CBI: Business confidence growing in service sector
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Business confidence growing in service sector

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'Business and professional services firms are relatively bullish about the coming 12 months and confidence has rebounded sharply, following a surprise pickup in business'

- CBI Head of Economic Analysis Anna Leach

Business confidence is growing in the UK service sector, but the overall outlook remains mixed, according to the CBI.

Service sector firms are more optimistic than they were three months ago, according to the latest quarterly survey. Business activity was generally better than expected and firms expect further improvement over the coming quarter.

Businesses also say that they are employing more staff and investing more in training – a trend they expect to continue over the next three months.

Investment intentions for the twelve months ahead were also firmer. But while businesses in the Business and Professional sector expects to expand over the coming year, the Consumer Services sector remains much more cautious.

The latest quarterly CBI Service Sector Survey was conducted between 26th October and 14th November. The 153 respondents come from both Business and Professional Services, including accountancy, legal and marketing firms, and Consumer Services, such as hotels, bars and restaurants, travel and leisure.

Anna Leach, CBI Head of Economic Analysis said:

“There are encouraging signs here, particularly with employers increasing headcount and training expenditure at the fastest pace since November 2007 and investment plans for the year ahead a little better.

“Business and professional services firms are relatively bullish about the coming 12 months and confidence has rebounded sharply, following a surprise pickup in business.

“Consumer services continue to face more challenging conditions: although profits and confidence have stabilised, business volumes continued to shrink this quarter and no material improvement is expected.”

The main findings are:

Consumer Services

Current Activity

• Optimism about the general business situation was slightly higher than three months ago (a balance of +5%).

• Firms say business volumes fell at a similar rate over the last three months as in the May and August surveys (-12%) and in line with expectations (-11%). Although business volumes remained below normal (-15%), it was to the least extent since August 2008. Business volumes are expected to fall at a similar pace over the next three months (-8%).

• Business values fell more slowly than expected (-7% compared with -17%) following a slower rate of price deflation than expected (-5% vs -17%). Business values are expected to grow marginally over the next three months (+4%).

• Average selling prices fell slightly (-5%) at a slower rate than predicted three months ago (-17%). However, the last two quarters show the weakest pricing environment since late 2009. Prices are expected to rise moderately over the next three months (+9%).

• Total costs per employee grew strongly (+22%), but more slowly than expected (+37%). Costs growth is expected to strengthen somewhat over the next three months (+28%).

• With weaker price deflation and slower costs growth than expected, profitability stabilised unexpectedly (-2% compared with expectations of -26%). However, profitability is expected to fall again next quarter (-8%) as further increases in headcount push up overall costs.

• Headcount and training expenditure rose unexpectedly this quarter (+12% and +18% respectively) both at the fastest pace since November 2007. Firms expect both to increase over next three months (+7% and +14% respectively).

Business Plans

• Investment intentions for the next twelve months strengthened across the board, with IT spending expected to be higher over the coming year for the first time since February (+8%). Less is expected to be spent over the coming year on land and buildings (-13%) and vehicles plant and machinery (-13%), although the latter moved above its long-run average.

Replacement remained the principal investment motive, cited by 61% of respondents, while reaching new customers (28%) rebounded to close to its long-run average (31%). Uncertainty about demand remained the main barrier to capital investment, moving to its highest number of citations since the quarterly survey began in 1998 (70%).

• On the whole, Consumer Services firms are not expecting to expand their businesses (a balance of 0%). Uncertainty over demand levels was the factor most likely to limit expansion (91%), with domestic competition running second (46%).

Professional and Business Services

Current Activity

• Firms were considerably more optimistic about the business outlook than three months ago (+22%).

• Both business values (+17) and volumes (+16) improved unexpectedly, in both cases seeing their first increases since May 2011 and the fastest rate of growth since November 2007. A similar pace of volumes growth is expected next quarter (+17%), while growth in values is expected to strengthen (+22%).

• Selling prices deflation was in line with long-term average (-10%) and close to expectations (-14%). Prices are expected to be flat next quarter (-1%).

• Total costs per person employed rose more quickly than expected (+19% compared with +5%) and are expected to increase at a similar rate next quarter.

• Profitability stabilised (-2%) in contrast with expectations that it would continue falling (-14%), following strong growth in business volumes. Profitability is expected to grow next quarter (+10%), with further volumes growth expected and flat prices. If realised, this would mark the first profit growth since February 2008.

• Employment rose unexpectedly (+12% compared with expectations of +4%), while training investment also rose faster than predicted (+12% compared with +2%). Both employment and training expenditure are expected to increase over the next quarter at a similar pace (+13% for both).

Business Plans

• Investment intentions for the next twelve months have strengthened, with all investment categories now above their long-run averages. Firms expect to increase capital expenditure on land and buildings (+8%) for the first time since May 2011, investment in IT is expected to grow strongly (+27%) and capital expenditure on vehicles, plant and machinery is now expected to be flat (-1%).

• Increasing efficiency returned as the prime motive for investment (cited by 66% of respondents) and to a slightly greater extent than usual (long-term average of 60%), while replacement slipped back slightly (61%) to close to its long-run average (58%).

Although uncertainty about demand remained the most cited constraint on investment (55%), concern was at its lowest level since May 2008 and below its long-run average (58%). Concern over shortage of internal finance (13%) fell to its lowest levels since August 2009, while inability to raise external finance remained slightly elevated (14%) alongside concerns about finance costs (11%).

• Business expansion plans for the next twelve months (+32%) are their strongest since August 2007. The biggest potential constraint on expansion was demand levels (85%), which remained above the long-run average (80%).

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