Agents' summary of business conditions - October 2026

Overview

This Agents’ summary of business conditions (ASBC) summarises intelligence from the Bank’s Agents considered by the Monetary Policy Committee ahead of its November meeting. The intelligence was gathered in the six weeks to early-October.

Intelligence suggests that overall private sector output growth remains modest with wide variation across sectors. Consumer demand remains fragile and price sensitive, while business and financial services growth has softened relative to our last update period. Manufacturing is supported by defence, aerospace, energy infrastructure, data centres and exports. In contrast, consumer durables, construction, housing and commercial property remain weak. Investment intentions have turned slightly positive but from a low base.

Contacts expect modest output growth, in aggregate, in the coming months, with weak domestic demand, elevated costs, high borrowing rates and geopolitical and domestic policy uncertainty offsetting stronger export-oriented and technology-related activity.

While still below normal, employment intentions have firmed slightly and are now moderately positive as many large firms have completed cost-cutting exercises. Recruitment difficulties remain a little below normal, and modest spare capacity persists

The average pay settlement for 2026 so far remains at 3.6%. Early indications suggest that 2027 pay settlements will be broadly similar to 2026 with a slight uptick in expectations since last round.

Cost inflation is reportedly elevated but uneven. The sharpest pressures are in energy and energy-intensive materials, related to the conflict in the Middle East, and technology inputs. While weak consumer demand growth and competition are expected to continue to limit the pass-through of cost pressures, contacts expect consumer goods price inflation to start to firm up, as contracts are repriced. Consumer services inflation is expected to persist at around its current levels.

Food price inflation is expected to end the year at 3%–4% and has been milder than expected in 2026. But contacts expect food price inflation to increase and remain elevated in H1 2027 as pricing contracts are re-set. Food producers cite 3%–6%, but supermarkets suggest it may not exceed 4%. The impact of the heatwave and drought on food price inflation is expected to be modest. El Niño is an upside risk to food price inflation in 2027.

Artificial intelligence (AI) adoption is increasingly moving from experimentation to deployment at scale across a wide range of sectors.

Consumer spending

Overall consumer demand has held up over the summer, but is expected to remain fragile. Many retail contacts report significant discounting and promotional activity to support sales volumes. They continue to describe consumers as value-driven, price sensitive and highly selective in their spending decisions.

Premium and value brands of consumer goods tend to see stronger sales performance than ‘middle market’ offerings. Supermarkets continue to report stable or moderately lower food and beverage sales volumes. Retailers report some moderate growth in volumes of clothing and footwear and homeware, possibly owing to the warm summer. Demand remains weak for electronics, furniture, and kitchen appliances. Strong appetite for Chinese electric vehicles continues to support growth in new car sales and resilience in the new and used car markets generally.

In hospitality, leisure and accommodation, contacts generally report challenging trading conditions and greater use of promotions than normal to stimulate demand. As with consumer goods, performance is stronger at each end of the value spectrum.

Most contacts expect the next few months to remain challenging for sales volumes given fragile consumer demand with rising cost-of-living pressures for consumers such as higher fuel and household energy costs and, for some, higher mortgage costs.

Investment

Investment intentions are slightly positive for the year ahead, though from a low starting point, very similar to what was reported in the September ASBC.

The underlying factors weighing on overall investment sentiment persist: uncertainty around demand and cost inflation continue and some contacts still consider borrowing costs to be high and a constraint on investment. There are also increasing reports that public sector grant funding is less easily available and more limited. However, there is further evidence that infrastructure spending is now increasing as regulated industries move into new investment cycles. And Agents continue to hear from some contacts across sectors that they are recommencing essential investment spend that can no longer remain on pause.

For business services firms, in particular, technology spend remains the key driver of increased investment spend. Occasional instances of significant increases in investment are usually due to AI. Although for the majority increasing their spend on AI, this tends to be operational rather than capital expenditure.

While many manufacturers report cutting back on investment due to financial constraints, the drive to automate in the face of high labour costs persists for some. Those in defence and aerospace manufacturing remain bright spots.

Consumer-facing contacts report a mixed outlook in the face of weak and uncertain demand. Larger retail groups are more likely to invest through downturns, although those that are highly leveraged and adapting to higher finance costs are less so.

Trade

Goods export volumes continue to grow modestly, supported by demand for defence and aerospace products and components used in data centres and energy infrastructure. Services exports revenue growth is further below normal.

The tone from contacts on goods exports is positive but mixed. The conflict in the Middle East has affected logistics and costs more than demand, although it has also weakened confidence among some overseas clients and delayed construction projects in the region. Export demand is strongest in defence, aerospace, healthcare and equipment for data centres and energy infrastructure, particularly from markets outside the EU. Higher oil prices have also increased demand for more fuel-efficient aircraft and maintenance services as airlines seek to extend the use of existing fleets. By contrast, US tariffs and administrative requirements associated with Brexit continue to weigh on trade. Overall, contacts are more positive about the outlook for goods exports than domestic demand for manufactured goods.

