The service sector is still in deep recession, but there are also some signs that sentiment is improving, alongside indications that the decline in business activity is starting to slow, the latest CBI Service Sector Survey reveals today.
The quarterly research, conducted between 29 April and 13 May, covers 179 service-sector firms. They are divided into Business and Professional Services, such as accountancy, legal and marketing firms, and Consumer Services, including hotels, bars and restaurants, travel and leisure.
In Consumer Services, the volume of business fell over the past three months at the fastest rate since November 2001, but because prices rose, the fall in business values was less marked. In Business and Professional Services, values fell even faster than volumes due to record deflation in average selling prices.
However, in both sectors slower rates of decline in both values and volumes of business are expected in the next three months. If realised, the declines in activity would be the slowest since last summer.
Employment continued to fall sharply in both sub-sectors, though in both the rate of decline is expected to ease over the coming months. The overall profitability of business also fell very sharply in both compared with three months ago, but at a slower rate than in the previous quarter when it declined at a record pace.
There are some signs that sentiment is improving. In the Consumer Services sub-sector, 27 per cent of firms said they were more optimistic than three months ago, compared with 12 per cent saying they were less so, giving a balance of +15 per cent. This is the first positive result since February 2007. In Business and Professional Services sentiment continued to decline for a balance of -6 per cent of respondents, but this is the slowest rate of decline since confidence started to slide in February 2008.
Ian McCafferty, CBI Chief Economic Adviser, said: “We have seen further falls in business activity over the past three months, but this survey suggests that the sharpest falls may now be over and that the situation is starting to stabilise.
“Firms are a lot less pessimistic than they were three months ago, and although the recession has deepened, business is not expected to decline at the same rate going forward as it has in the past six months. Although the situation is very tough for firms, some tentative grounds for cautious optimism are starting to appear in some areas.”
The lack of availability of credit continues to be an issue, and is particularly affecting Consumer Services firms. The lack of credit is affecting their ability to increase business over the next year (the balance of +31 per cent in the sub-sector reporting this is an issue is the highest figure since the survey started in November 1998) and their investment plans (a balance of +30 per cent cited inability to raise external finance as a factor likely to limit capital expenditure over the next year, another survey high). These constraints were less pronounced in the Business and Professional Services sub-sector, however.
The survey also appeared to reflect the effects of pay restraint and low inflation in the services sector. In Consumer services, the balance of companies reporting rises in total costs per person employed was the lowest in the survey’s history, while in Business and Professional services it was actually negative, and also the lowest in the survey’s history. These balances are both expected to be negative next quarter.
Consumer services
Falls in business volumes were worse than expected (the balance of -53 per cent compared with -34 per cent the previous quarter, and was the lowest since November 2001), while falls in business values were closer to expectations (-30 per cent compared with -49 per cent previously). In the coming three months, volumes are still expected to decline (for a balance of -36 per cent), as are values (-10 per cent), but at a slightly slower pace.
Profitability fell again, although the balance reporting a decline over the last three months, of -33 per cent, was less than the -68 per cent the previous quarter. The outlook for the next three months suggests a continued decline, but at a slower pace still (-14 per cent).
Numbers employed fell at a record rate (a balance of -30 per cent compared with -22 per cent the previous quarter). Firms expect more job losses over the next quarter, but at a slower rate (a balance of -6 per cent).
Companies expect to authorise less capital expenditure in the coming 12 months than in the last, for the fourth quarter in succession. Nor are they expecting their business to expand in the coming year. The balance of -35 per cent is the eighth consecutive negative answer to “expected expansion” for the coming 12 months.
Looking at the sub-sectors within Consumer Services:
Volumes of business in Travel Services fell significantly for a fourth successive quarter (a balance of -44 per cent compared with -48 per cent the previous quarter), with the value of business also falling sharply (-51 per cent compared with -46 per cent previously). Overall profitability of business also fell steeply (-65 per cent compared with -88 per cent previously), and is expected to fall further over the next three months at a similar rate (-63 per cent). Pessimism about the business situation in the industry is widespread; business confidence fell for the sixth successive survey.
Hotels, Bars and Restaurants saw a sharp fall in the volume of business (-66 per cent compared with -4 per cent previously), though the value of business fell less steeply (-16 per cent compared with -36 per cent previously) and firms are more optimistic about the business situation (+37 per cent compared with -81 per cent previously). Overall profitability stabilised (-3 per cent) after falling heavily (-56 per cent the previous quarter). Looking forward to the next three months, overall profitability is expected to remain little changed (-1 per cent).
In the Leisure and Personal Care Sector, business volumes fell sharply again (-72 per cent compared with -76 per cent the previous quarter). Values fell too (-68 per cent compared with -76 per cent the previous quarter). But the outlook is more encouraging. Although firms expect the value and volume of business to be lower next quarter, the rate of decline appears to be slowing considerably (-10 per cent for volume and -13 per cent for value). Furthermore, sentiment is improving about the business situation with a balance of +15 per cent, compared with +3 per cent the previous quarter and -68 per cent the quarter before that.
Business and Professional Services
Business volumes and values fell but at a slightly slower pace than last quarter’s record rates. Volumes fell for a balance of -43 per cent of firms (compared with -65 per cent the previous quarter) and values for a balance of -54 per cent (compared with -62 per cent previously). Further, less rapid declines are expected next quarter .
Profitability also fell but at a slower rate than in the previous quarter. A similar rate of decline is expected over the next quarter.
Jobs were lost at a sharp pace, but again the rate of decline is expected to slow over the next quarter.
Selling prices fell at their fastest rate since the survey began in 1998, with a balance of -35 per cent of firms reporting falls in their selling prices over the last three months. Prices are expected to continue to fall over the coming three months, albeit at a slightly slower rate.
Looking at the sub-sectors within Business and Professional Services:
In Telecomms and Computing, business values fell sharply, continuing a steep downward trend. Over the next quarter the decline trend is expected to be arrested. Volumes also declined but again are expected to stabilise next quarter. Numbers employed and costs per employee fell slightly, while profitability improved with a balance of +41 per cent compared with +2 per cent the previous quarter.
Marketing firms show a continued decline in business values and volumes, although in both cases the rate of decline is less severe. Sentiment about the business situation fell, as did overall profitability.
In Transport of Goods and Post, business values fell very sharply, continuing a steep downward trend. Over the next quarter the trend is expected to continue downwards, but less steeply. Business volumes also declined, but a lot less steeply than in previous quarters and are expected to improve over the next quarter. Sentiment fell further, and numbers employed fell at a faster pace than in the previous quarter.