Agents' summary of business conditions - June 2026

Overview

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

To date there are only a few signs that the Middle East (ME) conflict has caused a weakening in output growth. But as the conflict has dragged on, business confidence has dampened further. Contacts had been planning for an increase in growth through this year but think this is less likely now.

There are risks of supply shortages in the manufacturing sector, with some contacts increasing their stocks of supplies and finished goods as a mitigant. There is so far limited evidence of stockpiling from wholesale contacts in response to the ME crisis.

While still mentioned relatively rarely, the ME conflict is emerging as a potential driver of weaker hiring further out, as firms expect they may need to respond to the combined negative impact of higher costs and lower demand. The impact of higher-than-expected inflation on 2027 pay settlements is a growing concern for contacts. Some contacts’ early responses suggest that the pace of wage disinflation will slow due to the ME conflict. Very little impact is expected on 2026 settlements, as most have already been implemented for this year.

There are more reports of price increases for high energy content materials, and higher output price expectations of UK manufacturers for whom these materials are important inputs. The impacts of the energy price shock are more limited so far on business-to-business and imported finished goods prices. The consumer inflation picture is largely unchanged from last round. Beyond the direct energy price impacts, food price inflation is the principal expected driver of higher consumer prices over the next six months. There is considerable uncertainty around the extent of the impact, however.

As at the previous update, contacts still seem minded to pass on at least some of the cost rises that have or are expected to come through, because their profit margins are already squeezed. But they are worried that this will hit demand, especially if their goods and services are not essentials. So, they are likely to increase prices cautiously, keeping an eye on what their competitors are doing. If anything, the energy price shock means contacts expect achieving normal margins will take longer than pre-conflict.

Consumer spending

Consumer spending volumes continue to grow only modestly, with most sales growth driven by price inflation rather than underlying demand. Contacts are increasingly concerned that demand will weaken the longer the ME conflict persists.

Supermarkets report little change in volumes over the past month. Across retail, spending remains depressed and highly price‑sensitive, with intense competition and discounting widely reported.

Pubs, food chains and visitor attractions continue to report modest volume declines broadly similar to 2025, though with no clear direct impact from the conflict so far. Many contacts had expected some growth and so are disappointed. Demand for travel remains hesitant, with households delaying and booking summer holidays later than usual. Hotel occupancy continues to bifurcate, weakening at budget hotels but proving more resilient at hotels serving the relatively affluent or retired.

Looking ahead, contacts expect negligible volume growth in overall consumption this year, even if the ME conflict were to end soon, with downside risks from higher energy costs, pressure on household incomes, weaker consumer confidence and potential higher interest rates if the conflict persists.

Investment

Investment intentions have become more subdued since the Iran conflict and are now broadly flat for the coming year, with higher uncertainty and financing conditions continuing to weigh on contacts’ willingness to commit to new projects.

More contacts report lower or constrained investment intentions, especially consumer‑facing businesses and construction‑linked contacts, with the early‑year improvement no longer evident. Higher finance costs are influencing plans for some contacts, with clearer signs of reduced appetite to borrow. As a result, cash or grant‑funded investments are viewed as more likely to proceed. The viability of commercial real estate and private residential projects has deteriorated further, and a growing number of contacts report delaying projects.

There remain pockets of stronger spend. Utilities and regulated infrastructure contacts report materially higher planned investment. Some production contacts remain willing to invest in efficiency and automation, in part to offset higher labour costs, and in some cases are accepting longer payback periods. However, agriculture and owner‑managed small and medium-sized enterprises continue to cite government tax policy changes as a disincentive to invest.

Trade

Trade conditions remain mixed, with exports more negatively affected by the ME conflict than imports, and overall growth continuing to be modest.

Weaker performance in exports of services than the robust growth seen in the last few quarters reflect a sharp dip in sales to the Middle East (including consultancy) and softer inbound tourism from both the region and Asia. Offsetting this, contacts report strong growth in parts of financial services, particularly corporate insurance and investment banking linked to heightened uncertainty, as well as in technology and communications services associated with artificial intelligence (AI). Education exports are weaker, as international student numbers decline following visa changes and the introduction of a new levy.

