Agents' summary of business conditions - 2025 Q3

Overview

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

Sentiment remains downbeat, with many contacts now citing the Government’s upcoming autumn budget as a source of uncertainty. Most are not expecting any substantive pickup in activity until 2026. The news in consumer spending, business services and housing, seems slightly worse since the last update in the August 2025 Monetary Policy Report. In contrast, demand for credit seems to be picking up, and there are some faint, positive signals in the construction sector.

Employment intentions are little changed on the previous update and remain broadly flat to marginally falling, owing mainly to higher regulated labour costs. Intelligence suggests further reductions in employment from here are likely to be gradual. Recruitment difficulties are now around normal for most roles. There is little news on pay settlements for 2025, with intelligence still broadly consistent with the Agents’ pay survey at 3.7%. Very early indications for 2026 remain in the range of 2%–4%. Contacts report modest spare capacity, mostly in physical capacity, though a few describe hoarding skilled staff.

Inflation in materials and imported goods remains modest, with only a small downward effect from US tariff policy. Profit margins have improved a little for some contacts but remain squeezed for many – a more lasting rebuild of margins may take years rather than months. Consumer goods inflation is modest for many categories but remains elevated for food. Consumer services inflation remains elevated, as businesses pass on higher labour and food costs where they can, and is likely to remain high this year.

Consumer spending

Retail contacts seem a little more negative than the previous update. Sales volume growth is subdued at best, and consumer caution a key theme. Most see little prospect of improved demand this year given weak consumer confidence, with some now worrying about potential impacts on confidence from the upcoming Autumn Budget.

Supermarkets continue to report weak demand growth. Consumers are employing multiple tactics to reduce their spending, including pursuing promotions, greater use of loyalty cards, visiting multiple supermarkets, visiting more often to reduce food waste, and moving to value products.

Spend on homeware, furniture, and clothes continues to remain subdued, with demand overall generally flat. Housing-market weakness is constraining demand for DIY goods. Both new and used car sales are soft on the same period last year, with contacts reporting that consumers are increasingly choosing new and cheaper entrants to the UK market.

Accommodation providers report flat or slightly reduced occupancy rates. There is not much evidence of a pickup in domestic tourism so far this summer, with any strength in demand tending to be centred around local events such as Oasis concerts.

Recent warm, dry weather is supporting footfall at some visitor attractions. Even where footfall is up, contacts say visitors are spending less compared to the same period last year.

Restaurants and food-led pubs are reporting flat or slightly lower sales volumes on last year, although the warm summer weather has supported sales at drink-led pubs. Demand growth for foreign-travel services such as package holidays and flights has slowed, albeit from very high post-pandemic rates, because of wildfires abroad and households’ heightened caution.

Investment

Investment intentions remain subdued for the year ahead and are limited by uncertainty mostly over domestic policy, weak demand and financial constraints.

Essential investments continue, especially among larger organisations, with some firms returning to regular investment activity after hiatuses.

Higher labour costs from changes to the National Living Wage (NLW) and National Insurance contributions (NICs) can pull both ways on investment intentions. They incentivise spend by accelerating the return on efficiency-driven investment but also add to financial pressures limiting discretionary investment. Few cite international trade uncertainty as a factor, although mentions of demand and domestic policy uncertainty persist. There are instances of international groups choosing to prioritise non-UK investment, but this is not universal.

Family and individually owned private businesses are concerned about changes in inheritance tax laws making them less willing to invest.

Trade

Tariff changes and geopolitical concerns weighed less as contacts took some comfort from trade deals being progressed. Although tariff changes and global uncertainties are expected to constrain global demand.

Recent growth in UK exports to the US slowed as higher tariffs had brought forward activity into Q1. Some exporters are taking a hit to margin and/or looking at alternative sources and markets, but few are making major decisions on future US trade yet. EU demand for UK goods remains slightly down on last year, with Germany notably weak. Some exporters are wary of increased competition from China in the EU. Post-Brexit trade frictions remain a drag. Growth in demand from China and the Middle East remains slightly softer compared to last year.

Strength in advisory services is behind growth in exports of professional and financial services. Contacts report a further decline in US visitors, not helped by a weak dollar, and tourism from Asia remains subdued.

