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Firms’ investment in technology to improve productivity reaches record high

Business volumes in the services sector continued to improve in the three months to November, but at a slower pace than seen in the previous quarter, according to the CBI’s latest Service Sector Survey.

Business volumes and values in consumer services – which includes hotels, bars, restaurants, travel and leisure firms – saw steady and strong growth, in line with recent quarters.

But while business values and volumes in business & professional services – which includes accountancy, legal and marketing firms – continued to expand, they did so at the slowest pace since 2013.

The survey of 173 firms showed that profit growth slowed in both sub-sectors, but that underlying conditions were more mixed. While cost pressures eased in business & professional services, in consumer services costs per person rose at the fastest pace in eight years, partly reflecting the continuing strong expansion of headcount and training expenditure.

Optimism about the business situation has improved over the last three months, and business volumes and profitability are expected to continue expanding at an above-average pace during the three months to February.

Hiring and investment plans also remain solid. Companies are increasingly investing to improve their efficiency and exploit new technology, with the share of companies citing this motive rising to a record high in the consumer services sector, and to a three-year high in business & professional services.

Rain Newton-Smith, CBI Director of Economics, said:

“The UK services sector’s good run continues, and it’s encouraging that business volumes are expanding across the board, and that companies still expect healthy growth in profits.

“Employment growth is expected to slow a little in the quarter ahead, and given concerns over a lack of skilled workers – remaining close to a seven year high in business and professional services – companies are increasingly looking to invest in new technologies that could raise their productivity.”

Key findings:

Consumer Services

• 40% of firms reported a rise in business volumes, compared with 9% saying they were down in the last quarter, giving a balance of +31%. Volumes growth is expected to ease slightly in the coming three months (+24%). Growth in business values also remained steady (a balance of +29%, compared with +30% in August)
• 29% of companies said they were more optimistic regarding the business situation than three months ago, compared with 3% saying they were less optimistic, giving a rounded balance of +27% (down from +37% in August)
• 36% of firms said the overall profitability of business was up on the previous quarter, and 20% said it was down, giving a balance of +16%. A similar improvement is expected in the coming three months (+18%).
• 45% of businesses said numbers employed were up on three months ago, and 3% said they were down, giving a rounded balance of +41%. A balance of +16% expect numbers employed to go up in the next quarter
• Investment intentions in the year ahead are robust, with a balance of +20% of firms intending to increase investment in land and buildings, and +27% in information technology. Investment intentions for vehicles, plant & machinery eased very slightly to +11% (from +14% in August)
• 60% of firms gave increasing efficiency/speed/need to exploit new technology as a reason for expected capital expenditure over the next 12 months. This was a survey record high.

Business and Professional Services

• Business volumes continued to expand, with 30% of firms reporting they were up compared with the previous quarter, and 18% saying they were down, giving a rounded balance of +13%. This was the lowest since November 2013 (+13%). More robust growth is expected next quarter (+24%)
• Optimism about the business situation improved at a slower pace (+15%, compared with +32% in August), as 26% of firms said they were more optimistic than three months ago, whilst 11% said they were less optimistic
• 31% of businesses said numbers employed were up on three months ago, and 7% said they were down, giving a rounded balance of +23%. Employment growth is expected to expand at a similar pace next quarter (+26%)
• 64% of firms gave increasing efficiency/speed/need to exploit new technology as a reason for expected capital expenditure over the next 12 months. This was the highest level since November 2012 (+66%).