Agents' summary of business conditions - July 2026

Overview

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

Intelligence continues to suggest subdued growth in private sector real activity. Most intelligence was collected before the signing and subsequent breakdown of the Memorandum of Understanding (MoU) between Iran, Israel and the US and so does not reflect the volatility and uncertainty sustained by that sequence of events. Business confidence had continued to weaken to that point. If the ceasefire resumes and holds, it is likely some optimism will return, but it is also likely this will only gradually translate into a substantive pickup in activity.

Employment intentions remain broadly flat, reflecting weak and/or uncertain demand (including a degree of Middle East (ME)-related caution), labour cost pressures and increased use of automation. Recruitment difficulties have eased to a little below normal levels.

The weighted average 2026 pay settlement remains unchanged at 3.5%. Contacts continue to note a high degree of uncertainty regarding their 2027 pay settlement. The impact of the Middle East shock on inflation and the potential for upward pressure on 2027 pay settlements is a concern for some contacts.

Contacts continue to report inflation in high energy-content materials. UK manufacturers report higher own-price expectations where these materials are important inputs, although many are cautious of pushing too hard for price increases.

Own-price inflation expectations of consumer-facing firms have moderated somewhat since the June ASBC. This is most notably the case for food prices, with supermarkets now expecting a 2026 peak of 4%–5%, compared to the 6%–7% reported early in the ME conflict. Most retailers are not expecting a material pick-up in inflation for non-food consumer goods. Cost pressure in consumer services appears greatest in the hospitality sector owing to higher food and energy prices due to the ME conflict.

Most firms continue to report squeezed profit margins. There is a general acceptance that margin rebuild will take time, and likely longer than previously thought in the face of the Middle East shock. There is some pass-through of higher costs, but firms are mindful of demand conditions and customer sensitivity to price increases. They continue to seek operating efficiencies and are cautious on employment.

Consumer spending

Growth in consumer spending over the year remains predominantly driven by price inflation.

Some major supermarkets report a contraction in sales volumes over the past couple of months, which they say could partly reflect the impact of the ME conflict on fuel prices and consumer confidence. While supermarket shoppers are said to be even more responsive to discounts and promotions, most other retailers report little change in trading patterns. Customers are still highly cautious on big-ticket items, although hot weather has supported spending on outdoor goods.

While hot weather has helped spending at some hospitality and leisure venues, it has not been sufficient to offset broader consumer caution, so volume growth otherwise remains flat to slightly negative. Visitor attractions report that customers are leaving it very late to book, with proportionally more on-the-day footfall than usual. Similarly, travellers are booking holidays later than usual as they wait to see what happens in the ME. As such, it is difficult to get a clear view of summer bookings, but indications are they may be slightly weaker.

Contacts expect volume growth in 2026 H2 to be modest at best this year (that is, assuming an end to the ME conflict soon), and likely somewhat lower than last year. They consider risks to consumer confidence and spending remain negatively skewed.

Investment

Investment Intentions remain uneven but broadly flat for the year ahead, suggesting another year of subdued spend.

Uncertainty around demand and cost inflation persists across sectors, and there is increased concern about future government policy, given upcoming changes to Government leadership. Contacts still consider borrowing costs to be high.

Increasing construction input inflation is deterring or delaying contacts’ physical expansion plans. As a consequence, construction and property sector firms are among those least likely to be investing.

Across sectors, and especially amongst manufacturers, contacts are less likely to invest in expanding capacity. Instead, following recent inflation in labour costs, contacts are investing in automation and efficiencies. Business services contacts’ spending on technology including AI is increasing as they too pursue efficiencies. However, a proportion of this amounts to an increase in operational expenditure rather than capital expenditure.

Trade

Weaker demand from the Middle East is partly reflected in the slowing in annual growth in the value of exports of services and likely falls in the volume of goods exports on last year.

In services, contacts report decision delays and softer real estate activity in the ME affecting UK architectural and other professional services. International legal/business services and corporate insurance remain comparatively resilient with stable revenue growth. Merger and acquisition advisory, education and tourism are less resilient, aside from some premium‑end firms in the latter two sectors.

Goods exports to the ME remain down and there are increasing signs of softness in the US (tariffs), China and parts of the EU (Brexit frictions), though some contacts report pockets of growth elsewhere in Asia and the EU. The defence, aerospace and precision manufacturing sectors remain strong.

Sentiment is weaker than the previous update, contacts expect subdued, uneven or delayed demand, with downside risks from conflict‑related logistics, tariffs, higher energy costs and geopolitical developments. In services, this suggests modest values growth at best over 2026 H2 as some ME projects may be pushed into next year.