Business and financial services

Overall business services volume growth remains weak. Contacts remain cautiously optimistic, although they expect any pickup in volume growth this year and into 2026 to be modest.

Revenue growth is slightly weaker owing to softer transactional activity and discretionary spend.

Demand for audit, advisory and tax services remains strong, supporting professional services revenue growth. Transactional activity continues to soften with corporates focused on restructuring rather than acquisition, even though there continues to be a flow of smaller business owners looking to exit. Overall, logistics and wholesaling contacts report broadly stable volumes on last year. Demand for IT services remains mixed with robust growth reported for AI and cyber. Contacts report that cuts and delays are reducing demand for discretionary services such as marketing, training and consultancy. Recruitment activity has stabilised but remains notably down compared to last year.

Manufacturing and production

Manufacturing output remains slightly down on the same period last year. Contacts expect defence and aviation to drive near-term activity, with weaker subsectors expecting some output growth in 2026.

Output remains down on last year in the automotive sector as competition in electric vehicles, mainly from China, weak customer confidence, and US tariffs and quotas continue to suppress demand. Construction-facing manufacturers mostly report flat or lower output on last year and attribute constrained recovery and dampened sentiment to project delays. Output of consumer goods and food and drink is broadly stable or slightly down on last year owing to consumer caution. Strength in defence and aviation continues. However, contacts in the aviation sector report that labour shortages in their supply chain will constrain their pace of growth.

Construction

Construction activity remains modestly down on last year. But there are signs that new public projects and a small uptick in housing investment will likely support output returning to modest growth in 2026.

Contacts report lower commercial construction as projects are delayed or phased because of cost increases. Private activity is focused on refurbishment of existing stock, new office space, data centres and renewable energy. Larger contractors have pivoted toward large public projects, but delays on elements of HS2 and new nuclear projects at Hinkley and Sizewell mean current output growth is lower than expected. Water infrastructure activity has slowed as larger projects in the 2020–25 investment cycle have concluded.

Larger house builders report volume growth of around 3% on last year, smaller players slightly less so. All report building more social housing to achieve volume growth. Refurbishment of social and private rental stock continues. The Building Safety Act is slowing most new high-rise projects. Problems with utility connections, labour supply and delays in the consents process continue to weigh on confidence.

Corporate credit conditions

Competition to lend has intensified for the most credit worthy borrowers across all firm sizes. Although credit demand remains subdued, it’s normalised recently from small and medium-sized enterprises (SMEs).

Large investment-grade firms’ interest rate spreads have narrowed further, to lower than usual, on loans and bond issuance. Competition to lend among banks has also intensified for safer SME borrowers, and finance availability from alternative lenders has improved although at a higher cost. Early-stage finance is still tighter than normal.

SME demand for credit has picked up recently. Most is for working capital as firms aim to build resilience, for example securing cash flow in case of delayed client payments or building supply chain resilience by holding more inventory, but some is for asset finance. Some growing SMEs are now borrowing to fund more capex. Credit demand from large firms is still muted, mainly due to earlier strategic debt management and borrowing satisfying current financing needs, and some desire to deleverage.

Employment and pay

Employment intentions are little changed and point towards further gradual reductions in employment. Recruitment difficulties are around normal for most roles. 2025 pay settlements remain broadly consistent with the Agents’ pay survey and very early indications are for a further easing in pay pressures in 2026.

Employment intentions point towards further gradual reductions in employment, owing mainly to higher regulated labour costs. Some contacts report that headcount reductions have already happened – particularly in consumer-facing sectors most impacted by NLW. Many expect further reductions to be gradual, via natural attrition. A lot of companies are looking to automation to drive up productivity and minimise any increase in headcount as demand grows. A growing number are cautiously exploring the use of AI tools.

Recruitment difficulties are now around normal for most roles. Many firms note an improvement in responses to job adverts, although applicant quality can still be an issue. Employee churn has also fallen. Even in sectors where well-established skills shortages remain, some contacts report improved availability.

Cumulative pay settlements for 2025, remain broadly consistent with the Agents’ pay survey at 3.7%. Contacts attribute this to the looser labour market, more subdued inflation and a lower NLW increase compared to 2024. Most contacts are unable to estimate 2026 settlements, but very early indications suggest they will be lower than in 2025, in the range of 2%–4%.