Growth in services exports has slowed further below normal rates. Contacts report declines in overseas visitor numbers and that they are more price sensitive and increasingly choosing lower-cost options. International student numbers also continue to fall sharply. There is little change in business services exports, although demand from the Middle East remains subdued as construction projects are delayed or cancelled. Overall, growth in services export revenues is increasingly concentrated in business services rather than consumer services. Contacts see scope for growth to recover when oil prices normalise, but do not expect material improvement in the near term.

UK importers continue to report higher freight and material costs, including for imported steel, as well as longer delivery times. Supply chains remain broadly resilient, although demand for some electronic components continues to exceed supply. There are some reports of UK production being relocated closer to overseas customers to reduce exposure to tariffs, high UK energy costs and transport costs.

Business and financial services

Annual revenue growth is a little softer than the last update as geopolitical tensions and uncertainty about the UK Budget dampened confidence and fee inflation slows for professional services. Growth prospects remain mixed across the sector and overall are subdued.

Reported business services annual revenue growth remains positive but is a little softer than the last update and is slightly lower than normal. Fee inflation continues to slow across professional services as competition intensifies, demand remains subdued and clients look to leverage AI efficiency gains. Contacts report on-going strengths in advisory and consultancy. Client focus on cost control has supported growth in outsourcing but elsewhere is weighing on discretionary spend such as marketing and recruitment. Geopolitical volatility and Budget uncertainty are weighing further on confidence and transactional activity, slowing deal flow and decision making.

Contacts continue to point to modest revenue growth over the next year. While digital/tech, infrastructure-linked and selected professional/niche services are expected to continue growing strongly, prospects elsewhere look mixed. Contacts point to a range of headwinds including weak confidence, increasing operating costs, and geopolitical and domestic uncertainties. In professional services, while volumes remain relatively steady, fee inflation is expected to continue easing back to around normal. Transactional activity is expected to remain stable but subdued for much of the coming year. A few contacts expect recruitment difficulties to temper growth potential.

Manufacturing and construction

There is little change on the last update. Annual manufacturing growth is still slightly positive, driven by exports. Construction is still weak, especially housebuilding, although there is some tentative optimism related to the ‘Your First Home’ scheme.

The manufacturing sector presents a mixed picture. Overall output is up slightly on the same period last year, with weakness in automotive and consumer durables outweighed by strength in export-oriented aerospace/defence and production of equipment for energy infrastructure and domestic data-centre projects. In contrast, domestic housing- and construction-related manufacturing remains down on the same period last year. Overall, contacts are more optimistic than they were a few months ago, given some pickup in output and expect moderate growth, with clearer opportunities in export markets.

Construction output growth remains slightly negative on the same period last year, with uncertainty and ongoing cost pressures still reported as inhibiting confidence and delaying projects. Private housebuilding activity is particularly weak, especially in London owing to weak final demand. The pipeline of infrastructure work in nuclear and other energy, utilities, and defence is substantial, but some contacts are worried about delivery given cost constraints and wider economic uncertainty. The recent announcement of the ‘Your First Home’ scheme in England is a source of tentative optimism for some about activity in 2027, but they are highly uncertain as to the extent and timing, especially given ongoing geopolitical risks.

Corporate credit conditions

Credit remains widely available. Demand is mixed and generally cautious, although appetite remains strong for working capital and refinancing.

Banks, private credit providers, and specialist lenders remain keen to lend. Strong competition has compressed spreads and improved other terms, such as leverage, for better quality borrowers. Specialist lenders, challenger banks, and broker networks continue to help smaller firms retain access to finance. Lenders increasingly specialise by sector and risk profile, contributing to a wider variation in financing terms between stronger and weaker borrowers. Some contacts highlight greater use of high-cost unsecured borrowing and concerns that some weaker small and medium-sized enterprises are accumulating debt across multiple lenders.

The appetite to borrow is subdued, though mixed. There is slightly firmer demand than in the previous round for working capital, refinancing, and some investment. Many businesses remain cautious about new borrowing, given uncertainty, higher all-in borrowing costs, and weak profitability. Demand for new residential development finance is particularly weak – developers are seeking extensions of existing facilities where completed properties are difficult to sell.

Credit quality remains broadly stable, with no widespread deterioration in arrears, losses, or insolvencies reported by lenders. Financial stress is still concentrated among leveraged hospitality operators, and parts of the construction sector and its supply chain.

Employment and capacity utilisation

Employment intentions are slightly firmer than last round, but recruitment difficulties remain a little below normal.