Goods exports to the ME declined sharply, while exports to other regions remain broadly flat rather than improving. Defence and aerospace remain strong, but consumer goods demand is weak, particularly in Europe where conditions remain subdued.

Imports from the ME – largely refined oil, petrochemicals, helium and fertiliser – largely stopped in March/April before recovering modestly. Contacts mainly report higher costs for these inputs rather than widespread shortages. Ports continue to report strong import inflows, and contacts note rapid market‑share gains by low‑cost Chinese imports in areas such as fashion, household appliances and electric vehicles.

Business and financial services

Contacts report a slight easing in annual revenue growth in business services, and weaker client confidence.

Client confidence has fallen since the ME crisis began, but the impact on current activity is modest so far. The more material change is contacts’ weaker outlook, with pipelines for new work weaker, pushed out and increasingly uncertain, and consequently expectations of weaker revenue growth in 2026 H2 relative to earlier plans.

Volume growth is slightly softer and pricing power diminished as clients look to cut back on supplier costs and investment, with some expecting AI to support cost efficiencies over time. Contacts reporting growth are more often those providing data services, cost‑saving solutions, restructuring/exit support, temporary staffing, vehicle leasing, or services benefiting from more volatile markets. Weak demand is more common among contacts exposed to consumers, construction and property (eg transport, wholesale, surveyors, builders’ merchants). There is limited evidence of wholesale stockpiling in response to the crisis. Overall, contacts’ outlook is now more downbeat than current conditions, with decision‑making slowed or paused and the ‘green shoots’ spoken of earlier in 2026 judged to have withered.

Manufacturing and construction

Output in manufacturing and construction continues to fall modestly, with confidence weakening further amid soft demand, rising costs and heightened uncertainty.

Manufacturing output continues to decline modestly year‑on‑year, with soft demand persisting across most sectors. Aerospace and defence remain strong, continuing to benefit from the geopolitical environment, while food, drink and consumer goods remain broadly flat. Manufacturers serving the construction sector report declining demand, and some contacts with high ME exposure (eg luxury cars) reported significant production cuts as orders dried up. Looking ahead, output is expected to remain weak, and some firms are building stocks of inputs and finished goods as a mitigant against potential supply disruption risks.

Construction activity also continues to fall modestly compared to the same period last year. Infrastructure contacts remain busy across large projects (eg energy, water, telecoms, and data centres) and report a reasonable pipeline, but other areas remain downbeat, particularly residential development, given difficulty selling completed properties, especially in the South. Confidence has dipped further due to expectations of higher interest rates and building material costs, alongside domestic political uncertainty which contacts expect may weigh on public spending in the near term.

Corporate credit conditions

The ME conflict is adding to contacts’ uncertainty and costs, but no significant change in credit conditions is evident. Lending remains constrained by weak demand rather than tighter supply.

There is no evidence of a broad‑based credit tightening directly linked to geopolitical developments. Competition persists for higher‑quality corporates and small/medium enterprise borrowers, with banks and non‑bank lenders keen to lend. Larger firms are still able to access bank and private credit markets. Capital markets remain cautious rather than closed amid volatility. Access to finance remains uneven for smaller firms, with lending preferences generally reflecting the sectoral performance described elsewhere in this summary.

Credit demand remains soft overall and has eased back in some sectors following a brief pickup from low levels earlier in the year. Borrowing is primarily driven by refinancing, working‑capital needs and selective, defensive investment. Heightened uncertainty is reinforcing caution, with firms prioritising liquidity and deferring discretionary investment and borrowing.

Higher energy and freight costs linked to the ME conflict are putting pressure on some, particularly energy‑intensive and transport‑reliant firms. To date, this pressure appears to be manifesting more in lower firm confidence, reduced margins and strained cash flow than increased insolvencies.

