Agents' summary of business conditions - April 2026

Overview

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

In previous rounds, despite the weak outlook for economic activity, there had been early signs of improving business confidence. A hope of lower interest rates and a sense that the worst of the previous shocks was behind us had led contacts to expect a modest recovery later in 2026. The Middle East conflict has eroded that confidence, with contacts worried about its potential impact on demand, supply chains and input costs. But despite the uncertainty, apart from the small number of contacts who trade directly with the Middle East, few report significant impacts on their output, activity and intentions yet. And any feedthrough to costs or prices so far remains modest, outside of the direct impact of higher prices for fuel and oil-related products which have been felt immediately.

Intelligence suggests overall annual output growth remains weak and is being dragged down by declining output in construction and manufacturing. Demand for business services is weak as their client businesses are typically in cost cutting mode. Demand for UK exports is weak, especially in the European Union (EU). And UK households are still reluctant to spend and remain very price conscious.

Employment intentions are broadly flat this round having seemed to have firmed a little ahead of the Middle East conflict. The conflict is reported as a risk to employment growth by some recruiters but is not yet material. Around four-fifths of 2026 pay settlements are now agreed, with the cumulative average pay settlement running at around 3½%. There is little evidence of a Middle East effect on pay yet, although some contacts acknowledge it as an upside risk to future settlements because of the higher inflation outlook.

Higher oil prices are increasing input cost inflation, particularly through fuel and transport costs. But so far manufacturing price inflation remains around normal. Higher transport costs have caused the decline in business services price inflation to stall. The combination of higher costs and lower demand might prevent the gradual recovery in profit margins contacts had started to pursue.

The oil price shock, together with broader-based cost rises associated with the conflict in the Middle East, is expected to offset disinflationary pressures elsewhere in consumer price inflation. But there is much uncertainty beyond the very short term. The impact on fuel and transport costs is being felt immediately. Food price inflation is likely to rise through the year. Impacts elsewhere will take longer and depend on how the balance plays out between higher costs and lower demand.

Consumer spending

Consumer spending growth was already subdued before the onset of the Middle East conflict. Since then, there have been early signs that growth could be weakening further.

Prior to the Middle East conflict, contacts reported that consumer spending was more concentrated around promotions and paydays than usual. Supermarkets reported solid revenue growth, mainly the result of price increases, and that customers continued to be focused on the cost of staple items. Consumer caution had been inhibiting discretionary spending on goods such as beds and furniture for a long time. Some contacts noted greater demand for affordable credit, and more signs of arrears – indicative of the budgetary pressure lower-income households are under.

Since the Middle East conflict began, most consumer-facing contacts say they are yet to see a significant direct impact on spending. But proportionally more are reporting flat or falling sales volumes since it began than was the case earlier this year, especially at pubs and casual-dining venues. There hasn’t yet been much sign of a pickup in domestic-holiday bookings because of the conflict.

Contacts generally expect very modest volume growth this year, even in the best-case scenario of a swift end to the conflict. And they see downside risks from the conflict’s impacts on household energy costs and consumer confidence.

Investment

Early intelligence this round had suggested a modest improvement in investment intentions, but the conflict in the Middle East, if protracted, may suppress any improvement.

Prior to the Middle East conflict, contacts’ investment intentions had remained broadly flat, although the tone of conversations was beginning to turn more positive with some sense that the worst had passed. More contacts reported returning to normal investment cycles or sometimes catching up after past low spending.

The impact of past cost inflation and delays continue to dampen sentiment in the construction sector, where elevated levels of uncertainty persisted even ahead of the Middle East conflict. Contacts in construction are, together with those in the consumer facing sector, the most likely to be cautious regarding investment decisions.

It is too soon for most of the contacts spoken to since the Middle East conflict began to have a clear sense of how they will react. But there is a general sense that, if protracted, the conflict is likely to dent investment intentions. Some contacts talk of cutting or postponing investment in the short term in case of sharp rises in costs, including finance costs, or lower demand.

