According to the latest quarterly Service Sector Survey by the CBI, business optimism in both services sub-sectors (‘Business and Professional Services’ and ‘Consumer Services’) remained largely unchanged in the three months leading up to May. This is despite a continued decline in profitability for both business and professional services, as well as consumer services, marking the sixth consecutive quarter of decline.
While business volumes decreased in both sub-sectors, the decline was more significant in consumer services. However, there are expectations of volume growth returning in the next quarter for business and professional services, with the strongest expectations since April 2022, while volumes are expected to stabilize in consumer services. Despite a year of declining sentiment, optimism regarding the business situation remained unchanged across the service sector.
The survey also highlighted persistent cost and price pressures in the services sector. Cost growth in business and professional services remained well above the long-run average, while costs in consumer services grew at the second-fastest rate on record. Expectations are for growth to continue in both sub-sectors, albeit at a slightly slower pace in consumer services next quarter. Average selling prices also experienced substantial growth in both sub-sectors, although there is an expectation for slight easing next quarter while still remaining above the long-run average.
As a result, profitability is projected to decline once again across the sector, continuing the trend for the sixth consecutive quarter. With strong cost and price growth expected to persist, profits are anticipated to decline further in the next quarter, albeit at a slightly slower rate.
Nevertheless, employment showed growth in the service sector during the quarter ending in May, and further growth is expected to accelerate in both sub-sectors over the next quarter.
Looking ahead to the next year, the service sector as a whole foresees minimal change in spending on land and buildings, while investment in IT is expected to continue at a pace consistent with the long-run average. Business and professional services anticipate a modest return in investment for vehicles, plant, and machinery, while consumer services firms anticipate ongoing cutbacks, although to a lesser extent than in recent quarters. Uncertainty in demand across both sub-sectors continues to be the primary factor hindering investment.
“It is encouraging that the quarter ahead looks brighter for services firms’ trading conditions. Business volumes are set to return to growth in the next three months, underpinning expectations of stronger employment growth and improved investment intentions. However, rapid cost growth continues to squeeze services firms’ margins and adds to mounting evidence that underlying inflationary pressures remain strong.”
Charlotte Dendy, CBI Head of Economic Surveys and Data
Key survey figures for this quarter include:
Business & professional services:
- Sentiment about the general business situation was broadly unchanged (-2%), following four consecutive quarters of deteriorating sentiment.
- Business volumes continued to fall at a modest pace in the three months to May (-4% from –7% in April). However, volumes are set to return to growth next quarter (+20%).
- Cost pressures continue to build (+61% from +58%) at a pace far above the long-run average and are set to grow at a similar pace next quarter (+59%).
- Average selling prices grew at a strong pace (+27% from +21%), and are expected to continue to grow next quarter, but at a slightly slower pace (+23%).
- Profitability fell for the sixth consecutive quarter (-29%), with profits expected to fall at a much slower rate next quarter (-11%).
- Nevertheless, employment grew in the quarter to May after declining for two consecutive months (+12% from –7% in April). Headcount growth over the next quarter is expected to edge higher (+17%).
- Firms expect little change in spending on land and buildings (-1%). However, investment in IT is set to continue (+17% from +15%), and growth is set to return in vehicles, plant & machinery (+4% from –14%).
- Uncertainty about demand continues to be the biggest factor weighing on investment (+57% from +52%).
Consumer Services
- Optimism about the general business situation was broadly unchanged (+3%), following four consecutive quarters of deteriorating sentiment.
- Business volumes fell sharply (-24% from –7% in April) with volumes set to stabilise next quarter (-3%).
- Cost growth accelerated in the three months to May (+81% from +73%), the second fastest rate of growth on record. Next quarter, growth is expected to remain strong but ease slightly (+74%).
- Average selling price growth also edged higher (+39% from +31%), with expectations for continued growth next quarter (+30%), albeit at a slightly slower rate.
- Profitability dropped for the sixth consecutive quarter in the three months to May (-53% from -48% Feb). Profits are expected to decline at a slower pace next quarter (-40%).
- Employment growth picked up slightly over the quarter to May (+8% from +4% in April). Headcount growth is set to accelerate over the quarter ahead (+17%).
- Firms expect little change in spending on land and buildings (-2%). However, investment in IT is set to pick up pace (+17% from +9%) while continued cutbacks are anticipated in vehicles, plant & machinery (-5% from –10%).
- Uncertainty about demand (+39%) and shortages of labour (+37%) continue to be the biggest factors weighing on investment.
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