Agents' summary of business conditions - December 2025

Overview

This Agents’ summary of business conditions (ASBC) summarises intelligence from the Bank’s Agents considered by the Monetary Policy Committee at its December meeting. The intelligence was gathered in the six weeks to late November, so largely before the Autumn Budget announcements. Early reactions from contacts immediately following the Budget do not contradict themes from intelligence gathered prior.

Intelligence continues to describe a lacklustre economy, with contacts’ sentiment affected by concerns over what the Autumn Budget would bring. Most expect, or at the least hope for, a modest pickup in real activity in 2026. Early reactions to the Budget announcement suggest the clarity it brought is unlikely to unlock a major rebound but might allow a more gradual and marginal increase in activity in some segments of the economy.

Employment intentions are slightly negative with further risks to the downside. Firms have been cautious amid the uncertainty around the strength of Christmas trading and that surrounded the Budget. More firms report not replacing leavers, looking for efficiency gains instead.

Contacts expect pay pressures to ease slightly in 2026. Reported pay settlements for 2025 average 3.9%. Early indications for 2026 average around 3½%. The Agents’ pay survey, launched in early December, will provide a more comprehensive view of contacts’ pay expectations early in 2026.

There is little change to contacts’ inflation outlook, which is for gradual disinflation to continue in 2026. Many of the contacts spoken to post Budget say it has not significantly changed their 2026 pricing plans. Consumer goods inflation remains modest for most components other than food inflation, which is thought to be at its peak. Consumer services firms continue to drive efficiency to moderate price increases as far as possible, given fragile demand and rising concerns about affordability. These are expected to moderate consumer services price inflation.

Consumer spending

Goods and services sales volumes are stagnant, with demand inhibited by weak consumer confidence. Most contacts expect demand and confidence to remain subdued into the new year.

Goods consumers remain cautious and keenly focused on value for money. They are generally less inclined than usual to make discretionary purchases, with the Budget regularly cited by contacts as discouraging spending in recent months. Food sales volumes are generally flat, with contacts reporting that basket sizes are smaller than usual. Some supermarkets have been concerned that the Budget will dampen spending on Christmas food and drink, but discounters say that early sales of lower priced seasonal food are solid so far.

Furniture and homeware sales volumes are stable on last year at relatively low levels. Clothes retailers say that sales of autumn-winter clothes started slowly and report strong competition from online second-hand retailers.

It remains challenging for service providers in the face of weak consumer confidence. Most contacts report relatively flat volumes compared to last year, with any revenue growth driven by price increases. This is the case for pubs and restaurants where it is the mid-tier chains that have been the most badly affected as consumers seek the best value for money. The experience of accommodation providers and visitor attractions is mixed but volumes appear broadly flat.

Demand for travel appears to have normalised in 2025 from previously high levels, with volume growth slowing to low single digits at airports and holiday providers. In contrast, coach and bus operators have seen passenger numbers fall significantly following sizeable, regulated price increases.

Investment

Investment intentions have deteriorated further since the November ASBC, mostly due to domestic policy uncertainty, much of it linked to the Budget, weak and uncertain demand, and constrained financial headroom.

Contacts are uncertain about government policy in areas such as tax incidence/rates/breaks, regulation, planning, business rates, employment rights, and labour costs. They commonly cite these uncertainties as leading to delaying of investment and a low appetite to borrow. The cost of investment, whether finance or the actual capital investment itself, is mentioned much less now as a deterrent to investment intentions – uncertainty seems to be the dominant consideration.

There is wide-ranging reference to investing in Cloud transition, artificial intelligence (AI) adoption, software, and cybersecurity, which is likely to continue. Most is incremental spend and similar to operational expenditure and is therefore easier to adjust and lower risk.

Some large businesses that are well capitalised and can look longer term are investing in expansion to capture market opportunities or to meet better demand in specific sectors.

Trade

Manufactured goods export volumes continue to contract on last year. Modest annual services export values growth is slightly lower than the November ASBC. Contacts expect modest improvement in goods exports volumes in 2026 as US tariff uncertainties reduce.

Manufacturers continue to report lower export volumes on the same period last year owing to US tariffs and weakness in automotive and metals. Aerospace and defence sectors are the exception. EU demand remains subdued and contacts report difficulties holding onto market share, with some now growing their EU manufacturing capacity in response to Brexit. Changes to EU rules of origin could add further impetus to relocate production outside the UK. Chinese demand is weak owing to increased trade barriers. US tariffs have diverted more final product into the UK and contacts also note an increase in Chinese imported goods volumes.

