Mixed outlook for UK services sector

Business optimism improved amongst business & professional services during the three months to February, with employment expected to rise in the next quarter, according to the latest quarterly CBI Service Sector Survey.

In consumer services, however, sentiment and employment continued to fall and the outlook for the next three months remains poor.

Business volumes in both sub-sectors continued to fall in the three months to February. With the UK in lockdown since early January, the decline in consumer services volumes accelerated sharply, almost matching the pace seen in the lockdown in the spring of 2020. Looking to the quarter ahead, the outlook for volumes is mixed, with business & professional services set to return to growth, but a further fall expected in consumer services volumes, albeit at a slower pace.

Meanwhile, costs per person picked up across both sub-sectors during the quarter to February, and they are expected to grow at a faster rate next quarter. Average selling prices fell across the service sector in the three months to February. Business & professional services expect prices to stabilise next quarter, while consumer services expect prices to fall further.

Against this backdrop, profitability continued to weaken, at broadly the same pace as last quarter. Looking ahead, profitability is expected to stabilise for business & professional services firms, but decline at a steady pace in consumer services.

Services employment continued to come under pressure, with both sub-sectors reporting a fall, although at a slower pace compared to last quarter. While the pace of decline is anticipated to ease further for consumer services, business & professional services are expected to increase their headcount.

The outlook for investment remains subdued. Firms across the services sector expect to cut back on spending on land & buildings, and on vehicles, plant & machinery over the next twelve months, although spending on IT for business and professional services is expected to increase. Companies reported uncertainty about demand as the leading factor weighing on investment plans for the year ahead.

Ben Jones, CBI Principal Economist, said:

“With lockdown measures still in place, trading conditions remain extremely difficult, with firms across the UK’s services sector reporting a quarter of falling volumes, profitability and employment.

“Although, the pace of decline has eased, particularly compared with the first lockdown last year, the next few months promise mixed fortunes for the sector. Consumer service activity, in particular, is expected to remain in the doldrums, though business and professional services firms are a bit more hopeful, with profitability projected to stabilise and employment set to grow.

“While businesses will welcome the clarity on re-opening provided by the government’s road-map, restrictions are chipping away at companies’ resilience, with majority of firms putting their investment plans firmly on ice for the year ahead.”

Key findings:

Business & professional services

• Sentiment about the general business situation improved (+23% from -21%), the strongest rise since August 2015
• Business volumes continued to fall, at the same pace as the previous quarter (-21%). But volumes are set to increase next quarter (+15%), the strongest expectations in a year.
• Cost growth is picking up (+23% compared to +3% in the three months to August), and are set to grow at a faster rate next quarter (+34%)
• Average selling prices continued to fall at a similar pace to last quarter (-7% from -5%), with expectations to then stabilise next quarter (+2%)
• Profitability continued to drop, at broadly the same pace to last quarter (-26% from -23% in the quarter to November), but is expected to stabilise next quarter (+0%)
• Employment continued to fall, albeit at a slower pace (-5% from -19%), with headcount over the quarter ahead expected to increase (+29%)#
• Firms expect to cut back on spending on land and buildings (-12%) and vehicles, plant and machinery (-7%) over the next twelve months (although to a lesser extent than the previous quarter), but to increase their spending on IT (+24%).
• Uncertainty about demand (+56%) remains the biggest factor weighing on investment (compared to +70% in the previous quarter).

Consumer services

• Sentiment about the general business situation continued to worsen, and at a slightly faster pace than in the three months to November (-39% from -34%)
• Business volumes declined at a significantly faster pace in the three months to February compared with the previous quarter (-76% from -42%, close to the pace seen in the first lockdown in Q2 2020: -83%). The pace of decline is set to ease slightly next quarter (-55%)
• Cost growth picked up in the three months to February (+28% from +6%) with expectations for growth to accelerate next quarter (+34%)
• Average selling prices continued to fall, but at a slower rate (-14% from -22%), with a similar decline expected in the next three months (-11%)
• Profitability continued to fall, but the pace of decline has eased a little (-48% from -53%). The next quarter is expected to see a similar rate of decline in profitability (-45%)
• Employment continued to fall, but at a slightly slower rate (-47% from -56%). Headcount is set to decline at a slower rate next quarter (-33%)
• Consumer services firms expect to cut back further on spending on land and buildings (-49%) and plant and machinery (-24%) over the next twelve months, while investment in IT is set to be flat (+3%). Investment in training continued to decline this quarter (-17%) and is expected to fall at a similar rate next quarter (-16%).
• Uncertainty about demand (+70%) was the biggest factor weighing on investment plans for the next 12 months.