the Budget, near-term prospects continue to wane, as does contacts’ optimism that enquiries will translate into a modest rise in output in 2025.

Experience varies across sectors. Suppliers to the defence, aviation and semi-conductor sectors continued to report strongly growing output and strong order books. Food and drink output remained marginally above the same period last year. Vehicle and other durable goods output was down on last year, as was construction-facing output. Capital goods output was subdued owing to some firms holding off on investment and a reduction in some public sector capital spending. Farming output remained down on last year owing to challenging weather.

Construction

The rate of decline in construction output compared to a year ago continued to ease. Despite the Budget weakening sentiment, contacts expect modest growth to return during H1 2025.

Private housing build rates have picked up, with output close to where it was a year ago. Social housing providers are a constraint here as they are struggling to buy their share of private development, having also reduced their own. Overall, repair and maintenance has seen ongoing growth with office refits increasing and housing associations focused on improving existing stock. Spending on home improvements and renovations has, however, fallen and some public sector projects have been delayed or cancelled.

While recent and current drivers of the construction sector relate largely to demand factors, contacts are concerned that supply constraints such as planning (despite the expectation of reform), contractor shortages due to business failure, and tight labour availability, could limit future output growth.

Corporate credit conditions

The supply of credit is tighter than pre-pandemic for small firms, but seems not to be a concern for large firms. High interest rates and weak activity continue to supress overall demand for credit.

Banks continue to compete to lend to the most creditworthy firms and their appetite to lend to sectors previously considered vulnerable is increasing. Small and medium sized firms find secondary lenders easier to access as many cannot meet major banks’ credit criteria. Start-up and early-stage companies continue to struggle to source growth finance.

Demand for working capital and acquisition finance remain high and there are a few signs that demand for credit is rising, as capital expenditure recommences. But many contacts feel that further interest rate cuts and a pickup in demand are needed to stimulate greater appetite for new borrowing.

Businesses report that debtor days are manageable and customer defaults rare, and banks continue to report low levels of arrears. There is concern, however, that rising labour costs, following the Budget, could lead to more business failures.

Employment and pay

Many firms will consider reductions in headcount, hours and pay settlements to mitigate the impact on their labour costs from the employer NIC increases. Pay intentions for 2025 suggest an average increase in the range of 3%–4%.

Across a range of sectors, firms report that the increase in NICs will have a substantial impact on their total labour costs. This was largely unanticipated, particularly the threshold change, which will have a particularly significant impact on those employing relatively high proportions of part-time or low-paid workers. Firms are working out how best to deal with this. Potential actions cited include reducing labour input by reducing headcount or hours worked or accelerating investment in efficiencies/automation. Others are considering offshoring labour.

Employment intentions point to a very modest increase in employment over the next 12 months but have softened since the last round. Contacts continue to report that recruiting has become easier over the last year. There is no sign that the pace of reduction in recruitment difficulties is easing – a material increase in activity would likely be required to see tighter labour market conditions. Churn is lower and fewer firms are holding vacancies.

Pay intentions for 2025 currently indicate an average in the range 3%–4%. While a little higher than the 2%–4% reported in the previous November MPR, it is materially lower than the 5.5% average settlement for 2024. Upside pressures on 2025 pay come from the NLW (including the maintenance/restoration of pay differentials). Downside pressures will come from lower inflation, a looser labour market and the impact of the NIC increases, the latter of which are expected to push down on pay settlements but up on total labour costs. The Agents’ pay survey, currently in the field, should provide a clearer view on how these dynamics will impact pay settlements in 2025.

The NLW increase was a little higher than many contacts were expecting, but the biggest impact is on those employing a high proportion of younger workers (an increase of 16.3% for those aged 18–20). As with previous increases, consumer facing sectors and the care sector are seeing the biggest upwards pressure on their wage settlements from this.

Costs and prices

Goods inflation remains muted and consumer services inflation continues to ease gradually. CPI inflation is expected to rise next year and early reactions to the Budget suggest a risk of greater CPI pressures next year than in the November MPR.