Trade

The volume of goods exports continued to decline modestly in January and February compared to the same period last year. Those who trade directly with the Middle East report disruption, but to date there seems little general impact beyond that.

Depressed demand from the EU is the main driver of declining goods exports, but contacts also report a continuing drag from a range of post-Brexit trade frictions, and more fierce competition from Chinese exporters in EU markets. Overall, exports to the US are holding up well and most contacts continue to report only limited impact from tariffs. There is little news on exports of services which continue to show modest annual growth.

To date, contacts report no general impact from the Middle East conflict on exports to the US or Europe. Those who export to the Middle East face major disruption, either not being able to get supplies into the region or facing very sharp rises in transport costs. And a few UK manufacturers who import petro-chemical supplies from the Gulf report facing surcharges, delays and risks of shortages. There is general concern that the Middle East conflict risks disruption to global shipping lines – not just to and from the Gulf – and poses downside risks to UK import and export flows. One global shipping firm reports that the supply chain and shipping impact has so far been limited and is expected to remain so. They are not expecting a major supply chain shock in terms of moving cargo into/out of the UK. Nor are they expecting a spike in pricing, with movements so far within their normal range.

A further concern for contacts is the Carbon Border Adjustment Mechanism (CBAM), which was introduced by the EU in January 2026 and will take effect in the UK from January 2027. They warn that it will have significant effects and further disrupt goods exports to the EU. New EU steel quotas and other EU trade barriers are also likely to drag on UK exports.

Business and financial services

Weak annual growth in volumes and revenues continues. Contacts report that UK businesses are in cost cutting mode and so demand for their services is weak. Prior to the Middle East conflict, contacts had hoped that growth might pick up through 2026, but that hope has since diminished.

The overall tone is similar to recent updates, with the volume of activity barely growing and any revenue growth reflecting modest increases in fees. Contacts report that their clients are in cost cutting mode, as they attempt to shield their profitability from rises in costs and taxes, such as the higher business rates coming in 2026 Q2. Demand from firms in the construction and consumer facing sector is particularly weak. Firms that are growing tend to be those who offer clients a way to cut costs such as artificial intelligence (AI) consultancies. There is no obvious further weakening in demand reported for business services since the Middle East conflict began.

Previous cautious optimism that the UK economy was turning a corner has recently fallen quite sharply, and contacts now expect growth to remain weak. This is in part because they worry that interest rates may now be higher than they had previously expected.

Manufacturing and construction

Manufacturing and construction are seeing continued modest annual declines in output, in part reflecting weak demand. The Middle East conflict is further reducing confidence.

There is little news in the manufacturing sector with output continuing to decline modestly on a year ago. The weakness is driven by subdued demand from the construction and consumer-facing sectors including automotive. In contrast, those manufacturers in aerospace, defence, green technology and data centre components are growing strongly. To date most contacts have not seen any impact from the Middle East conflict on their orders. Some are bracing for a rise in input costs which could hurt demand if they pass it on to their prices. A few report stronger short-term demand as their customers look to build stocks against future shortages. Overall, confidence has worsened in response to the conflict.

Construction output continues to fall on an annual basis, partly reflecting temporary effects from exceptionally wet weather in January and February. Residential construction is being reduced in response to weak demand and elevated costs. Public sector spending on infrastructure is flat and lower than expected, and commercial work remains weak. Residential repairs and maintenance seems to be the one subsector displaying modest growth. Confidence overall has dipped further. Contacts fear the Middle East conflict will lead to higher interest rates and reduce demand. Some are also concerned about the rising costs of materials.

Corporate credit conditions

Aggregate lending continues to be constrained by weak credit demand. Compared with the March ASBC, supply conditions remain broadly accommodative, while demand has softened amid heightened uncertainty and rising cost pressures.

