Bank of England, Agents’ summary of business conditions
The adverse weather in February and March contributed to a marked slowdown in retail sales values and consumer services growth. Store-based retailers reported significant sales declines. Consumer services, such as restaurants, cinemas and hotels, were also badly affected, and most did not expect to recoup sales lost as a result of the weather disruption. Car sales had fallen in March, mainly due to strong year-ago comparisons and uncertainty about the tax policy for diesel cars.
Business services growth remained moderate. There was a slight pickup in insolvency and restructuring work, robust growth in asset management and firm demand for IT services. However, discretionary spending by corporates, eg on events and hospitality, remained weak. Services exports continued to be boosted by inward tourism and growth in UK retailers’ overseas online sales. UK-based professional services firms saw growth in demand for Mergers & Acquisitions (M&A) advice from overseas clients. Demand for services from the oil and gas sectors edged up.
Domestic manufacturing output growth had been affected by the weather and weaker activity in the construction and automotive sectors. Some manufacturers benefited from some reshoring of sourcing to the UK, exporters generally outperformed firms focused on the domestic market. Goods export volumes to the EU remained strong, with limited evidence of reluctance to award longer-term contracts to UK companies. There were concerns about a rise in trade protectionism.
Construction output growth had slowed further. That was largely due to the poor weather, but some projects had been delayed following the collapse of Carillion. Contacts expected to make up weather-related delays, but some would not be able to do so until after Q2 due to capacity constraints.
Investment intentions remained modest, reflecting continued uncertainty around Brexit. Investment intentions were positive in business services and manufacturing, and some firms planned to invest in expanding capacity for exports, as well as in automation to counter rising labour costs. Consumer services firms’ intentions remained weak.
Corporate demand for credit remained subdued, reflecting strong cash balances and/or heightened uncertainty. There had been demand for finance to support M&A activity, and some firms had undertaken pre-emptive refinancing ahead of Brexit. Supply of credit had tightened slightly for small firms.
Investor demand in commercial real estate had continued to outstrip supply, particularly for logistics premises. Retailers had continued to reduce their shop premises and the resulting increase in vacant units had depressed valuations in the sector.
Housing market activity remained subdued overall. Demand had softened in the secondary market, where supply was also weak, whereas demand had been robust for new-build homes, supported by the Help to Buy scheme. There was some excess supply in the south and excess demand in the north: on balance there was a modest excess of supply overall. Lending conditions continued to be very favourable. However, slim margins on standard mortgage products had led some lenders to focus on more profitable niche segments of the market.
Capacity utilisation in manufacturing had risen, following increases among exporters and some domestic manufacturers, particularly where demand for substitutes for imports had increased. Business and professional services firms reported some capacity constraints but there was excess capacity in the retail sector.
Recruitment difficulties had broadened across skills and sectors, which was reported to be partly due to reduced availability of EU migrant workers. Employment intentions had ticked up in manufacturing but remained weak in consumer services, due to higher labour costs and weak sales.
Growth in total labour costs had edged up, reflecting slightly higher pay settlements than in 2017 and the increase in employers’ pensions auto-enrolment contributions. Pay settlements had typically been in the 2½–3½% range, with higher awards targeted at retaining staff with key skills.
The effect of past sterling depreciation on imported goods and material costs had been waning but was being partially replaced by global commodity price inflation. Consumer goods price inflation had eased slightly and consumer services inflation was broadly stable.
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