Firms continue to mitigate the impact of increases in NIC and NLW via lower awards for higher-paid staff, reduced headcount and/or hours, higher prices, and other spending reductions. Indications are that quite a bit of adjustment has already taken place but there is potential for further action into 2026, for example where there are lags in contracts or pay deals being renewed.

Firms report modest spare capacity, reflecting weak demand in production and consumer-facing sectors. It tends to be concentrated in physical capacity, but some contacts are hoarding skills that are in short supply. Some are creating extra capacity via automation and technology.

Costs and prices

Consumer goods inflation is modest for many categories but elevated for food and likely to rise a little further in the short term. Consumer services inflation is expected to remain elevated this year. Margins are under pressure from higher costs, often combined with lacklustre demand. Cost reduction has helped but substantive margin rebuild is likely to be a long-term effort.

Overall materials and imported finished goods inflation is modest, although it varies a lot. For example, there is a lot of pressure on some food inputs while steel prices have fallen. Imported finished goods prices are helped a little by the strength of the pound against the dollar. Spare capacity in the Far East is also reducing some costs.

Manufacturers’ domestic price inflation remains around normal rates. Some firms have passed on labour as well as material costs, but prices are closer to stable where demand is weak. Business-to-business price inflation remains elevated, particularly for technology and professional services.

Profit margins remain tight for most contacts. Some report slight improvements as they take mitigating actions to reduce costs. A more lasting margin rebuild may take years rather than months.

Consumer goods inflation is higher for food than other categories, where non-labour cost pressures are more modest and low demand limits cost pass through. Driven mostly by commodity and labour cost, food price inflation is expected to rise to around 5%−5.5% later in the year, before easing back in 2026. Other goods inflation is generally expected to remain low, but contacts worry about rising business rate bills and other potential tax changes.

Consumer services inflation has stabilised at an elevated rate, as businesses pass on higher labour and food costs where they can. But weak demand limits the ability to raise prices for some contacts.

Property

The housing market remains subdued with weaker demand, improved supply and increased reports of price reductions. Investor caution over commercial real estate is expected to continue through 2025 H2, owing to ongoing macroeconomic uncertainty. Contacts are hopeful that transaction activity will improve in the medium term.

Housing market

Contacts report a subdued housing market, in which demand has weakened and supply improved in part due to landlords exiting the rental market. Most report very limited price movement, with an increasing share of contacts reporting price reductions, and offers are generally below asking prices. There’s a general sense of weak consumer confidence holding back demand, and some expect that a significant recovery of the housing market is some way off.

Rental price inflation continues to moderate from recent strong rates across all parts of the UK.

Commercial real estate

Transaction volumes are subdued as investors wait for the outlook for property yields to improve before re-entering the market. The limited number of transactions has created a gap between sellers’ and buyers’ price expectations, further restricting activity. Lenders have supported existing borrowers, helping to avoid forced sales.

Contacts generally anticipate positive developments in the sector, noting interest from overseas investors who view the UK as relatively stable. Occupier demand is expected to continue, with some interest extending to upper secondary assets from those priced out of prime spaces.

Outreach engagement

Participants in Bank outreach events continue to be concerned about the rising cost of living and financial difficulties.

The most pronounced increases are seen in food, energy, and transportation costs, but participants also note increases in utilities, council tax, TV licences and insurance. Off-grid households in some rural areas report big hikes in utility bills as their suppliers are not regulated. Increasing housing costs are causing additional strain on households.

Tighter household budgets have forced people to adjust their plans. Some older participants are either delaying retirement or seeking additional income. Other participants are taking on extra work to make ends meet. Participants agree that saving has become harder, with more money needed to cover daily expenses. Some note an increase in credit card debt and the use of ‘buy now, pay later’ schemes.

Third sector (charity) organisations report additional financial strain caused by reduced public funding – local and central – coupled with the NLW and NIC uplifts. Many have had to reduce services to afford these changes, despite increasing demand from service users. To mitigate this, some are moving to a more project-based model, linking staff costs to guaranteed incomes for a given period.

Organisations see more instances of ‘in-work poverty’, with households on incomes of more than £40,000 increasingly turning to food banks and living in budget deficit.