The mood among firms selling services has darkened considerably compared with three months ago after disappointing volumes of sales across the sector, the latest CBI/Grant Thornton Services Sector revealed today (Wednesday).
With levels of business volumes and values rated well ‘below normal’ in the services sector as a whole, sentiment fell sharply on last quarter.
Firms providing services to consumers, such as hotels, bars, restaurants, cinemas and gyms, were particularly pessimistic about the general business situation, with the steepest fall in optimism since November 2001.
Those offering business and professional services, such as lawyers, accountants, architects, IT and recruitment firms, were also less optimistic than they were three months ago, after five quarters of improving sentiment.
Volumes of business fell slightly for consumer services firms, which was much worse than the solid growth these firms had expected, while the value of their business was flat.
Business services firms fared better, though growth in their business volumes was slower than expected and overall the value of their business fell slightly.
Whereas business volumes fell for all types of consumer services, firms the only business and professional services sub-sector to see falling volumes was 'management and legal services'. All others continued to report rising volumes and profitability over the past three months.
The somewhat better conditions for business services firms were clear in the data for the rising numbers employed last quarter. The business services sector still sees employment growth in the coming quarter, though at a below-average rate. This compares to falling employment in the consumer services sector, which is expected to continue over the next three months.
Already negative perceptions about the 12 months ahead have deteriorated for consumer services firms, which no longer expect growth in the coming year to exceed the last. Likewise, business and professional firms also do not expect their business to expand more in the next 12 months than the last.
Over the past three months, the rate of cost increases fell back for consumer services while they accelerated in the business services sector. And consumer-facing firms were unable to raise selling prices as fast as they had hoped, while prices rose only very slightly for firms selling services to other businesses.
Ian McCafferty, the CBI’s Chief Economic Adviser, said:
“The services sector is beginning to feel the slowdown underway in other parts of the economy and firms are concerned about the outlook for their business over the coming year. This is focused mainly on the parts of the sector affected by tighter household purse strings - namely consumer services - as people feel less inclined to treat themselves to meals out, hotel stays or trips to the cinema.
"While demand has held up for most business services firms, some in management and legal services have been hit by slower mergers and acquisitions activity. Business services firms are doing what they can to insulate themselves from the slowdown, by focusing on increasing efficiency and seeking to reach new customers with new services.
"Consumer services firms did not manage to put up selling prices as much as expected though they still hope to do so next quarter. Price inflation is not evident in the business services sector, however."
Alysoun Stewart, head of Entrepreneurial Advisory at Grant Thornton, said:
"The credit crunch is really starting to make its presence felt in the services sector, with both consumer and business services experiencing the steepest fall in optimism for more than six years.
"Of all the services, spending on hotels, bars and restaurants has taken the biggest turn since November and these firms are preparing for a difficult quarter. In the consumer sector, only leisure firms and those offering personal care forecast better profitability over the next three months.
"Management and legal firms reported a fall in profitability not seen since May 2002, and the business services sector as a whole will be battening down the hatches over the next three months."
Consumer services in detail
Consumer services firms reported a modest fall in their business volumes in the last three months (a balance of -7%), which disappointed their expectations and was the first fall for 18 months (the last negative balance was -35% in August 2006). The value of their business over the past three months changed little (a balance of -1%) while levels of business in value and volume terms were ‘below normal’ for the third quarter in a row.
Costs per employee continued to rise, albeit at a slightly slower rate than in the previous two quarters (costs rose this quarter for a balance of +28%). Fewer firms than expected were able to raise selling prices (a balance of +25% reported price rises compared to an expected +51%). This was, nevertheless, still above average for the eighth quarter in a row and expectations of price increases to come are strong (a balance of +45%).
Consumer services firms’ profitability during the quarter worsened for the first time in two years over the past three months (a balance of –9%) and is expected to fall further (a balance of -19%).
Numbers employed in consumer services fell for the first time since August 2006 (for a balance of -6%) and are expected to fall in the next three months (-9%).
Training budgets have already fallen in the last three months (a balance of -20%) and are expected to continue to do so (-23%).
Looking ahead, the greatest balance of consumer services firms on record do not expect their business to expand more in the coming 12 months than in the last (a balance of -59%). An above average proportion (83%) says the level of demand is likely to limit their ability to expand their business and a sizeable percentage (54%) says this uncertainty over demand will limit their investment in the coming year.
Reflecting the credit crunch, cost of finance is considered to be a constraint on future investment to the greatest degree seen since the survey began (cited by 20% of firms).
Business services in detail
Business and professional services firms’ expectations were disappointed for both volumes and values of business in the past three months. Firms reported the slowest growth in business volumes (a balance of +6%) since November 2003 (+4%) and the value of their business fell (a balance of -6%) for the first time since May 2003 (-5%). Firms expect volumes in the next three months to be flat (-2%) and values to fall (-8%).
These negative figures have been driven mainly by one sector - management and legal services - which recorded very weak balances for volumes (-37%) and values (-39%) of business over the past quarter.
While costs are intensifying for the business services sector (a balance of +46% reporting rises in the last three months and +56% expecting them in the next three), firms' ability to raise their selling prices is negligible - with an almost flat balance of +4% this quarter and +3% expected next quarter.
As a result, the rate of profitability growth is its weakest for a year (a balance of +9%) and a decline is expected for the coming quarter (-4%). This is the first negative expectation since May 2006 (-14%).
The greatest balance of firms (-26%) since August 2001 (-51%) say they do not expect their business to expand more in the coming year than in the last. Of factors likely to constrain expansion, the level of demand was ranked its highest (86%) since November 2003 (87%).
Of firms’ reasons to invest in their business in the year ahead, there was a particularly high score for reaching new customers (37% - which is a record). Providing new services (32% - the highest for a year) and looking for efficiency (73% - the highest since February 2001) were also rated as particularly important.
Firms reported unchanged training expenditure in the last quarter (a balance of -1%) but this should pick up in the next, although the balance (+10%) would still represent a below average rise.