Business and financial services

Low domestic demand is the main factor behind weaker business services activity.

Contacts serving the construction and consumer sectors report ongoing modest decline in business-as-usual demand. Clients continue to delay decisions, reducing transactional activity such as merger and acquisition and commercial real estate deals. And clients’ focus on costs means there is less demand for discretionary services with fee increases getting harder to achieve. The strongest increases in activity are in digital transformation/cyber risk, financial markets trading and pockets of professional services such as tax and employment advisors. Price uplifts remain the primary driver of sector revenue growth overall, although fee inflation is moderating.

Contacts expect slightly weaker revenue growth in H2, both compared to last year and 2026 H1, as fee increases continue to slow. They also expect activity to continue to moderate slowly. More recently, contacts began to cite UK political uncertainty as another factor that would give clients reason to delay decision making.

Manufacturing and construction

Output in manufacturing and construction continues to fall on last year and growth expectations remain subdued.

Manufacturers report that output continues to contract modestly. The exception is in aerospace and defence where growth remains robust and order books strong. Elsewhere, volumes are mostly flat to slightly down including food, drink and consumer goods, in part due to weak discretionary demand. Manufacturers of automotive and construction products report weak levels of output and reductions in capacity. Looking ahead contacts are cautious – although the outlook continues to vary by sector, overall they expect little change in demand.

Construction output continues to fall modestly as elevated geopolitical uncertainty and rising cost pressures reduce confidence and further slow decision making. New residential development in London has fallen sharply and elsewhere new housing starts are moderating. Many new commercial office and care home schemes are no longer viable. Public sector demand remains steady and industrial activity continues to grow. Contacts report strong pipelines for public sector, defence, and major infrastructure spend, but also consider they could be slow to materialise. Developers expect the housing market to remain challenging and can only maintain prices via increased incentives and generous part-exchange offers. When confidence returns there is expected to be a three to six month lag before on-site activity recovers. Overall expectations for construction for the coming quarters remain subdued, with political uncertainty and steel quotas adding further headwinds.

Corporate credit conditions

Credit conditions remain broadly unchanged. Credit is available to most firms and uncertainty including from the Middle East conflict still weighs on credit demand for some.

Banks are prepared to lend but remain selective with a preference for larger, existing clients. There is less appetite to lend to small and medium sized firms, the construction and hospitality sectors, and those firms at risk of revenue erosion from AI. These companies must rely on second tier funding. Asset finance and invoice discounting facilities are growing.

Appetite for borrowing is weaker than the available supply. Companies with larger borrowing needs are benefitting from the competitive market, increasing facilities and putting in place additional funding for when it is required. Others are nervous about taking on more debt at higher interest rates, with more trying to use more internal funding or operate with no debt. Some are considering hedging since the ME conflict has increased funding costs and expectations of higher rates. And some are nervous as tightening payment terms put pressure on their working capital facilities.

Employment and capacity utilisation

Employment intentions remain broadly flat. Recruitment difficulties have eased to a little below normal. Firms continue to report modest spare capacity.

Headcount is expected to be broadly flat over the next 12 months. Job cuts, generally achieved through natural attrition, reflect weak demand, mainly in consumer services and parts of manufacturing, although the rate of decline in the former has slowed a little as some contacts reach their lower bound for headcount. Offsetting this, some targeted recruitment is reported in professional and IT/digital services. Elevated labour costs mean that contacts across sectors remain focused on efficiency and productivity gains via automation and technology, including AI (Box A). Prospective changes to employment rights are a secondary drag on employment plans. The ME conflict is leading to greater caution and delays in hiring and use of temporary workers to maintain flexibility.

Recruitment difficulties have edged below normal. Market conditions are relatively easy for routine roles with lower employee churn helping. While the long-standing pockets of tightness in specialist skills and some geographies remain, modest improvements in availability are reported, in part reflecting weak hiring and/or job cuts amongst competitors.

Modest spare capacity remains in firms, reflecting weak or inconsistent demand, especially in production, construction, and consumption. There is generally more slack in physical capacity than labour hoarding and some firms are consolidating or mothballing assets to ‘right size’ their operations. While the ME conflict is causing some supply chain disruption – there are reports of higher freight and fuel costs, longer delivery times and rerouting – we are not hearing of significant, generalised shortages of inputs or raw materials. Some contacts are increasing stocks as a precaution, amidst concern shortages could become more of an issue later if the conflict persists.

Labour costs

The weighted average pay settlement for 2026 remains 3.5%. The impact of the Middle East shock on inflation and the potential for upward pressure on 2027 pay settlements is a concern for some contacts. Contacts find it difficult to give a precise estimate for their likely 2027 settlement but note the relevance of: affordability, recruitment and retention, and union bargaining.

