Service sector optimism deteriorates at fastest pace since financial crash

The quarterly survey revealed that sentiment declined among both business & professional services and consumer services firms. In the business & professional services sector – which includes accountancy, legal and marketing firms – optimism about the business situation fell at the fastest pace since financial crisis. Sentiment in the consumer services sector – which includes hotels, bars, restaurants, travel and leisure firms – also deteriorated, at the fastest pace since August 2016.

Business volumes also fell across the service sector. In business & professional services, volumes fell at the sharpest pace since April 2013 and are set to decline at a faster pace over the quarter ahead. Meanwhile, consumer services firms reported a drop in business volumes, for the fifth consecutive month.

Profitability in business & professional services firms fell at the sharpest pace in six years in the three months to February, and profits dropped in consumer services for the fourth consecutive quarter. Profitability is expected to decline at a similar pace in both sub-sectors over the coming three months.

Rain Newton-Smith, CBI Chief Economist, said:

“With just over one month until we leave the EU, the effect uncertainty is having upon the sector is unmistakeably negative. Volumes and profits continue to fall across both services sub-sectors, while optimism has fallen at the quickest pace since 2009.

“Dimmed expectations for the year ahead mean it’s more important than ever for the UK to avoid a no-deal scenario, which would create a perfect storm of issues for our world-leading services firms.

“Until politicians can agree a deal that commands a majority in Parliament and is acceptable to the UK and protects our economy, sentiment will continue to deteriorate.

“It is essential politicians act to remove the cliff edge from a sector that provides so much of Britain’s prosperity.”

The employment picture also deteriorated with the service sector overall reporting the weakest employment growth since February 2011. Headcount in business & professional services was unchanged over the past three months, while consumer services saw a slight fall in employment. Over the next quarter, employment is set to remain unchanged in the service sector as a whole, marking the weakest expectations since August 2012.

Services firms expect to cut back or keep spending unchanged on land and buildings and vehicles, plant and machinery. However, business and professional services expect to increase expenditure on IT while consumer services expect to keep spending flat, with the weakest expectations since February 2015. Uncertainty about demand is the key factor holding back investment across the service sector, to the greatest degree since May 2013.

Overall economic growth is expected to remain subdued, reflecting weak household income growth and the drag on investment from Brexit uncertainty. For more detail, see our December economic forecast.