Employment intentions have firmed a little since the summer. Expectations regarding future headcount remain lower than normal but are now moderately positive. Larger firms are more positive for the first time in a while – for many because they have completed restructures or cost-cutting exercises. However, there are distinct sectoral differences with business services notably more positive than consumer-facing contacts. Subdued demand, high labour costs, and the recent tightening in employment regulations continue to constrain hiring across sectors. As does the continuing rollout of AI and automation which is increasingly yielding measurable productivity improvements. However, evidence of AI-driven reductions in employment remains limited.

Recruitment difficulties remain below normal. While contacts report better candidate availability many have concerns about applicant quality and some report shortages of experienced workers or those with specialist skills. Some specific locations also report ongoing labour market tightness amidst a looser overall market than 12 months ago.

Modest spare capacity remains within firms and is broadly unchanged from the previous round. Spare physical capacity remains more evident than spare labour capacity with consumer services firms noting weak utilisation. Supply chain conditions have largely normalised with sporadic reports of difficulties in chemicals, minerals and electronics.

Labour costs

The average pay settlement for 2026 remains at 3.6%. 2027 is expected to be broadly similar to 2026, a little higher than reported last round.

Most contacts are not yet providing estimates of their pay settlements in 2027, although the number who have has doubled this round. Among those providing estimates, most expect settlements to be broadly unchanged from 2026 at around 3.6% in 2027. Union pressure, specialist role recruitment and retention difficulties exert upward pressure, while a looser labour market, weak demand, squeezed margins and affordability exert downward pressure. There remains considerable uncertainty about both the National Living Wage increase and the future path for inflation. The Agents’ pay survey, launching next month, will provide further evidence on pay intentions for 2027.

Around 40% of contacts that settled for 2026 after April identify inflation or the cost-of-living as influencing pay. But there is no evidence of a general late-year inflation premium in settlements as affordability, subdued demand and the looser labour market are limiting pass-through into larger awards.

Input costs, intermediate pricing and margins

Cost inflation is elevated, with greater pressure in energy-intensive materials and technology inputs. With competition and weak demand constraining pass-through, margins remain compressed. 

Materials cost inflation remains elevated but uneven, led by fuel, metals, fertiliser, petrochemicals and packaging. As the Middle East conflict prolongs and hedges and forward contracts are repriced, raw material cost inflation is expected to rise further. Many firms are still protected by fixed contracts, while weak demand and customer resistance are causing others to absorb costs in margins and reduce other costs. The extent of price pass-through to come will depend on how much firms’ costs increase when contracts are renegotiated and their ability to reduce costs further.

Imported finished goods inflation remains moderate though is higher for engineering and technology goods that are exposed to chips, energy and freight. Import price inflation may rise modestly over the next 6–12 months but trade diversion and Chinese competition should limit this somewhat.

Domestic manufacturers and business-to-business services mostly report 2%–5% price increases, with transport services reporting continued pass through of higher energy costs and information services reporting higher rises in the price of subscriptions, software and hardware. Accountancy and legal fees are rising more slowly and insurance premia are easing.

Profit margins across the economy remain compressed relative to sustainable levels as competition and weak demand constrain pass-through. While this dynamic is expected to persist, contacts hope to improve their margins during 2027 through a combination of price increases – such that goods price inflation starts to firm up as contracts re-price – and other levers of adjustment, including procurement, automation and cost-cutting.

Consumer prices

While weak consumer demand growth and competition are expected to continue to limit the pass-through of cost pressures, contacts expect goods price inflation to start to firm up, as contracts are repriced. Services inflation is expected to remain moderately persistent.

Components of consumer services inflation remain persistent at around 3%–6%, driven by high labour, energy, food, fuel, property, business rates, and maintenance costs. This is expected to continue over the next 6–12 months.

Contacts expect goods inflation to start to firm up as contracts are repriced, However, weak consumer demand growth, UK retail competition and import competition, particularly from China, should contain price pressures. Clothing and footwear prices remain flat, while there is deflation in new electric car prices, reflecting Chinese imports. Modest deflation in white goods from the Far East also continues. In the other direction, shortages of chips continue to lead to inflation in electronic goods. As the Middle East conflict persists and contracts start re-pricing, businesses are having to start passing on more of their cost increases.

Food inflation has been milder in 2026 than feared reflecting lower commodities costs than expected (eg coffee, cocoa, sugar), some commodity and energy hedging or forward buying, and the natural cycle of stocking of inputs (notably fertilisers) having mainly taken place prior to the conflict erupting. Weak demand, consumer price sensitivity and intense supermarket competition has also constrained price increases. As contracts start repricing and the energy shock prolongs, contacts expect price pressures to increase, with the central view that food inflation will end the year at 3%–4%.