Employment and capacity utilisation

Employment over the next 12 months is expected to remain broadly unchanged, although the ME conflict is increasingly noted as potentially reducing labour demand later in the year. Recruitment difficulties remain around or below normal levels.

Headcount is expected to be broadly flat over the next 12 months. Consumer services contacts continue to expect headcount to fall, while those in business services, construction and manufacturing are slightly more positive. In response to elevated labour costs, contacts are strongly focused on efficiency, and productivity and automation, including AI, is most frequently cited as dampening hiring intentions along with weak product/service demand. Employment rights developments are a secondary drag on hiring. While still mentioned relatively rarely, the ME conflict is emerging as a potential driver of weaker hiring further out, with any effect expected to come through the combined negative impact of higher costs and lower demand. Contacts also attribute a shift towards temporary recruitment on the uncertainty generated by the ME conflict and there are concerns about the impact of prolonged uncertainty on hiring.

Recruitment conditions on average are normal, with persistent pockets of tightness for specific roles/skills and geographies, balanced by relatively easy recruitment for less specialised roles. Employee churn is low and contacts report that weak hiring and/or redundancies made by competitors are improving availability of labour.

Contacts continue to report spare capacity with weak or delayed demand cited as the main reason. Production, construction‑linked activity and some consumer‑facing sectors report the most slack. Some contacts have been right-sizing through closures, mothballing and consolidation as well as headcount reduction.

Labour costs

Reported average 2026 pay settlements remain unchanged at around 3.5%. The impact of higher-than-expected inflation on 2027 pay settlements is a growing concern for contacts. Some contacts’ early responses suggest that the pace of wage disinflation will slow due to the ME conflict.

The impact of higher-than-expected inflation on 2027 pay settlements is a growing concern for contacts, who had been anticipating further pay disinflation in 2027. In particular, contacts affected by the Real/National Living Wage (NLW) or who are unionised expect pay settlements next year to be higher than previously planned. Intelligence from around 40% of contacts the Agents spoke with this round, weighted by employment, (25% by number of firms, about 50) suggests that the pace of wage disinflation will slow due to the ME conflict. Very tentative estimates are that wage settlements could be 0.5–1 percentage point higher than previously planned if price pressures persist. But this is very early thinking based on expected CPI inflation at around year end being above 3% rather than around 2%. Contacts are focused on inflation when thinking about settlements at this point but are much less clear on how the labour market and demand environment will evolve, and therefore the extent to which pressure on margins, a looser labour market and subdued demand, could push down on pay pressure nearer the time of agreeing settlements next year.

2026 pay settlements remain lower than last year averaging around 3.5%. Contacts cite a lower NLW increase in 2026, lower CPI inflation (at the time of settling), a looser labour market, weaker company performance and uncertain demand outlook as driving pay disinflation. They continue to skew pay settlements towards lower paid employees, but some have reduced the size of the skew to address issues of morale among staff in higher pay brackets. Most do not expect to review pay again until 2027.

Input costs, intermediate pricing and margins

There are more reports of price increases for high energy content materials, and higher output price expectations from those UK manufacturers reliant on them. Many contacts expect the rebuild in their profit margins to take longer because of recent developments.

The high and volatile oil price is significantly impacting many contacts reliant on petroleum derivative products, such as airlines and hauliers. Contacts reliant on energy-intensive materials are also seeing higher costs, most notably in construction where costs have increased for steelwork, bricks, and cement. UK manufacturers report increased cost pressures and expectations of higher output prices.

Higher costs for a range of other materials are also coming through, such as plastics. Imported finished goods inflation remains muted and the underlying dynamics of strong production and weak domestic demand in China mean this should continue. But the cost of transporting these goods is rising, largely due to fuel surcharges.

Steel prices have also risen significantly this year, in part due to the ME conflict, but there is also likely some impact from the introduction of the Carbon Borders Adjustment Mechanism in the EU. The price of imported steel is expected to rise further in July when the UK’s new tariffs and quotas come into force. Some smaller businesses using imported steel as an input to production report these changes are likely to put further upwards pressure on costs.

