The Bank of England's Agents' summary of business conditions, published today, paints a cautious picture of the UK economy, highlighting a significant easing in wage pressures as the standout development.

Wage Settlements to Average 3.6% in 2026

Contacts report that wage settlements are projected to average 3.6% across 2026, up slightly from the Agents’ pay survey's 3.4% estimate but down markedly from the 4% average in 2025. This moderation stems from a looser labour market, heightened concerns over profitability and affordability, and a weak demand outlook.

Businesses continue to cite lower pay pressures than last year, with many large employers influencing the revised figure upwards. Despite this, overall labour costs are expected to ease further compared to 2025.

Subdued Economic Activity Persists

The broader economic picture remains lacklustre, with little evidence of a consumer spending rally so far this year. Manufacturing and business services anticipate flat to modest volume growth in the second half of 2026, while construction expectations have deteriorated, with recovery now pushed to 2027.

Investment intentions have stabilised at weak levels, focused on maintenance, refurbishments, and efficiency-boosting technology rather than capacity expansion. Weak demand limits growth-oriented planning, except among firms with strong financial positions.

Mixed Signals in Services and Credit

• Business and financial services show subdued activity, with revenues propped up by price inflation and volumes flat. IT services grow via AI and cybersecurity spending, while banking incomes rise year-on-year.
• Credit conditions have improved modestly: supply is stronger, particularly for quality borrowers, with falling interest rate spreads and increased lender competition. Demand ticks up for refinancing and working capital but stays subdued amid debt repayment caution.

Profit margins remain squeezed due to limited pricing power amid subdued demand. Business rates hikes will add to fixed costs this year, while consumer services inflation eases, with price rises expected lower than last year.

Implications for Policy and Businesses

This report underscores ongoing economic fragility, with easing wage growth offering some relief to inflationary pressures. However, persistent caution among firms signals that any substantive recovery may be protracted, influencing expectations around monetary policy and fiscal planning.