Professional, financial, IT and construction related services report positive – but decreasing – revenue growth. This is attributed to rising uncertainty and reducing levels of foreign direct investment. US tariffs had negatively impacted export values for a range of wholesalers. Overseas student intake to universities remains down on last year, as do international tourism numbers and spend.

Business and financial services

Annual revenue growth in business and financial services has eased, with Budget uncertainty offsetting a slight recovery in some subsectors. Contacts expect continued very modest turnover growth, with improved demand from Q2 as current sources of uncertainty ease and weaker subsectors recover from a low base.

Revenue growth is currently supported by price inflation, with volumes now flat. IT services continue to grow, driven by demand for AI, cybersecurity, and software licenses, though discretionary spending is deferred. Professional services are buoyed by audit, restructuring, and tax advisory work. Suppliers to the defence sector see continued demand growth. Mergers and acquisitions activity remains subdued, with deals taking longer due to increased due diligence and regulatory uncertainty. Recruitment activity has declined as firms freeze hiring in response to weak demand and higher labour costs. Services into construction and property remain weak, with some growth from datacentres and renewables.

Manufacturing and production

Manufacturing output remains modestly down on last year, with the automotive and chemicals sectors facing notable declines. Contacts hope for a modest recovery during 2026 as uncertainty related to the Budget and global tariffs eases.

Manufacturing output is down, reflecting subdued demand across consumer goods and supplier sectors. Automotive output has suffered from temporary closures and global competition, while chemicals output is down due to weak industrial demand. Construction-facing contacts’ output is slightly down on last year, and output of consumer goods, food and drink are lower as consumers remain cautious, particularly around big-ticket items. Capital equipment providers’ output is also down as client investment intentions remain muted. The defence and aerospace sectors show resilience, and there are pockets of growth in renewables and infrastructure.

Construction

Construction sector output continues to contract on last year. Contacts expect modest positive output growth to return by mid-2026 as public sector and infrastructure projects start, and house building picks up.

Construction activity is down, with new house building and commercial projects remaining below last year’s levels due to high build and funding costs. Larger infrastructure and public sector schemes provide some support, and repair and maintenance activity is steadily increasing. Office, hotel, and retail refurbishments continue, and post-Grenfell regulation is stimulating retrofitting investment into housing. Planning delays and Budget uncertainty have been slowing activity across the sector.

Corporate credit conditions

Credit availability remains steady for large firms, while smaller businesses continue to face tighter supply, reflecting ongoing caution among lenders and borrowers.

Credit supply is favourable for large, investment-grade borrowers, with strong bank competition and readily available bond finance. However, supply for non-standard lending and smaller firms remains tighter, relying on challenger banks and alternative lenders. Demand for credit is subdued, as businesses pay down debt and delay borrowing decisions ahead of the Budget. There is sustained demand for small and medium enterprise and merger and acquisition finance and social housing development. Contacts report rising distress in vulnerable sectors such as construction, and consumer-facing industries, especially among small firms. But mainstream banks report normal borrower distress levels, though there are signs of a slight uptick from a low bass.

Employment and capacity utilisation

Employment intentions are slightly negative, with further risks to the downside. Contacts have been cautious, waiting to see what the Budget would bring and the strength of Christmas trading.

Just under half of contacts this round intend to maintain their current headcount next year, with marginally more of the remainder intending to decrease rather than increase headcount. Uncertainty over Christmas trading and the impact of the Budget, higher labour costs and the Employment Rights Bill are discouraging contacts from new hires at the margin. Firms continue to leverage technology, automation and AI to boost productivity and reduce the need for headcount growth. Weak Christmas trading could lead to further reductions in headcount.

Some significant headcount reductions have already taken place. An increasing share of firms reported reducing headcount over the past 12 months this round. Greater caution has led more firms to not replace leavers immediately, as they wait to see if the firm can manage without that role. A few firms, especially in the retail and hospitality sectors, have also reduced hours somewhat.

Recruitment difficulties remain around normal, on average, with persistent pockets of tightness for some roles and skills. Employee churn remains low, with staff reluctant to move given the uncertain environment. Contacts generally report an increased number of job applicants.

Modest spare capacity persists, reflecting weak demand in production and consumer-facing sectors. It is concentrated in physical capacity, but a few contacts are hoarding skills that are in short supply.

Labour costs

Firms expect labour cost pressures in 2026 to be somewhat weaker than in 2025, driven by a looser labour market and subdued demand, and less upward pressure from the National Living Wage (NLW) compared with last year.

