Bank of England agents’ summary of business conditions
Consumer spending growth had changed little. Growth in retail sales values had been broadly steady, but within that there was downward pressure on sales of furniture and homewares. In addition, the market for new cars remained challenging. Consumer services turnover growth continued to be helped by strong growth in inbound tourist spending, though there were some signs of a softening in discretionary spend by domestic consumers.
Growth in business services turnover had picked up slightly, but remained moderate. Growth was supported by an increase in mergers and acquisitions activity, property transactions, and continuing strength in overseas demand for professional services. Spending on IT services also remained strong.
Manufacturing output growth had remained moderate. Export volumes growth had increased, supported by strong global demand and the fall in sterling. The latter had led to some, albeit still limited, switching from overseas to cheaper, domestically produced goods. Activity in the oil and gas sector had picked up. Construction output growth had eased, with growth in housebuilding offset by flat or falling activity in other parts of the sector.
Investment intentions remained positive, but mainly reflected the investment needed to maintain business activity and improve efficiency. This included investment in automation, artificial intelligence and robotics.
Finance remained readily available, particularly for medium-sized and larger corporates, though banks’ risk appetite towards construction and retail had fallen slightly. Provision of trade credit insurance had tightened for some firms in these sectors. Insolvencies had increased, albeit from a very low base, and there were reports of strains in payment along supply chains, particularly in construction and retail.
Outside London, investor demand for UK commercial real estate remained broadly unchanged, with demand modestly above supply. There was strong demand for distribution space, while demand for non-prime retail property had softened. Investor sentiment remained comparatively weaker in London, weighed by concerns about stretched property valuations.
Housing market activity remained subdued with transactions steady at a low level, reflecting weak supply and demand. Within that, the new-build and rental sectors were buoyant, pushing up prices and rents. Housing demand was particularly weak in London and the South East, especially for the most expensive properties. The rise in Bank Rate had little discernible impact on demand as mortgages remained cheap and readily available.
Overall capacity utilisation held steady at a slightly higher level than normal, particularly in services. Companies cited labour availability as one of the main constraints to activity.
Employment intentions continued to point towards modest headcount growth, except in consumer services, where headcount was expected to continue falling. Recruitment difficulties remained at elevated levels.
A survey showed that companies expected the average pay settlement rate to increase to 3.1% in 2018 from 2.6% in 2017. Total labour cost growth continued to pick up, largely due to a combination of recruitment difficulties, the rising cost of living and the increase in the National Living Wage.
Materials cost inflation remained elevated, driven by commodity price increases. Business services price inflation remained a little below normal.
Consumer price inflation held steady, reflecting the ongoing impact from the fall in sterling. Retailers had sought to recover higher input costs gradually in the face of cautious consumer demand. Consumer services price inflation had edged down, but remained under upward pressure from increases in regulated prices, such as rail fares, in addition to firms passing on higher input and labour costs.
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