Overview

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

In the main, reported economic activity remains as subdued as it was in the last round. On the expenditure side, consumer demand remains weak. Contacts continue to expect a modest strengthening of consumption growth over 2025, but the timing and extent of this is contingent on an improvement in sentiment. Continuing the trend seen over recent rounds, contacts are scaling back investment plans for the year ahead. Annual services export values growth is stable, but goods export volumes have fallen even more compared to a year ago. Expectations for 2025 H1 export growth are modest, and the risks associated with tariffs are a key concern for goods trade.

On the output side, manufacturing output continues to fall on a year ago, the rate of decline in construction output continues to ease, and business services output showed modest growth. As at the last update, spare capacity remains, especially in manufacturing, and is more evident in physical capacity than in labour. Overall, contacts still expect some recovery in output growth in 2025, but demand uncertainty and price sensitivity pose downside risks.

On balance, employment intentions have turned negative since the last round, with more firms reporting that they are pausing or freezing hiring and saying they may look to shed jobs if the outlook does not improve. Recruitment difficulties have broadly normalised. There is little news since the previous round on pay settlements: recent company visits continue to suggest average pay rises of 3.5% to 4%, consistent with the Agents’ annual pay survey at the start of the year (3.7%).

Higher labour costs are contributing to increasing consumer goods inflation and may lead to the moderation in consumer services inflation slowing. Overall, the inflation outlook suggested by Agents’ intelligence is broadly consistent with the near-term uptick and subsequent moderation of inflation set out in the February Monetary Policy Report (MPR).

Consumer spending

There has been little change since the last round. Contacts continue to expect a modest strengthening of consumption growth over 2025, but the timing and extent is contingent on an improvement in sentiment, which they perceive to be the greatest impediment to recovery.

Consumer goods volume growth is low. Although supported by considerable discounting, groceries volume growth remains modest. Spending on special occasions is resilient, but customers are more price-sensitive on everyday items. Heightened consumer caution is reflected in customers postponing purchases of durable goods. Contacts also report a lack of activity in the housing market as a major factor inhibiting demand for related big-ticket items.

Consumer services intelligence is mixed but on balance appears consistent with subdued growth in annual volumes and stronger revenue growth as price inflation remains elevated.

Investment

Contacts are scaling back investment plans for the year ahead, continuing the trend seen over recent rounds

Increasing financial pressures in firms, partly associated with the upcoming labour market policy changes and a weak demand outlook, are deterring investment. Some businesses are waiting to see how current conditions evolve before committing to spend and some are already cutting back on plans. For others, availability of credit in their sectors and costs continue to constrain investment, especially those who are cash-poor. Inheritance tax changes get occasional mentions as a new disincentive to invest among those in the agricultural sector and privately owned small and medium-sized firms.

There is some sectoral variation within the overall muted investment intentions story. Consumer services firms with a high proportion of employees on the National Living Wage (NLW), are those most likely to tell us they are reducing investment spend. Manufacturers are those most likely to prioritise investment spend on automation and efficiencies to continue to grow, while maintaining head count and cutting back elsewhere. Business services firms report more balanced investment intentions for the year ahead in pursuit of growth and more efficient use of labour.

Trade

Goods export volumes are lower compared to this time last year. Risks associated with tariffs now present a key concern for goods trade. Most contacts are adopting a ‘wait and see’ approach although some are already factoring tariff risks into forward plans.

Contacts report stable annual growth in services exports values and expect sustained growth in 2025 H1. Professional and financial services firms report increased export revenues. Manufactured goods exports volumes have fallen further on a year ago. European Union demand remains weak, only partially offset by strong US growth and modest net growth elsewhere. Exporters to the US are nervous about potential adverse demand impacts of tariffs, but there may be opportunities in other markets. New excess supply capacity in non-US countries potentially leading to increased competition for UK exporters is a concern for others.

Weak global demand along with caution around the impacts of tariffs, is weighing on growth in goods export order books. But advisory, logistics and risk mitigation services expect steady growth.

Business and financial services

Business services revenue growth remains stable, with a modest pick-up in growth in volumes offsetting a further decline in pricing power. Contacts expect the rate of revenue growth to pick up slightly during 2025, but price sensitivity and demand uncertainty are cited as possible constraints.

Budget-related demand for tax and legal advice continues, supporting professional services and finance revenue growth. Mergers and acquisitions activity shows some signs of improvement, but growth is constrained by caution among buyers and sellers. Restructuring and insolvency activity remains slightly higher on a year ago. Corporate events and hospitality growth continues, driven mostly by professional services firms. Consultancy and IT activity remains weak as clients cut back on discretionary spending, though demand for cybersecurity and artificial intelligence (AI) advice continues. Uncertainty about the domestic and global outlook poses a downside risk to volume growth.

Manufacturing and production

Manufacturing output volumes remain modestly down on a year ago. Budget impacts, subdued consumer demand, and global uncertainty weigh on expectations of a pick-up in growth in 2025.

Lower business confidence and a consequent reduction in capital spend is leading to weaker output of capital and intermediate goods. Construction-facing output is down on a year ago despite tentative signs of growth in demand for housebuilding. Weak consumer demand also means food and drink output is still only marginally ahead on a year ago and other consumer goods demand is down. Automotive output remains down owing to weak demand and transition to new models, adversely affecting demand for chemicals and steel. In contrast, output in defence and aviation, remains strong, although the latter faces capacity constraints in the supply chain.

Construction

There is further easing in the rate of decline in construction output compared to a year ago. Contacts expect modest positive output growth from 2025 H2, heavily influenced by expectations of further interest rate cuts and increased government spending materialising.