Contacts expect increased food price pressure in 2027 H1, as stocks and earlier pricing agreements roll off. Contacts in the food supply chain speak of 3%–6% inflation. Trade bodies expect food inflation to be 5%–6% in 2027 reflecting the effects of El Niño. Supermarkets expect that weak demand and competitive pressures will cap it at around 4%.

The impact of this summer’s UK heatwave and drought is mostly felt in production of fresh produce, livestock, dairy and feed/forage-dependent products. Contacts expect pockets of lower yields and quality, and that supermarket price resistance, consumer price sensitivity and import substitution should mean only muted price increases on some items are still to come into early 2027.

Most contacts consider El Niño an upside risk to food price inflation, with cost pressures being category-specific and building over several quarters: fresh produce first, followed by feed, livestock, with dairy and meat much later. Some effects are already visible for instance in vegetable oils, berries and asparagus. Contacts in the food supply chain do not expect El Niño to be the dominant effect on UK food inflation in early 2027, compared to the greater impact of higher energy prices. Trade bodies expect a non-trivial impact from El Niño, as reflected in their latest forecasts, and that it will peak around the middle of 2027.

Housing and commercial real estate

Higher mortgage rates are weighing further on housing demand, while new-build supply remains constrained. CRE investment remains constrained by weak expected return on investment.

Demand in the housing market has softened further, with pronounced weakness at the higher end and signs it is spreading into the lower end of the market, which, till now, has been more resilient. Higher quoted mortgage rates are weighing on affordability, with reports of weaker mortgage volumes. In the second-hand market, a widening gap between seller expectations and buyer willingness to pay is prolonging transactions. Housebuilders continue to rely on incentives to support volumes, while new-build supply remains constrained by weak viability.

House prices are broadly flat overall, masking regional differences, with declines in London and the South East continuing and increases in the North West, for example. Contacts expect little recovery in the near term, although some hope the new ‘Your First Home’ scheme in England will support sentiment.

UK rental prices are picking up, while London rents are broadly flat. Higher mortgage rates are delaying moves into owner-occupation and regulatory changes continue to encourage small-scale landlords to sell, with supply increasingly concentrated among large portfolio landlords.

CRE investment remains constrained by weak expected return on investment. The continued increase in risk-free yields is weighing further on both valuations and transaction times.

Artificial Intelligence update

Artificial intelligence (AI) adoption is increasingly moving from experimentation to deployment at scale across a wide range of sectors.

AI is becoming more deeply embedded in firms’ operating models, particularly in professional and business services, where contacts report changes to service delivery, recruitment and pricing practices. Firms continue to report productivity improvements across a range of activities, including document review, coding, research, forecasting, customer service and administrative processes.

Labour-market effects are becoming more evident, although these continue to be seen primarily through lower replacement hiring, slower recruitment and reduced trainee intakes rather than widespread job losses. Entry-level and routine professional roles remain the most exposed, while demand is increasing for AI-literate, technical and judgement-intensive roles. Contacts continue to report skills shortages and pay premia for some of these roles.

Compared with earlier in the year, contacts increasingly report that the effects of AI extend beyond productivity and employment. AI is influencing business models, pricing strategies, investment decisions and firms’ cost structures. Some firms describe AI as supporting the development of new services and products, while increasing their focus on higher-value advisory work. In professional services, pricing models are evolving, with greater use of value-based pricing and increasing client pressure to share efficiency gains arising from AI adoption.

AI is also changing firms’ cost structures. Labour savings are increasingly accompanied by higher spending on software, cloud services, cyber security, governance and data infrastructure. AI-related investment remains strong, supporting demand for software, cloud infrastructure, data-centre capacity and energy. Firms increasingly view AI as a long-term strategic transformation requiring ongoing investment in governance, controls and risk management.

Contacts report much more extensively on investment in and adoption of AI by users than on investment by firms developing and supplying AI technologies. Contacts nevertheless report AI adoption supporting demand for software, cloud infrastructure, data-centre capacity and energy. Among our contacts, notable increases in spend on AI tend to be more operational in nature than increases in investment on foundational development.

Outreach engagement

The charities sector continues to report a difficult funding environment.

Charities report increased mergers in the sector due to the difficult funding environment as well as more instances of partnership and collaboration, particularly when bidding for contracts or grants. Grant-giving organisations are oversubscribed, forcing them to find ways to manage demand. For example, some have lowered their maximum income threshold requirement. Some organisations are investing in AI to help them run operations more efficiently.

Charities report that those who use their services who live near tourist areas face difficulties such as long-term employment and affordable housing. In these areas there are also high instances of in-work poverty as wages do not match local housing costs. In more rural areas, service users report the lack of good infrastructure, such as roads, as a significant barrier to accessing job opportunities, health services, and education.

Next publication date: 11 December 2026