Service sector business slows but expected to pick-up next quarter
Business volumes for business and professional services were unchanged in the three months to February having slowed significantly when compared with growth rates six months ago.
Meanwhile growth in consumer services slowed slightly. That’s according to the CBI’s latest quarterly Service Sector Survey.
The survey of 169 firms showed that sentiment in business and professional services – which includes accountancy, legal and marketing firms – levelled off after nearly three years of improvement, while optimism among consumer services firms – which includes hotels, bars, restaurants, travel and leisure – continued to improve.
Profitability declined strongly in professional and business services, as selling prices fell and employment costs rose significantly. Meanwhile, profitability continued to increase in consumer services as average selling prices rose at a faster pace than in the previous quarter. Growth in profitability eased compared with the last quarter.
Looking ahead, business volumes growth is expected to pick up in both sub-sectors over the quarter to May, but rising costs will help keep profits static across the sector.
Employment in both sectors continued to increase at a healthy pace, although slightly less strongly than in the quarter to November. The consumer services sector saw training expenditure rise strongly again, with further strong growth expected to continue next quarter.
Both sectors plan to ramp up IT spending over the next year to improve their efficiency, particularly in consumer services which saw a record proportion cite efficiency as an investment driver, with capacity expansion another significant driver.
Rain Newton-Smith, CBI Director of Economics, said:
“Buoyant household demand continues to bolster the UK’s consumer services sector. However, business and professional services are striking a more cautious tone, with growth in volumes petering out over the last six months.
“The outlook for the next three months paints a more encouraging picture with activity expected to pick up in both sectors.
“Employment growth remains strong and services firms have signalled they will continue to keep investing in new technology and skills.”
- 43% of firms reported a rise in business volumes, compared with 21% saying they were down in the last three months, giving a rounded balance of +21%. Growth in business values remained strong (balance of +24%).
- 27% of companies said they were more optimistic regarding the business situation, compared with 12% saying they were less optimistic, giving a balance of +15% - the lowest since November 2012 (+6%).
- 34% of firms said the overall profitability of business was up on the previous quarter, and 21% said it was down, giving a softened, but above average balance of +13% (+16% in November). In the coming three months, profits are expected to be flat (balance of +2%).
- Average selling prices had a balance of +20% compared with +5% in November.
- 29% of businesses said numbers employed were up on three months ago, and 6% said they were down, giving a balance of +23% (compared with +41% in November). A balance of +33% expect numbers employed to go up in the next quarter.
- Growth in total costs per person employed is expected to reach the highest since November 2006 (when it was +59%) in the next quarter (balance of +56%).
- Investment intentions in the year ahead are strong, with a balance of +33% of firms intending to increase investment in land and buildings, and +46% in information technology. Investment intentions for vehicles, plant and machinery eased very slightly to a balance of +9% (down from +11% in November 2015).
- 64% of firms gave increasing efficiency/speed/need to exploit new technology as an expected driver of capital expenditure over the next 12 months.
Business and Professional Services
- Growth in the volume of business slumped to flat (a balance of +1%), with 25% of firms reporting they were up compared with the previous quarter, and 24% saying they were down. Better growth is expected next quarter (balance of +18%).
- Optimism about the business situation was fairly steady (a rounded balance of -2%, compared with +15% in November), as 23% of firms said they were more optimistic than three months ago, whilst 24% said they were less optimistic – this was the lowest since May 2012 (-11%)
- 19% of businesses said overall profitability was up on three months ago, and 39% said they were down, giving the lowest rounded balance since November 2012 (-21%).
- Average selling prices had a balance of -13% compared with +1% in November.
- 28% of businesses said numbers employed were up on three months ago, and 8% said they were down, giving a balance of +20% (+23% in November). Employment growth is expected to be similar next quarter (balance of +21%).
- 56% of firms gave increasing efficiency/speed/need to exploit new technology as driver for capital expenditure over the next 12 months. 63% of respondents cited replacement as the greatest driver of capital expenditure in the next year.
Notes to Editors:
The Service Sector Survey was conducted between 27 January and 15 February 2016. 108 Business & Professional Services firms and 61 Consumer Services Firms replied.