Business to business price inflation has stepped up in services exposed to the energy shock, for example hauliers and delivery companies have increased prices quickly via fuel surcharges. But elsewhere in this sector the impact is limited and for the most part, inflation pressures continue to moderate driven by lower wage pressure and weaker demand.

Contacts still seem minded to pass on at least some of the cost rises that have or are expected to come through, because their profit margins are already squeezed. But they are worried that this will hit demand, especially if their goods and services are not essentials. So they are likely to increase prices cautiously, keeping an eye on what their competitors are doing. If anything, the energy price shock means contacts expect achieving normal margins will take longer than pre-conflict.

Consumer prices

The consumer inflation picture remains similar to the April ASBC. Beyond the direct energy price impacts, food price inflation remains the major upside risk to consumer prices in the next six months. Considerable uncertainty remains around the extent of the impact.

Concerns about rising consumer goods inflation centre on food. Most supermarkets report current annual food inflation in the range of 3%–4%, with an expectation that the ME conflict will see this increase to around 5%–6% by year-end 2026.

Other consumer goods, mostly imported, such as clothing, footwear and household goods, are less directly affected by the energy shock, but are incurring higher transport costs. Here the underlying dynamics of high production capacity in exporting nations and weak UK demand point to continued weak pricing pressures.

Concerns around inflationary pressure in consumer services centre on hospitality and holidays. In hospitality, there are concerns that higher energy and food prices will reignite cost-push inflation, offsetting the moderating impact of a looser labour market and more muted wage pressures. To date, the impact on costs is largely limited to fuel surcharges from food and drinks suppliers and there are limited reports of immediate output price rises. Cost pressure is expected to build over time if the conflict drags on, including from higher direct energy costs as fixed contracts become due for renewal. Most hospitality firms are nervous about price rises as, for the majority, demand is price sensitive. For overseas holidays, increases in air fares are not yet coming through, with airlines concerned about weak load factors and most well hedged on jet fuel in the short term.

Contacts in both consumer goods and services fear that a prolonged war in the ME would lead to higher inflation later in the year, with a larger cost shock such that they would have to try to pass more on into higher pricing, although their ability to do that would ultimately depend on customers’ willingness and ability to pay higher prices.

Housing and commercial real estate

Contacts report that the housing market has weakened since the start of the ME conflict. Buyer confidence is fragile and sales are taking longer than normal. commercial real estate (CRE) activity remains weak in both development and investment.

A more pronounced regional picture for house sales is developing, with London much weaker than other regions, especially the devolved nations where demand has fared better. At the higher end of the housing market, price reductions are necessary to achieve sales. In general, buyers are taking longer to commit and cancellations have picked up.

Demand is weaker in the new build market than in the secondary market, but the same regional picture applies, and development has all but stalled in London. House builders are offering fewer incentives as margins are under more pressure owing to rising build costs.

Although rental price inflation has moderated over the past year, some contacts expect an increase in rents in the coming months due to Renters Rights legislation in England.

Aside from prime office and some industrial, most areas of CRE are challenged with some investors lowering bids or halting purchases, and others holding off listing. Rising material costs, planning delays and weak demand is constraining new CRE development.

Outreach engagement

Households and charities continue to feel the impact of higher costs.

Households continue to feel the pressure of higher prices, particularly for food and energy costs. Many expect inflation to rise, though not as high as the peak of inflation in 2022.

Attitudes to work are shifting, with some individuals opting for part-time roles instead of full-time employment, often at the expense of job security and benefits. Others are taking on additional jobs.

Charities continue to struggle with higher operational costs including labour, technology and insurance. At the same time, they face reduced grant funding, and lower philanthropic and corporate donations.

While there is growing interest in the use of artificial intelligence, charities remain cautious to adopt, reporting concerns around data privacy and the sensitivity of information they hold. Despite this, there is increasing engagement on how AI might be used by the sector.

Next publication date: 24 July 2026