We asked contacts to give an early estimate of what the effect on 2027 pay settlements might be of CPI being above 3% rather than around 2% towards year-end. For the relatively small sample able to respond, the majority fell in the range of 0–1 percentage point higher than previously planned. This could mean pay settlements end up broadly in line with 2026, which would imply little to no pay disinflation next year. However, some contacts cite higher total labour costs, pressure on margins, a looser labour market, and subdued demand, as likely to curtail pay pressure in 2027. Those affected by the Real or National Living Wage (RLW/NLW) or who are unionised continue to expect above inflation pay settlements.

The average 2026 pay settlement remains unchanged at 3.5% and lower than 2025. Pay rises are strongest in consumer facing firms, largely due to NLW/RLW, and weaker in construction and real estate due to weak demand.

Input costs, intermediate pricing and margins

Many contacts continue to report heightened cost and price pressures as a consequence of higher energy prices. This is less true for contacts in sectors not as exposed to energy price volatility.

Many contacts continue to note higher prices for energy-intensive materials. The list is long and includes chemicals, plastics, metals, insulation, steelwork, and bricks. Many manufacturers face these increased costs and consequently feel pressure to raise output prices. But many also remain very conscious of the sensitivity of demand and so feel constrained in their ability to raise prices.

There are more mentions of higher imported finished goods inflation for investment goods, especially technology such as servers (higher memory chip prices) and machinery. There are fewer mentions of higher inflation for imported consumer goods.

Except for those directly exposed to the energy shock, for example hauliers, business-to-business firms report stable or moderating own-price inflation expectations owing to a looser labour market and increasingly price sensitive clients.

Most firms continue to report squeezed profit margins. There is a general acceptance that margin rebuild will take time, and likely longer than previously thought in the face of the ME conflict. Most believe that a sustained recovery in margins requires stronger demand conditions. Margins seem manageable for now as most contacts look to protect free cash flow through tight control of operating efficiency and capital expenditure.

Consumer prices

Own-price inflation expectations of consumer-facing firms have moderated somewhat since the June ASBC, most notably for food prices. Recent intelligence suggests peak 2026 food inflation of 4%–5%, down from 6%–7% earlier in the conflict.

Supporting this, there is more evidence that UK food manufacturers are sticking to normal contract renegotiation timelines. Own label manufacturers fear losing contracts with large supermarkets that are very focused on cost management. Branded goods producers are wary of fragile demand from consumers increasingly willing to switch to cheaper alternative products.

Beyond 2026, food price inflation is likely to fall back gradually due to staggered pass-through of higher costs from the ME shock. The path for food inflation is highly dependent on whether the ceasefire holds and how energy prices develop from here.

There are few signs of a pick-up in inflation for other consumer goods. The exception is for products exposed to significantly higher memory chip prices. Consumer services contacts report that consumers remain cautious and price sensitive. Contacts say they are doing their utmost to keep price increases as low as possible. The pressure is greatest in hospitality where contacts expect food and energy prices to pick-up – some are citing future price increases of around 5%.

Housing and commercial real estate

Property market sentiment remains weak, owing to high borrowing costs, ongoing geopolitical uncertainty and affordability/viability challenges.

In the housing market, confidence is fragile among buyers and sellers with transactions taking longer to complete. House prices are flat in most areas and falling in others, with the top end of the market particularly weak. Contacts consider a pick-up in H2 is dependent on reduced uncertainty and improved confidence, which would be aided by a reduction in mortgage rates.

There are fewer enquiries from first time buyers in the mortgage market, although remortgaging volumes are holding steady. More borrowers are choosing variable, tracker or short-term fixed products owing to uncertainty over near-term interest rates and pressure on household budgets.

Investor and occupier demand in the commercial real estate market is strongest for Grade A, city centre office space, but in general, activity remains subdued with higher build costs owing to the ME conflict further weighing on the viability of developments.

Outreach engagement

There is a perception that structural changes in the economy are reducing both the quantity and quality of jobs.

Participants pointed to fewer roles being advertised, organisations replacing fewer staff than are leaving, and some jobs being moved elsewhere. There was also concern that where roles are available, they are often lower paid or less secure, with propositions in some sectors that do not match the level of responsibility the role requires. This has led to some individuals adapting their approach to work, such as moving into self-employment or taking on additional (including zero-hours) roles as a form of financial security. Participants also report that more experienced or senior workers are now applying for junior roles, increasing competition for younger individuals.

Rising costs continue to affect households’ financial resilience and stability. Many participants report limited disposable income and savings, which restricts their ability to cope with unexpected expenses.

Next publication date: 11 September 2026