Agents' summary of business conditions - September 2026

Overview

This Agents’ summary of business conditions (ASBC) 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.

Output growth has improved in some sectors, mostly in certain business services and in manufactured exports. Business confidence has risen in those sectors, as firms adapt to continuing uncertainty. And investment intentions have improved a little. But there remain significant pockets of weakness including subdued growth in consumer spending, a continuing fall in construction activity and further softening in residential and commercial property markets. There is little expectation of an imminent improvement in these sectors.

The cumulative average pay settlement for 2026 has ticked up from 3.5% to 3.6%. This small change mainly reflects new information on April settlements, rather than news on later deals. Only around a quarter of the minority of firms whose settlement date is after April explicitly identify inflation or cost of living considerations as affecting the settlement, so it’s unlikely the 3.6% average will move much as new data come in. Those who have settled do not expect to review pay again until 2027, and only a very small proportion of contacts expect to make one-off cost-of-living payments later this year.

The limited available intelligence continues to suggest that 2027 settlements will be similar to or slightly lower than 2026. For the minority prepared to give a 2027 estimate, a potentially lower National Living Wage (NLW) than in 2026, looser labour market and relatively poor financial performance are pushing down, while the impact of higher-than-expected inflation as a result of the conflict in the Middle East, union activity and some continuing recruitment and retention pressures are pushing up. Amid much uncertainty, many contacts view the NLW increase and inflation outturns as key risks.

Input costs and consumer prices continue to edge up as firmer energy-intensive input costs are only partially offset by weak demand and retail competition. But expectations for food price inflation for year-end have further eased nearer to 4%. Profit margins seem to be slightly less compressed as firms have managed to find efficiency savings as well as passing on a portion of the increase in costs into prices. But some of increase in input costs may still be passed on in prices in 2027, including where hedges or fixed contracts have limited the cost impact so far.

Beyond 2026, contacts see modest upside risks to food price inflation from hot weather in Europe and from El Niño. There may be lower harvests in the UK and the EU for some crops, but contacts do not expect broad-based food inflation or widespread shortages. The potential impact of El Niño would likely emerge gradually over several quarters reflecting hedging, contracts and retailer competition. In both cases, the coming months will bring better information on harvests and then cost implications.

Consumer spending

Consumer spending growth across goods and services is little changed since the last update and remains moderate and mainly price driven. Most contacts expect consumers to remain value-driven in their spending, reflecting squeezed household budgets and continued geopolitical uncertainty.

Supermarkets continue to report weak food sales volumes with consumers trading down to lower cost brands. Demand is generally weak for big-ticket items, especially those that rely on housing market activity such as furniture. An exception is new car sales which continue to see a recovery towards pre-Covid norms, driven by keenly priced Chinese imports. Clothing and footwear sales volumes have been stronger since the spring with several retailers attributing this to the prolonged hot weather. Homeware retailers report low single digit annual sales volume growth.

Hospitality firms generally report challenging trading conditions. The World Cup and hot weather have benefited some, but the net impact of both seems limited. Hotel and leisure spend varies by location but there is little sign that concerns over the Middle East (ME) conflict, extreme weather, or reports of issues at EU borders have generated a significant ‘staycation’ effect in the UK. Holiday operators report some increase in overseas package holiday bookings in recent weeks.

Investment

Investment intentions remain uneven but there are tentative signs they are becoming slightly positive for the year ahead, though from a low starting point.

The drivers holding back sentiment discussed in previous rounds persist: uncertainty around demand and cost inflation remain, and borrowing costs are still considered a constraint. But there are some accounts of essential investment recommencing that can no longer remain on pause, although further rounds of evidence will be required to confirm this as a trend.

As always, the picture varies by sector. Infrastructure spending is starting to increase though is picking up more slowly than some contacts expected. Ports and airports continue to invest. The outlook for consumer facing firms is mixed in the face of weak demand and squeezed margins, but larger groups can look through the cycle and continue to invest to remain competitive. Manufacturers and warehouse operators are looking for opportunities to automate following recent labour cost inflation. Persistent high energy costs are incentivising investment in renewable energy generation. Business services firms are increasing their technology spend – including on AI – but much of this is often an increase in operational rather than capital expenditure. Construction and property sector firms remain among those least likely to be investing.

Trade

Goods export growth has improved over recent months. There is little news on exports of services values where growth remains lower than normal.

After a year or so of flat to falling volumes, goods exports and turnover are now growing, though below normal rates. Contacts now report less disruption from the conflict in sales to the ME. Some sectors are booming, notably suppliers of components for data centres and energy, and defence. Smaller goods exports companies remain gloomy about the future and continue to cite concerns over US tariffs, carbon regulations, increased competition from China, and the lagged effects of Brexit.

Services exports revenue growth remains lower than normal at low single digits reflecting a sharp decline in demand from ME countries for services related to discontinued construction projects. Aside from that, other business service revenues continue to grow a little below normal. There is reasonable growth in overseas demand for insurance, defence and AI related services, but merger and acquisition services remain quiet. Spending by overseas visitors to the UK is doing well but the inflow of international students continues to weaken.

