Optimism returns to service sector - CBI Service Sector Survey

Business optimism increased across the service sector in the three months to February, according to the latest quarterly CBI Service Sector Survey.

This was driven by a marked improvement in sentiment in both the business & professional and consumer services sectors, which rose at the fastest pace since August 2015 and February 2016 respectively.

Nevertheless, business volumes in both sub-sectors continued to fall. The drop in consumer services volumes quickened, while business & professional services volumes continued to fall, although at a slower pace. Looking to the quarter ahead, the outlook for volumes is mixed with consumer services volumes set to stabilise and business & professional services volumes expected to grow at a robust pace, with expectations for the latter the strongest since May 2018.

While growth in total costs per person eased slightly in the business & professional services sector, cost pressures picked up in-line with the long-run average in consumer services. Profitability continued to decline in both sub-sectors, although the pace of decline eased somewhat in business & professional services. Next quarter, cost growth is expected to accelerate in both sub-sectors in the three months to May with consumer services firms anticipating that profitability will decline at a similar pace. Meanwhile due to expectations of solid volumes growth, business & professional services expect profitability to grow.

There was a mixed picture for services employment, with the business & professional sub-sector returning to growth over the last quarter while consumer services headcount was unchanged. In the three months to May, headcount is expected to grow at a faster pace in business and professional services – the strongest expectations since August 2017 – while consumer services employment is expected to remain broadly unchanged.

Investment intentions improved across the service sector compared with the previous quarter. Business & professional services expect to increase investment on IT, vehicles and plant & machinery however spending on land and buildings is set to be cut back. Overall, business & professional services firms are optimistic about the prospects for business expansion in the coming year, with the balance the most positive since November 2017.

Prospects for investment in the consumer sector have also improved, although firms were negative about the outlook for business expansion over the next twelve months. Consumer services expect to increase spending on land and buildings and IT, but to cut back spending on vehicles and plant & machinery.

Ben Jones, Principal Economist, said: 

“Firms will also be looking ahead to forthcoming EU negotiations and to see what can be done to support and grow our world-class services sector. By focusing on ease of doing business and setting goals for ambitious market access, we can capitalise on renewed optimism and ensure expectations remain strong as we move forward.”

Overall, underlying momentum in the UK economy remains subdued at the start of 2020, but we continue to expect a mild improvement over the course of the year. Household spending is set to remain a key driver of GDP growth, as a low unemployment rate underpins solid growth in real wages. For more details, see the CBI’s December economic forecast.

Key findings:

Business and Professional services

• Sentiment about the general business situation improved considerably on the quarter (+22% from -20% in November), at the fastest pace since August 2015
• Business volumes continued to decline last quarter, albeit at a slower pace (-6% from -16% in November). However, volumes are expected to see solid growth in the three months to May (+26%)
• Growth in total costs per person eased slightly (+24% from +28%) however cost growth is expected to pick up next quarter (+39%)
• Average selling prices grew slightly (+4%) but are set to pick up sharply next quarter (+21%)
• Profitability fell for the fifth consecutive quarter in the three months to February, albeit at a slower pace (-5% from -25% in November). However, profits are expected to grow next quarter (+7%)
• Employment returned to growth (+7% from -4%) and headcount is set grow at a much faster pace next quarter, the strongest expectations since August 2017 (+28%)
• Firms expect to keep cutting back on land and buildings investment (-12%). However, spending on IT (+23%) and vehicles, plant and machinery (+7%) is set to increase.
• Business and professional services are optimistic about the outlook for business expansion over the year ahead (+16%), the most positive balance since November 2017.

Consumer services

• Optimism about the general business situation improved significantly (+15% from -25%), at the fastest pace since February 2016
• Business volumes declined at a sharper rate in the three months to February, marking the sixth consecutive quarterly fall (-17% from -13%). Nevertheless, volumes are set to stabilise next quarter (+1%)
• Cost growth picked up in line with the long run average (+40% from +28%) in the three months to February with growth expected to strengthen further next quarter (+66%)
• Average selling prices were unchanged (+1% from +1%) but growth is set to pick up next quarter (+9%)
• Profitability declined at a sharper pace (-26% from -14%) with profits expected to fall at a similar rate next quarter (-22%)
• Employment was flat last quarter (+2% from +9%), with headcount expected to remain broadly unchanged next quarter (-3%)
• Consumer services firms expect to cut back on spending on vehicles, plant and machinery (-9%). However, spending on land and buildings (+6%) and IT (+34%) is expected to increase.
• Consumer services are negative about the outlook for business expansion over the year ahead (-8% from -1%).