Overall, contacts expect pay pressures to ease in 2026 compared with 2025. Contacts’ pay settlements for 2025 average 3.9%. Early indications of 2026 pay settlements are around 3½%. Firms with relatively high expected settlements report that these are driven by the Real Living Wage and NLW, catch-up after previous freezes or low pay awards for higher earners, ongoing recruitment or retention issues in specific areas, trade union activity, and CPI. These views did not change post the Budget. The 4.1% increase in the NLW was in line with contacts’ expectations, although a little lower than many had budgeted for. The Agents’ pay survey will provide further intelligence on the drivers of 2026 pay.

Non-labour costs

Cost dynamics support a gradual disinflation path for consumer price inflation.

Materials price inflation, including for key materials such as steel, timber and chemicals, remains soft and contacts expect this to continue into 2026, consistent with weak UK and global demand. Most UK manufacturers plan only modest output price increases for 2026. Labour cost inflation is the most frequently cited cost pressure; contacts expect materials and energy costs to remain stable. Imported goods prices inflation is currently weak and contacts expect this to continue into 2026. Weak global demand means US dollar factory gate price inflation is expected to remain subdued.

Business-to-business price inflation varies by sector, with higher inflation for relatively low-paid and labour-intensive services such as cleaning and security, and lower inflation for more discretionary services such as advertising and marketing. Many professional services firms are looking to raise fees to cover expected labour cost inflation, but there is a growing acknowledgement that increases may only be partially realised due to client resistance.

Many firms continue to report squeezed profit margins and ongoing efficiency initiatives as mitigation.

Consumer prices

Overall, contacts expect consumer price inflation to fall in 2026. In particular, contacts consider we are at the peak for food price inflation and that it will reduce from here, and that consumer services inflation will gradually moderate in 2026.

Most contacts report that additional costs from Extended Producer Responsibility regulations have been largely passed through into prices. Non-food consumer goods inflation remains muted, reflecting favourable cost conditions such as flat factory gate and freight prices owing to weak global demand, value-conscious UK consumers, and a saturated retail market. Contacts expect these conditions to carry over into 2026 and for output price inflation to remain low.

In hospitality and leisure services, firms continue to drive efficiency to contain price increases as far as possible, given fragile demand and rising concerns about affordability for consumers. Most expect to increase output prices by 3%–4% in 2026. It is in these discretionary consumer services categories that contacts most commonly report a margin squeeze. Contacts continue to expect consumers to remain price sensitive and therefore do not see larger price increases as a viable way to recover margin in the short term.

Property market

Persistent budget and political uncertainty have dampened property market activity across residential and commercial sectors.

Housing

Recent months have seen quieter conditions for both sales and new instructions, with prices remaining static compared to last year and, more recently, achieving lower levels relative to asking prices. The north of England is seeing stable to modestly growing prices, while the south faces weaker demand and sharper declines in transaction volumes and prices, particularly at the top end of the market. Most contacts do not expect a material pickup in the market over the next six months.

The rental market continues to show excess demand, though rental price growth is moderating.

Commercial

Demand and rental growth remain robust for prime assets, particularly city-centre offices and convenience retail, while secondary properties contend with rising vacancies and need refurbishment to attract occupiers. Investors are concentrating on prime Environmental, Social and Governance aligned assets but remain cautious amid policy uncertainty, holding back capital until yield prospects strengthen. Some interest persists in secondary sites where value can be unlocked through repurposing. Industrial demand remains solid, though momentum is easing for larger units. Investors anticipate a gradual recovery as uncertainty recedes and liquidity improves.

Outreach engagement

Households and charities are facing increased financial pressures, with rising costs, job market barriers, and limited access to stable funding.

Participants report that price volatility is making it difficult to budget and cite large increases in food prices. Many feel that their financial situation is weakening as prices continue to rise and they are less able to save.

Some report that the sectors they work in are facing recruitment challenges, particularly in roles requiring specialist skills. However, in industries like hospitality and local government, hiring has slowed, or recruitment approaches have shifted. For example, some organisations are looking beyond local markets, even internationally, for the first time. Students, young people, and older individuals are struggling to enter the labour market, with part-time jobs increasingly hard to find. Redundancy fears have become more elevated.

Many charities have no choice but to apply for short-term project-based funding, which makes it difficult to plan longer term and develop sustainable initiatives. Investment projects are especially difficult to get over the line in those communities perceived to have significant economic and social problems.

Some charities are pivoting their food bank provision from crisis and short-term support to more sustainable services, such as nutrition-led food clubs, but all are suffering reduced food donations.

Housing, energy, and food concerns remain the biggest issues currently facing those using charity services. Some charities report increased cases of mortgage debt, and a higher number of households facing homelessness or who are in temporary housing.