Reports of higher freight and fuel costs and longer delivery times for imports continue. Despite this, supply chains seem generally resilient, although some raw materials such as chemicals and fuels have seen unpredictable supply and this is expected to continue.

Business and financial services

Contacts report growing revenues due to continued fee increases and some robust pockets of growth. With indirect impacts from the ME conflict less than feared and firms adapting to on-going uncertainty, contacts are slightly more upbeat

Contacts report a modest improvement in annual volume growth even though it remains lower than normal. Sectors growing robustly include IT, tax, employment law, restructuring, and engineering consultancy, the latter due to increased demand for infrastructure and data centres. Elsewhere, elevated uncertainty continues to delay decisions and weigh on transactional activity across capital markets, mergers and acquisitions and commercial real estate. Continued cost pressures mean demand remains weak for discretionary services such as public relations, marketing and training.

Contacts point to sluggish, yet slightly improved demand conditions. But despite robust pipelines of new business in the better performing sectors, overall growth in 2026 H2 is expected to remain modest and uneven, and often fee led rather than volume driven.​

Manufacturing and construction

Increased exports are supporting slight growth in manufacturing output, an improvement from the contraction reported in the last update. Construction remains weak, especially housebuilding.

Manufacturers report mixed conditions, but the overall picture is that output is up slightly compared to a year ago. Weakness in the automotive and consumer durables sectors is more than balanced by strength in export-oriented aerospace and defence sectors. Production of equipment for energy infrastructure and data centre projects is also growing. In contrast, construction- and domestic housing-related manufacturing, including furniture, remains down on last year. There is still only limited evidence of an impact on activity from the ME conflict. Reflecting the pickup in output, contacts are on balance more optimistic than the last update.

Contacts still cite heightened uncertainty and continuing cost pressures as factors delaying construction projects and weighing down on confidence and output more generally. Funding conditions have reportedly tightened, too. Private housebuilding activity continues to be particularly weak, especially in London. The pipeline of public and private infrastructure work, including nuclear, other energy, utilities, and defence, is substantial, but some contacts worry about delivery, given planning and regulatory constraints. Contacts expect activity to remain subdued at best with further contraction possible.

Corporate credit conditions

Credit supply continues to outstrip demand, with the gap broadening modestly across all firm sizes. Distressed borrower levels remain low.

Banks are prepared to lend across all sizes of firm but prefer larger, existing clients. Competition across all sectors and firm sizes for viable borrowers has increased as maintaining or growing market share is challenging. Tier 1 lenders compete mainly on price, which puts pressure on lending margins generally. Second tier funders’ ability to make quicker decisions and accept more risk mean they remain competitive on service rather than price. Funding for acquisition is readily available. Larger firms report good access to bond markets. Asset finance for investment and invoice discounting facilities has grown too. There remains less appetite to lend to firms at risk of revenue erosion from AI, smaller firms, or construction and hospitality firms with a weak track record.

Appetite for borrowing is still cautious due to the subdued outlook for the UK. There is further evidence of deleveraging by larger firms and of repayment of loans taken on as part of support schemes during the Covid pandemic. Some contacts are content to operate from internal or group funding. Some are maintaining or increasing funding headroom, and demand for acquisition finance continues. Lenders keen to take on new customers has led to more early refinancing activity to benefit from this competition.

Banking contacts continue to report low levels of distressed loans as their clients continue to prioritise margin protection over growth.

Employment and capacity utilisation

Labour market conditions are little changed from the previous update. Employment intentions remain broadly flat, recruitment difficulties remain a little below normal, and modest spare capacity persists.

Headcount is expected to remain broadly flat over the next 12 months. Weak demand and high labour costs remain the main constraints, particularly in consumer-facing businesses and parts of manufacturing. Automation and AI are influencing role design and replacement hiring, with some workflow efficiencies reported, although quantified productivity gains remain rare. There is limited evidence of broad AI-driven reductions in employment. Any recruitment is generally targeted at filling skills gaps or supporting specific growth or investment projects. Contacts planning further reductions typically expect to achieve them through attrition.

Recruitment difficulties continue to be below normal with increased candidate availability although shortages persist in specialist and technical roles. Some firms favour experienced, immediately productive hires, potentially making it harder for some young and entry-level workers to access employment opportunities.

Modest spare capacity appears broadly unchanged from the previous update, reflecting subdued or uneven demand. Spare physical capacity remains more evident than spare labour capacity. Reports of generalised supply shortages are limited, although some contacts continue to report isolated supply pressures and longer lead times for specific materials and equipment.

Labour costs

Limited intelligence on 2027 pay settlements continues to suggest they will be broadly in line with or lower than 2026.

The double weighted average 2026 pay settlement has ticked up a little to 3.6%, from 3.5% reported in the last update. This mainly reflects newly collected April settlements rather than news on more recent settlements. Those already settled, do not expect to review pay again until 2027.

Around 20% of employees have their pay settled after April. Of those contacts whose 2026 settlement date is after April (or who will backdate a settlement after negotiations are concluded), around a quarter explicitly identify inflation or cost of living considerations as affecting the settlement, so it’s unlikely the 3.6% average will move much as new data comes in. Within this group, unionised firms report that higher-than-expected inflation features prominently in negotiations.