Competition remains strong across lenders for higher-quality borrowers, with larger firms continuing to access bank and private credit markets, though they are being more cautious about bond issuance amid recent volatility. Access to finance remains uneven for smaller firms, with borrowing focused more on refinancing than new lending. There is little evidence of a tightening in credit supply linked directly to the Middle East conflict.

Credit demand remains subdued and has weakened in some sectors, unwinding the modest improvement reported last round. Contacts consistently report that low demand reflects caution about the economic outlook rather than binding credit constraints. Where borrowing is occurring, it is mainly for refinancing existing debt and modest working-capital needs, rather than for expansion, with many firms deferring new borrowing and prioritising liquidity.

Financial stress remains elevated in hospitality, retail, construction and parts of agriculture and manufacturing. Weak demand and tight margins remain the primary drivers. While higher energy and freight costs linked to the Middle East conflict are adding pressure, the impact so far has been felt more through confidence and margin compression than through a marked rise in firm failures or widespread distress-driven borrowing.

Employment and capacity utilisation

Employment intentions are broadly flat this round having firmed a little ahead of the Middle East conflict with modest headcount increases having been planned in some sectors. The Middle East conflict is being reported as a risk to employment growth by some recruiters but is not yet material.

Ahead of the Middle East conflict, there had been plans to modestly increase headcount in business services where there are some reports of stronger pipelines and firms building tech/AI capacity. Construction is also less negative than previous rounds with some firms insourcing. In contrast, consumer services contacts are planning further headcount reductions citing weak demand, high labour costs and a push to digitalisation. Larger firms are a little more positive than they have been recently, although their increases in employment are modest and they remain cautious about hiring, with junior staff seen as particularly expensive. Some recruitment agencies and business organisations anticipate that a prolonged Middle East conflict could dampen hiring later in the year.

Recruitment conditions remain broadly around normal and churn remains low. Contacts generally report an increased number of applicants for roles, though candidate quality and skills mismatch are recurring issues. Tighter visa/sponsorship arrangements are said to be limiting specialist talent supply, although contacts are making use of selective offshoring/outsourcing to reduce costs and access wider talent pools.

Slack across firms is broadly unchanged from the last round, with weak demand continuing to leave capacity under-used, particularly in production, construction-linked activity and some consumer-facing sectors.

Labour costs

Around four-fifths of 2026 pay settlements are now agreed, with the cumulative average running at around 3½%. There is little evidence of a Middle East effect yet, although contacts recognise it as potentially increasing pay pressures because of the higher CPI inflation outlook.

Contacts continue to report that pay pressures have eased compared to 2025. A looser labour market, concerns around profitability and affordability, and a relatively weak demand outlook are contributing to lower wage inflation.

The Middle East conflict is not yet affecting outstanding 2026 settlements, but some contacts recognise it as an upside risk. Settlements later in the year and into 2027, particularly those benchmarked to CPI and including those currently being negotiated with unions, may need to reflect the higher inflation outlook. However, this is set against weaker demand and firms’ ongoing margin constraints, and a labour market which is expected to remain considerably looser than in recent years.

Input costs, intermediate pricing and margins

Higher oil prices are increasing input cost inflation, mostly via fuel and transport costs. So far manufacturing price inflation has remained normal. Higher transport costs have caused the decline in business services price inflation to stall. Any recovery in profit margins is under threat from the combination of higher costs and lower demand.

Materials cost inflation has risen, mostly because of oil and energy, and there have been spikes in some metals prices. The coming months will see higher oil prices feed through to other products such as fertilisers and plastics. So far, transport costs are the main factor increasing imported finished goods inflation. Overall, cost increases have been relatively modest, but firms worry about what may come later.

Manufacturers’ domestic price inflation remains around normal overall, with only a few material or energy surcharges reported so far. Energy costs, more generally, will take some time to work through because many heavy users have fixed price contracts. Although business-to-business price inflation is gradually coming down in many cases, that is now balanced by fuel escalators or other increases in transport costs. Double-digit increases remain common in IT services and products.