The combination of NLW, NIC and Extended Producer Responsibility (EPR) is expected to push prices up – notably for the food and drink, hospitality, leisure and care sectors – and CPI inflation higher next year. Many contacts are still working out exactly what this means for their 2025 price setting and strategy, which for some will depend on demand growth and margins. Where margins have eroded significantly, weak demand might mean modest price increases in 2025 will not be sufficient to restore them and further price increases in 2026 will be needed. Food and drinks manufacturers, hospitality and grocers are increasingly mentioning EPR costs (paying for the recycling costs of packaging materials), which for some will be at least as large as the increased costs of NICs.

Raw material costs continue to fall slowly. Imported finished goods prices are stable, with foreign prices and shipping rates stabilising.

As wage inflation eases gradually, business-to-business price inflation is slowly abating. Modestly higher inflation is expected in NLW-dependent sectors. The extent to which firms will pass on higher costs such as NIC to other companies will depend in part on the strength of demand they face and the size of their margins.

Manufacturers’ domestic prices are unchanged reflecting weak demand, with some segments finding it hard to win business. However, contacts expect modest price increases next year partially to pass on higher costs imposed by the NLW, NIC and EPR. Where margins have become significantly eroded, there are expectations modest price increases will be needed in 2026 as well as 2025.

Whilst underlying costs have stabilised, retailers report doing less discounting, which is putting less downward pressure on consumer goods prices, on average. Food price inflation is around 1%–3%. Inflation on clothing is modest. Modest deflation persists for other durables such as furniture and used cars.

Contacts continue to report relatively high inflation for some consumer services, where labour supply is constrained by skills, such as software, cyber and data. As demand for discretionary activity is still weak, price inflation for leisure activities has been flat to moderate.

Property

Contacts report cooling sentiment in the housing market following the Budget. In contrast, the ending of pre-Budget uncertainty seems be fortifying expectations of increased activity in the commercial real estate market.

Housing market

The supply of properties for sale continues to improve, but purchasers do not, generally, see this as a good time to buy. Contacts report that the Budget accentuated this feeling and may have cooled a housing market that was recovering from a weak 2024 H1. Affordability is a key constraint with the top end of the market generally slower than the bottom. First-time buyers are reportedly very active. House prices are up by low single digits on a year ago and the expectation is of similar – or perhaps lower – increases in the year ahead.

Rent inflation continues to moderate, except in Scotland, where regulatory changes are leading to a rally in rents. Contacts report rent growth in the mid-single digits relative to a year ago. Properties are taking a bit longer to rent owing to cooler demand and unaffordability of rents. However, rental supply is not increasing as landlords continue to exit the market.

Commercial real estate

Contacts report that investment transactions weakened very modestly on a year ago for both domestic and foreign buyers. They attribute this primarily to uncertainty in the lead-up to the Autumn Budget. Most expect material increases in the volume of investment and occupation activity over the course of 2025 given the ending of pre-Budget uncertainty following the Budget announcements and expectations of further reductions in Bank Rate.

Some contacts continue to express concerns about the excess supply of non-prime retail and office space, and the prospects of those servicing debt associated with it. Given the conservative lending by banks following the global financial crisis, this is usually about how borrowers rather than lenders will be impacted.

Outreach engagement

Cost of living challenges persist, constraining household budgets with many reporting having to be more cautious with their money. Consequently, charities continue to report increased demand for their services.

Outreach participants report that the higher cost of living is having a large impact on more middle-income households. A growing number are reported to be accessing food banks, non-mainstream lenders, and debt advice services. Charities report increased demand for foodbanks but a decrease in donations. Sharp rises in private sector rents and a lack of social housing stock are causing significant challenges. There was a common view that the UK was moving from a cost-of-living crisis period to higher cost of living and lower living standards being the ongoing norm.

Many households felt that the narrative of the economy having stabilised with inflation back to around 2% was at odds with their experience. Some questioned the efficacy of the inflation-targeting regime.

As well as the challenges posed by high demand for their services, charities report other headwinds such as difficulty securing long-term funding solutions, loss of experienced staff and staff burnout. The NIC increases are a big issue for the charity sector given the large number of low-paid and part-time workers. Job cuts and pay freezes are expected to be the likely response.