Service sector optimism suffers - latest quarterly survey

Sentiment deteriorated at a faster pace in consumer services compared with the previous quarter, while business and professional services saw optimism fall, after a brief period of improvement in the quarter to August.

Volumes continued to fall in both sub sectors, though more slowly than in the previous quarter. The survey of 229 survey respondents - carried out between 28 October and 15 November – suggests that the outlook for the next quarter remains challenging, with volumes anticipated to decline at a slightly quicker pace.

Profitability continued to fall, although the rate of the decline eased compared with the previous two quarters. Next quarter, both sub-sectors expect to see a quicker decline in profitability.

While employment dropped at a slower pace across the service sector as a whole, consumer services still witnessed the second sharpest fall on record. Headcount is tipped to continue falling over the next three months, albeit at a slower pace.

Investment intentions remain subdued across both sub sectors, with firms expected to cut back or keep spending the same on all areas of capital expenditure. Demand uncertainty remains the key factor weighing on investment decisions.

Ben Jones, CBI Principal Economist, said:

"Unsurprisingly, sentiment waned across the services sector as COVID’s second wave crashed on UK shores. The worrying fall in service sector volumes, profitability and employment continues.

"The impact has been more pronounced in consumer services, which have been hit the hardest by shifts in consumer behaviour, social distancing rules and the Autumn lockdowns. But many business-facing services are also struggling from weaker demand, from recruiters and building managers to advertising firms, accountants and lawyers.

"Extending the job retention scheme into next Spring has provided firms with some certainty amid the crisis. For many services businesses, the looming end of the transition period with the EU represents a double blow, posing another significant challenge to firms’ resilience.

"Data adequacy, which lies outside a potential Free Trade Agreement, urgently needs securing to prevent money being poured into amending contracts unnecessarily, which would be unaffordable for many smaller firms."

Key findings
Figures are balance statistics unless otherwise stated.

Business and professional services

• Sentiment about the general business situation deteriorated (-21% in the three months to November from +9% in the three months to August)
• Business volumes fell again in the three months to November, though more slowly than previous quarter (-21% from -32% in the quarter to August). Volumes are set to fall at a slightly faster pace next quarter (-25%)
• Costs were unchanged (+3%) after falling at the sharpest pace in survey history (-30%) in the three months to August, with expectations for costs to grow slightly next quarter (+7%).
• Average selling prices continued to fall, albeit at a slower rate (-5% from -17%), with expectations for a similar decline next quarter (-8%)
• Profitability fell at a slower pace in the three months to November compared with the previous quarter (-23% from -46% in the three months to August), with the decline in profitability expected to accelerate slightly over the next three months (-29%)
• Employment fell, though the pace of decline eased (-19% from -32%). Headcount over the quarter ahead also expected to fall, but at a slower pace (-6%)
• Firms expect to cut back on investment in land & buildings (-32%) and vehicles and plant & machinery (-23%). IT and training investment is set to be broadly unchanged (+3% and -2% respectively).
• Uncertainty about demand (+70%, highest since financial crisis) was the most important factor weighing on investment.

Consumer services

• Optimism about the general business situation deteriorated at a quicker pace than in the three months to August (-34% from -20%)
• Business volumes declined at a slower pace in the three months to November, compared to the previous quarter (-42% from -64%), with the pace of decline set to be slighter faster next quarter (-46%)
• Costs ticked up slightly in the three months to November (+6% from +3%) with expectations for cost growth to accelerate next quarter (+18%)
• Average selling prices declined at a slightly slower pace than the previous quarter (-22% from -27%), with a faster decline expected over the next three months (-32%)
• Profitability continued to fall, though more slowly than in the three months to August (-53% from -81%) and profits are expected fall further next quarter, at a quicker rate (-68%)
• Employment fell at the second fastest rate on record in the three months to November (-56% from -63%), with headcount set to decline at a slower pace next quarter (-48%)
• Consumer services firms expect to cut back on spending on land and buildings (-35%), vehicles, plant and machinery (-48%) and training (-31%), while spending on IT is set to remain broadly the same (-1%),
• Uncertainty about demand (+57%) remained, by far, the biggest factor weighing on investment, followed by inadequate net return (+34%).