Service sector optimism, profits and volumes fall

Sentiment declined in both services sub-sectors. In the business and professional services sector – which includes accountancy, legal and marketing firms – optimism about the business situation fell for the fourth quarter in a row, albeit at a slower pace than in the previous quarter. Meanwhile, sentiment in the consumer services sector – which includes hotels, bars, restaurants, travel and leisure firms – fell for the third consecutive quarter.

Business volumes also deteriorated across the services sector in the quarter to May. Business and professional services saw business volumes fall at the sharpest pace since August 2012, with volumes set to decline further in the three months to August. Meanwhile, consumer services firms saw business volumes fall for the third consecutive quarter, but with volumes anticipated to grow slightly in the quarter to August.

Meanwhile, cost pressures edged higher in both sub-sectors. Selling prices grew at a steady pace in business and professional services, while price inflation slowed in consumer services.

Against this backdrop, business & professional services firms reported that profitability plummeted – at the fastest pace since November 2011 – while consumer services reported the fifth consecutive quarter of heavily falling profits. Profitability is expected to decline in both sub-sectors over the quarter to August, albeit at slightly slower paces. Across the economy as a whole, stockbuilding is likely to have supported economic growth in early 2019. However, business surveys suggest that underlying conditions remain more subdued, as Brexit uncertainty and slower global growth bite further on activity. For more detail on our view of the outlook, see our economic forecast.

Anna Leach, CBI Deputy Chief Economist, said:

“Brexit paralysis continues to take a toll on the UK’s services firms. Profits, optimism and investment spending are falling sharply amidst a torrid operating environment.

“Politicians have wasted six critical weeks, allowing uncertainty to tighten its stranglehold on the British economy. Business and the country need Westminster to rule out No Deal, and deliver an urgent resolution to the Brexit mess.”

Key findings

Business and professional services:

• Optimism regarding the general business situation fell (-8%) in the quarter to May, but at a slower pace than in the previous quarter (-34%)
• Business volumes fell (-19%, down from -12% in February) at the fastest pace since August 2012 (-21%)
• Profits also fell sharply (-24%), at the quickest pace since November 2011 (-29%). Profitability is expected to decline at a slower pace over the next quarter (-13%)
• Growth in total costs per person edged higher (+39% from +33% in February), remaining above average (+28%). Cost growth is expected to be broadly steady next quarter (+41%)
• Growth in average selling prices was stable (+4%), and is expected to remain so in the three months to August (+4%)
• Numbers employed (+10%) grew after headcount was stable in the quarter to February (-1%), and employment growth is set to edge higher next quarter (+15%)
• Investment intentions were markedly subdued: firms expect to cut back spending on land and buildings sharply in the year ahead (-19% - the weakest balance since August 2010 (-22%)). They expect to modestly increase spending on vehicles, plant and machinery (+4%) and on IT (+6%), although the latter is the weakest level since May 2013 (+6%)
• Firms remain extremely negative about the outlook for expanding their business over the year ahead (-20%).

Consumer services:

• Optimism about the general business situation continued to deteriorate in the quarter to May (-12%), but at a slower pace than in the quarter to February (-28%)
• Business volumes fell (-7%) at a similar pace to the previous quarter (-5%). Volumes growth is expected to recover somewhat in the three months to August (+5%)
• Profitability fell for the fifth consecutive quarter (-25%) and at a similar pace to the previous quarter (-26%), and is expected to fall again next quarter (-15%)
• Growth in total costs per person picked up (+56% from +46% in February), remaining above the long-run average (+37%). Cost growth is expected to ease slightly in the quarter to August (+51%).
• Average selling price growth eased (+9%) on the previous quarter (+21%), to below the long-run average (+14%). Selling price inflation is expected to pick up next quarter (+15%).
• Employment returned to growth (+17%) after dipping in February (-6%). Solid growth in headcount is expected next quarter (+25%)
• Investment in IT is set to increase in the year ahead (+15%). However, firms expect to cut back on spending on land and buildings (-19% – the weakest balance since August 2013 (-24%)) – and on vehicles, plant and machinery (-25% – the weakest balance since August 2012 (-32%))
• Firms remain extremely negative about the outlook for expanding their business in the year ahead (-31%).