Construction of private houses continues to pick up, albeit modestly, and output is very slightly ahead of a year ago. Overall repair and maintenance output is up slightly, mostly driven by commercial renovations. Reports of some larger public sector projects being delayed or cancelled persist but work in transport for utilities and new schools continue. Some private industrial developments, such as data centres and warehouses are progressing, but new commercial developments continue to decline on last year hindered by high funding and build costs. Across construction as a whole, planning delays, a lack of utility connections, high costs and some labour shortages continue to be cited as future constraints on development.

Corporate credit conditions

In the main, contacts report they can access credit, although small firms still find it more difficult than pre-pandemic. Rising costs, weak activity and low confidence are supressing demand for credit.

There is a good supply of market-based finance, bank finance is available across sectors and there is some evidence of rising risk appetite. Finance for start-up and early-stage firms remains scarce. Demand for credit remains weak with most new borrowing focused on efficiency-enhancing, rapid-payback investment. The exceptions are investment in new utilities infrastructure and demand for working capital, where demand for credit is rising.

A significant minority of firms report tightening payment terms, rising debtor days and reducing trade credit insurance. There are concerns that failure rates will increase, owing to labour cost inflation, soft demand and a hardening stance from some creditors. Despite this, banks continue to report little increase in their watch lists.

Employment and pay

Employment intentions are now negative, on balance, with more firms reporting hiring pauses or freezes and saying they will review staffing levels through natural attrition or redundancies if the outlook does not improve.

Firms continue to report facing a material increase in total labour costs owing to the changes in employer National Insurance contributions (NICs). For those employing relatively high proportions of part-time or low-paid workers, the threshold change is particularly significant and was unanticipated. For such firms, the increase in NICs can be in the 2%–4% range and if affected by NLW, the combined impact on labour costs can be up to 10%.

As well as passing increases in labour costs on where they can, firms are responding with other measures, including giving lower pay rises than they otherwise would, seeking productivity improvements, or moderating headcount and hours. Weak demand and heightened uncertainty are factors for firms looking to reduce headcount. Recruitment difficulties are broadly back to normal. Churn is substantially lower than in the past couple of years and fewer firms are actively recruiting. The number of applicants for less skilled or junior roles has risen significantly.

Those firms that say they are focused on improving productivity are looking to do so by redesigning roles or redeploying staff, changing expectations around working from home, driving efficiencies in stock control or administration, and the use of IT or AI. Others, especially in retail, distribution and manufacturing, feel that they have already run out of options to raise productivity easily and that AI will take years to generate savings.

For those firms offering lower pay increases to partly offset the impact of higher NICs, typically the pay settlement offer is 1 to 2 percentage points lower than it would otherwise have been.

Intelligence from company visits over the past few months suggest average pay rises for 2025 of 3.5% to 4%. This is broadly consistent with the results of the Agents’ annual pay survey at the start of the year (3.7%).

Costs and prices

Intelligence suggests that consumer goods price inflation has started to increase, that the moderation in consumer services inflation may slow and that the overall outlook is broadly consistent with the near-term uptick and subsequent moderation of inflation set out in the February MPR.

Contacts report that raw material costs are starting to edge up and that the sterling cost of imported finished goods remains flat overall. Domestic manufacturers face muted input price inflation and rising labour costs but are mostly only managing to pass on modest price increases in less competitive segments.

Business-to-business price inflation is easing as professional services companies face greater client resistance to price increases than last year. The exception is firms dependent on NLW or that enjoy robust demand.

Margins remain squeezed, in aggregate, with expectation of further compression from April in NLW-intensive sectors facing weak demand growth.

Labour costs appear to be the main driver of inflation across both consumer goods and services as firms look to pass on the higher NLW and NIC. For consumer goods this is contributing to rising price inflation with producers, wholesalers and grocers all starting to pass on the higher costs. For consumer services this means a potential moderation in the slowing of inflation seen over the past year or two.

Also impacting on consumer goods prices is the upcoming implementation of Extended Producer Responsibility (EPR) regulations for packaging, which for example, could add as much as 0.5% to 1% to grocers’ prices if fully passed through. Some grocers report that suppliers have started to pass on increases in packaging costs ahead of implementation, owing to the lengthening of their supply contracts and annual price negotiations. Taken together, in 2025 contacts expect price inflation of around 3% to 4% for food, with some industry bodies pointing to upside risks.

For consumer services, where supply is constrained by skills, price increases are continuing to be elevated for example around 5% for car repairs and maintenance, and 5% to 10% for health. Hotel room rates are expected to rise by around 5% and food and drinks at pubs at hotels and restaurants by 3% to 8%.

Overall, the inflation outlook suggested by Agents’ intelligence is broadly consistent with the near-term uptick and subsequent moderation of inflation set out in the February MPR.

Property

The housing market remains subdued and house price inflation is modest, particularly in London. Commercial real estate investors remain cautious as macroeconomic uncertainty endures.

Housing market

Estate agents and home builders report a subdued sales market, where potential buyers are uncertain about the economic environment. The increase in stamp duty from April has not had a significant effect on the timing of transactions in England and Northern Ireland.

We continue to receive intel of landlords exiting the rental market, which is increasing the supply at the bottom of the market but constraining rental supply. However, rents have stabilised at high levels as demand has also weakened.

Commercial real estate

Development and transaction activity remain weak, with contacts linking depressed demand to high Bank Rate and gilt yield volatility, as well as uncertainty about valuations. Contacts expect this situation to persist.