Service sector volumes grow but margins under pressure
Demand in the services sector held up in the three months to August, with volumes in business and professional services growing at the fastest pace in over a year.
However, rising costs in both sub-sectors are eroding profitability, according to the CBI’s latest quarterly Service Sector Survey.
Business and professional services firms – which include accountancy, legal and marketing firms – reported that business volumes grew at the fastest rate since May 2016, while consumer services companies – which include hotels, bars, restaurants, travel and leisure – saw volumes rise at a similar pace to the last quarter. Business volumes are expected to accelerate in consumer services over the next quarter while business and professional services expect to see stable growth. However, while optimism among business and professional services firms continue to improve, sentiment among consumer services firms deteriorated.
Rising costs are eroding profitability in both sub-sectors: profitability has been flat or falling in both sectors since May 2016. Total costs per person in business and professional services firms rose at the fastest pace in nine years, while costs in consumer services rose at the quickest pace since February 2004, causing profitability to decline at the fastest pace since August 2012. Nevertheless, employment growth picked up in both sub-sectors with expectations for growth in the next quarter the strongest since November 2014 in business and professional services. Investment intentions for the year ahead for IT remained robust in both sectors, driven by the need for replacement and to increase efficiency and speed.
Anna Leach, CBI Head of Economic Intelligence, said:
“It’s fair to say that the performance of the UK services sector is very much a mixed bag this summer. While business volumes and numbers employed have risen, the impact of higher costs is harming the profitability of firms.
“With the latest GDP data showing no growth in consumer spending in the second quarter, it’s no surprise that consumer services firms are particularly downbeat. And the availability of skills and labour is a real risk to plans for investment and growth. This underlines the degree of care which will need to go into crafting the UK’s future migration system to ensure that firms have access to the people needed to underpin growth and prosperity.”
Labour and skills shortages are biting strongly among consumer services firms. The proportion of firms citing availability of professional staff as a likely limit on the level of business over the year ahead were at their highest since the survey began in 1998, while those citing the availability of clerical staff were the highest since February 2002. Additionally, the proportion citing the availability of labour as likely to limit investment was the highest since August 2002.
Business and professional services
Optimism about the business situation improved (+8%) although at a slower pace than the previous quarter (+14%)
The volume of business this quarter (+8%), grew at the fastest rate since May 2016 (+12%) with 25% of firms reporting volumes were up compared with the previous quarter, and 16% saying they were down. Volumes are expected to rise at a similar pace over the coming quarter (+9%)
Growth in average selling prices was the same as the previous quarter (+9%)
Total costs per person (+44%) rose at the fastest pace since August 2008 (+49%) and are expected to grow at a similar rate over the next quarter (+41%)
21% of firms said the overall profitability of business was up on the previous quarter, and 25% said it was down, giving a balance of -4%, the fifth consecutive quarterly fall in profitability
32% of businesses said numbers employed were up on three months ago, and 8% said they were down, giving a balance of +24%.
Investment intentions for the year ahead were broadly flat for land and buildings (+3%) and vehicles, plant and machinery (+4%), while firms expect to spend more on IT (+25%)
Businesses cite uncertainty about demand/sales as the factor most likely to limit capital expenditure (50%)
50% of firms said they expected to expand their business over the year ahead, and 49% said they did not, leaving a balance of +1%.
Optimism about the business situation deteriorated (-12%) – after two quarters of improving sentiment – 11% of firms said they were more optimistic than three months ago, whilst 23% said they were less optimistic
29% of firms reported a rise in business volumes, compared with 20% saying they were down in the last three months, giving a balance of +9%, a similar pace of growth to the previous quarter (+12%). Volumes growth is expected to pick up over the next three months (+21%)
Average selling price growth eased notably over the last three months (+7% this quarter compared with +29% in the previous), the slowest pace of growth since November 2015
Total costs per person grew at the fastest pace (+63%) since February 2004 (+65%)
Profitability declined in August (-26%) at the fastest rate since November 2011 (-31%). Profitability is expected to continue to fall next quarter (-19%)
Growth in numbers employed accelerated (+23%) but is expected to ease slightly over the next three months (+18%)
Capital expenditure is expected to increase across all three categories over the coming 12 months relative to the previous year – land and buildings (+6%), IT (+24%) and vehicles, plant and machinery (+13%)
Inadequate net return was cited as the main factor likely to limit capital expenditure by 62% of respondents - the highest since May 2000 (72%)
48% of firms said they expected to expand their business, and 52% said they did not, giving a balance of -4%. The principle factor cited as likely to limit the level of business was the level of demand/sales.