Most contacts still won’t give an estimate of 2027 pay settlements. As was the case in the July 2026 ASBC, those who do suggest that settlements will be broadly in line with, or only slightly lower than, 2026. For these contacts, a potentially lower NLW, looser labour market and relatively poor financial performance are pushing down on 2027 pay, while the impact of higher-than-expected inflation, union activity and some ongoing recruitment and retention pressures are pushing up. Few firms seem aware of the Low Pay Commission’s early estimate of a 3.7% increase in NLW in 2027 published on 1 April 2026, and most NLW firms still cite the 2027 NLW (and Real Living Wage) as a key source of uncertainty. Inflation is also frequently cited as an influence on pay whose outturn at a settlement-relevant juncture is currently highly uncertain. Despite this, the tone this round is less fearful of adverse CPI outcomes.

Input costs, intermediate pricing and margins

Higher energy prices continue to push input costs upwards, offset only partially by weak demand. Profit margins are slightly less compressed.

Materials cost inflation remains elevated. Contacts report double-digit increases in plastics, fertiliser and other petrochemical derivatives, and some metals, with the outlook dependant on movements in energy prices, tariffs and the ME conflict. Imported finished goods price inflation is edging up slightly, in part owing to some shipping costs further increasing, and modest cost increases in homeware, gifts, and (particularly) electronic products from Asia.

Domestic manufacturers report modest output price inflation in the 1%–5% range, or higher where inputs are energy or UK labour intensive. There is an increasing number of business services companies reporting modest fee rises. For example, professional and technical companies report 2%–5% increases with some software and IT costs rising much faster.

Overall, profit margins are slightly less compressed as firms find efficiency savings as well as passing on a portion of the increase in costs into prices. Beneath the overall figures, businesses pass on higher energy, fuel and commodity costs when possible. Some are helped by surcharges and index‑linked contracts to quickly pass on costs, and others on low‑margin models have little alternative. But elsewhere, weak demand means they must try to offset cost pressures through procurement savings, not systematically replacing staff and other cost controls, or productivity gains. Some firms are currently protected from higher costs by hedges or fixed contracts, or are waiting for contract renewals or seasonal pricing windows and so may try to raise prices in 2027.

Consumer prices

Current consumer price inflation continues to edge up. Expectations for food price inflation this year continue to tick down compared to what they were earlier in the ME conflict, but hot weather and El Niño may present upside risks beyond year-end from this lower base.

Consumer goods retailers report that inflation is around to 3%–4% for furniture prices and 1%–3% for new-car prices and remains weak for clothes prices. Food inflation is modest, supermarkets currently put it at between 2% and 3%. Expectations for year-end continue to ease to be nearer 4%, converging to the bottom of the 4%–5% range cited last month.

Looking ahead to 2027, there is a risk that hot weather in the UK and Europe may create pockets of food price pressure through lower harvests for some crops, but contacts do not expect broad-based shortages. El Niño is considered a modest additional upside risk, mainly through higher food and animal feed costs. Factors such as hedging, contracts and retailer competition mean that any effects would emerge gradually over several quarters. The coming months should bring more clarity as the impact on harvests and the consequent effects on prices are known.

Consumer services contacts report that inflation is moderate but persistent, driven by labour, food, energy and business rates. Contacts are prioritising occupancy, promotions, menu changes and efficiency gains over commensurate price increases. Upside risks remain from energy repricing, food inputs, freight, visitor levies, business rates and future wage rates.

Housing and commercial real estate

The property market has softened further. Sentiment continues to deteriorate with a range of headwinds holding back both demand and supply.

Estate agents continued to report a subdued market, with house prices under more pressure in London and the South East and barely rising elsewhere. Transaction numbers are down on last year, in some areas by double digit percentages, and sales are taking longer to complete. Demand in the new build market is similarly weak, with higher mortgage rates weighing on affordability. House builders are reliant on bulk sales and incentives to support cash flow and there is no expectation of an imminent pickup in supply of new homes.

Commercial real estate development and investment activity is being held back by high construction and finance costs, which along with planning and regulatory constraints are challenging viability. Contacts do not expect an imminent pickup in transactions.

Outreach engagement

Households and charities report continued financial strain from higher costs and reduced incomes.

Participants report that higher costs of food, housing, transportation and utilities continue to squeeze household budgets causing them to become far more careful and deliberate in their day‑to‑day spending. There are signs of growing financial strain as households are increasingly accessing their savings to pay for everyday expenses, turning to debt, or taking on second jobs or side hustles as a financial buffer.

Participants are concerned about their local labour market. They report fewer entry level or part-time jobs for young people, and greater cost-cutting in local companies, leading to redundancies. In areas with poor transportation links, employment opportunities are limited. There is a growing worry about AI leading to fewer jobs, and that people aren’t always able to retrain and pivot quickly in response.

Charities and community organisations report that they are increasingly delivering services that would previously have sat within statutory provision, while facing short-term funding, payment in arrears and higher employment costs. Due to funding pressures, some charities are considering mergers and seeking alternative income streams.

Next publication date: 30 October 2026