Contacts are now concerned that the squeeze on profit margins is likely to intensify, rather than lessen as they had been expecting. Fuel escalators or other indexation tools allow some automatic pass-through, and customers may be more willing to accept higher prices owing to highly visible material input cost increases and the nature of the shock. But firms also fear that pass-through of other cost pressures will become more difficult, particularly with customers themselves facing higher inflation and interest rates.

On balance, contacts 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 adversely affect demand, especially if their goods and services are not essential items. So, they are likely to increase prices cautiously, keeping an eye on what their competitors are doing.

Consumer prices

The oil price shock, together with broad-based cost rises associated with the conflict in the Middle East, is expected to offset disinflationary pressures elsewhere in consumer price inflation. But there is much uncertainty beyond the very short term.

Consumer goods inflation is still centred on food prices, rising 3%–4% on a year earlier. Although there is great uncertainty, there is so far more concern over food inflation than for most other goods due to higher energy, transport and agricultural costs. Contacts fear that food inflation is likely to rise through 2026, perhaps to 6%–7%, rather than falling back further as previously expected. Despite pervasive uncertainty about the timing and magnitude, many other sectors are concerned over the potential impact of higher transport and energy costs.

Consumer services inflation has been gradually abating, as underlying cost pressures eased. This could pause, however, following the conflict in the Middle East. Airfares and package holidays inflation is expected to rise somewhat due to higher jet fuel costs. Contacts also note that there could be shortages in jet fuels from as early as May, which could lead to flight cancellations and higher prices. There is less direct concern about the impact of freight and shipping costs, though higher energy costs will be a worry for businesses without fixed price contracts, or where renewal is due soon. Higher food inflation will feed through to hospitality businesses, facing difficult judgements over how much they can try to pass onto customers, who are also feeling under greater pressure. Price regulation will limit some of the pass-through of higher fuel costs for transport.

Housing and commercial real estate

Housing market sentiment is weaker than the March ASBC and continues to weigh on sales in the secondary market and on new build plans. Commercial real estate (CRE) deals remain subdued with further headwinds expected from higher funding rates.

First time buyers continue to generate some momentum at the lower end of the market, while sales at the top end of the market continue to be subdued. The Middle East conflict has led to higher mortgage rates and many mortgage products being withdrawn. While there is some evidence this is leading to activity levels falling and buyers withdrawing from transactions, the full impact of higher mortgage rates is likely to be felt from Q2. Contacts now judge that the uplift in the housing market that had been expected for 2026 H2, supported by expectations of lower interest rates, is now much less likely to materialise.

CRE activity remains subdued with weak investor appetite, especially in the office market. Demand for industrial space continues to cool. Contacts report increasing difficulty in making new schemes commercially viable.

Outreach engagement

Households and the charities that support them continue to feel pressure from rising prices and limited funding opportunities.

Household participants continue to feel pressure from rising prices, with food prices a major concern. Energy and transportation are growing concerns, especially for those in rural areas. Many expect inflation to rise because of the conflict in the Middle East. But there is recognition that economic forecasts are uncertain, particularly given unpredictable geopolitical risks, and that policymakers have difficult decisions to make to balance competing risks and pressures.

Charities report that many of the households they support have very little financial resilience left. With emergency savings depleted, many are one financial shock away from crisis. Limited access to fair credit, and poor financial guidance are pushing some towards high-cost or illegal lenders.

Participants report a growing mismatch between skills, pay and responsibility. Pay for some skilled or supervisory roles has failed to keep pace with National Living Wage increases, reducing incentives to take on additional responsibility. There is a growing sense that part time, entry-level jobs, graduate roles and apprenticeships are declining, limiting opportunities for younger people.

Given the limited and highly competitive funding landscape, some charity organisations are finding additional sources of income to fund their work. For example, more have opened commercial ventures such as cafes. Others have increased collaboration with similar organisations to access larger funding opportunities.

Next publication date: 12 June 2026