Services sector sees strong growth at start to year - CBI

Business volumes in the services sector grew strongly in the three months to February, with both sub-sectors seeing a rise in profits for the first time since November 2015, according to the latest quarterly CBI Services Sector Survey.

Business and professional services firms – which include accountancy, legal and marketing firms – saw business volumes grow at the fastest pace since August 2015, and growth is set to accelerate further in the three months to May. Meanwhile, after a sharp decline in the previous quarter, volumes grew at the fastest pace in a year in the consumer services sector – which includes hotels, bars, restaurants, travel and leisure firms. Consumer services growth is expected to ease next quarter but nonetheless remain firm.

Other indicators also painted a healthier picture of the sector as a whole. Profitability grew for the first time since November 2015 in both sub-sectors, with expectations of similar growth in the coming quarter. Employment continued to grow in business and professional services, while growth in headcount picked up in the consumer services sector.

Prices continued to rise in consumer services but were flat in business and professional services. Next quarter, price growth is expected to accelerate in both sub-sectors.

Sentiment in the services sector remains mixed, with business and professional services firms’ optimism remaining unchanged from three months earlier, but optimism about the general business situation improved for consumer services companies. These firms are also more optimistic about their plans for business expansion in the year ahead (the strongest since November 2014), whilst business and professional services firms are more negative in their views.

Looking at growth in the economy more broadly, momentum was tepid for most of last year. We expected similarly subdued growth to persist further ahead – for more detail, see our latest economic forecast.

Rain Newton-Smith, CBI Chief Economist, said:

“It’s great to see the services sector start the year off on a firm footing. Despite feeling the pinch from high inflation, business volumes have bloomed, profits have grown for the first time in over two years and hiring is on the up.

“But there are still some telling signs that the underlying challenges for business, professional and consumer services firms have not gone away. Investment plans are muted amid uncertainty, and plans for expansion among business & professional services firms have turned downwards.

“Up and down the country, businesses are plainly worried at the lack of clarity over the UK’s future relationship with its biggest trading partner, the EU. Belonging to a comprehensive customs union would go a long way to allaying these concerns, thus alleviating some of the uncertainty weighing on investment and expansion plans.”

Meanwhile, investment intentions for the year ahead remain positive for IT, improving a little in this area for business & professional services firms. However, spending in other areas is set to be cut back slightly or left unchanged.

Key findings

Business and professional services:

• Optimism regarding the general business situation was unchanged in February (-1%, from +5% in November 2017). However, firms have become more negative about the outlook for business expansion in the year ahead (-9%, down from +16% in November)
• Growth in business volumes (+14%) accelerated, with volumes rising at the fastest pace since August 2015 (+33%), up from +1% in November. Growth is expected to strengthen further in the three months to May (+23%)
• Profits grew slightly (+8%) for the first time since November 2015 (+15%), and growth is expected to edge higher next quarter (+11%)
• Growth in total costs per person edged higher (+33% from +29% in November), and costs are expected to grow at a faster pace next quarter (+43%)
• Average selling prices were relatively unchanged (+3%), the weakest balance since May 2016 (-6%). However, price growth is expected to pick up in the three months to May (+17%)
• Numbers employed (+14%) grew at a steady pace, and are expected to grow at a slightly faster rate next quarter (+22%)
• Investment intentions are mixed – firms expect to cut back slightly on land and buildings (-4%) and keep spending on vehicles, plant and machinery unchanged (+2%). Meanwhile, investment on IT is expected to increase solidly (+20%).

Consumer services:

• Optimism about the general business situation rebounded (+8%) – rising for the first time in three quarters – with 25% of firms saying they were more optimistic than three months ago, and 17% saying they were less optimistic
• Growth in business volumes (+32%) bounced back from the previous quarter’s decline (-20%), but is expected to ease in the three months to May (+22%)
• Profitability increased (+14%) at the fastest pace since November 2015 (+16%), and is expected to grow at a similar pace next quarter (+13%)
• Growth in total costs per person rose (+43%) at a similar pace to November (+44%), and at a pace slightly above the long-run average (+37%). Growth is expected to remain steady in the three months to May (+42%)
• Average selling price growth eased (+17%) from the previous quarter (+35%). But, growth is expected to pick up next quarter (+28%)
• Employment grew strongly (+34%), after a fall in the previous quarter (-7%), with another firm rise expected next quarter (+31%)
• Investment intentions in IT remain positive (+18%). However, firms expect to cut back on spending on vehicles, plant and machinery (-9%) and to leave investment in land and buildings unchanged (-2%).

Notes to Editors:

The Service Sector Survey was conducted between 30^th January and 16^th February 2018. 102 Business and Professional Service firms and 56 Consumer Service firms replied.

A ‘balance’ is the difference between the weighted percentage of firms answering that output is “up” and the percentage answering “down” (for example, if 30% of firms say that output is up, 60% that it is unchanged, and 10% that it is down, the balance statistic is +20%).