CBI: Optimism flat despite resilient service sector

26 May 2016 10:25 AM

Services sector companies appear more cautious than at any time in the last three years, according to the CBI’s latest quarterly Service Sector Survey.

Business and professional services firms were slightly less optimistic about the general business situation over the three months to May compared with the previous quarter, while in consumer services companies’ optimism improved at the slowest pace since 2013. Yet despite this, the survey of 175 firms suggests that employment growth, training expectations and investment intentions remain robust.    

Business and professional services firms – which includes accountancy, legal and marketing firms – reported a slight uptick in business volumes growth over the last quarter, allowing profitability to stabilise after a sharp fall in the previous quarter. However, the consumer services sector – which includes hotels, bars, restaurants, travel and leisure – saw business volumes growth slow, which combined with rapid increases in costs, caused profitability to decline for the first time since 2013.

Looking ahead, volumes are expected to expand moderately in both sub-sectors over the quarter to August, with profitability expected to be flat in consumer services and improve slightly in business & professional services.

Employment in both sectors continued to increase at a strong pace in the three months to May and job numbers are expected to rise further next quarter. Firms have become slightly less concerned that labour shortages might limit business expansion over the year ahead. And across the services sector businesses have raised spending on training, with even stronger growth expected over the quarter to August.

Investment intentions remain solid across the services sector, with the strongest growth expected on investment in IT. Expected expenditure on vehicles, plant and machinery also picked up significantly over the last three months.

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

“Business conditions and demand seem to be holding up reasonably well for the services sector, although many consumer firms are feeling the pinch from rising costs. Encouragingly, employment growth remains steady and services firms have signalled they will continue to keep investing in new technologies and skills.

“Despite this, companies are sounding the warning bell as they get to grips with increasing uncertainty, including around the outcome of the EU referendum, the fallout from financial market volatility earlier this year, more downbeat global growth, and a lack of clarity on how apprenticeship levy will work in practice.”

Key findings:

Business and Professional Services

• 22% of companies said they were more optimistic regarding the business situation, compared with 27% saying they were less optimistic, giving a balance of -5% – the lowest since August 2012 (-11%).
• 36% of firms reported a rise in business volumes, compared with 23% saying they were down in the last three months, giving a rounded balance of +12%. Business values also expanded (balance of +15%).
• 26% of firms said the overall profitability of business was up on the previous quarter, and 24% said it was down, giving a balance of +2%. This followed a sharp decline of -20% in the last quarter. Profitability is expected to improve in the three months to August (balance of +14%).
• Average selling prices have continued to fall over the last three months, with a balance of -6%. Prices are expected to decline at the same pace in the next three months (-6%).
• 34% of businesses said numbers employed were up on three months ago, and 8% said they were down, giving a balance of +26% (compared with +20% in February). A balance of +32% expect numbers employed to go up in the next quarter, the highest since February 2015. 
• Businesses citing uncertainty about demand/sales as a factor limiting capital expenditure is at its highest level since November 2013 (balance of +54%) and is up slightly from the February survey (balance of +52%).
• Investment intentions for the year ahead are strong, with firms intending to increase investment in all categories: land and buildings (balance of +12%); vehicles, plant and machinery (+14%); and IT, which is predicted to grow at the fastest pace since November 2006 (balance of +43%).

Consumer Services

• Optimism about the business situation has improved at a more moderate pace (a balance of +9%, compared with +15% in February), as 25% of firms said they were more optimistic than three months ago, whilst 16% said they were less optimistic.  This was the lowest balance since February 2013. 
• 33% of firms reported a rise in business volumes, compared with 24% saying they were down in the last three months, giving a balance of +9%. Growth in business values also eased (balance of +13%).
• Profitability declined in the quarter to May (-9%), the first fall since August 2013. This likely reflects slower growth in business volumes as well as the fastest increase in costs per person employed since August 2008 (balance of +58%).
• Average selling prices rose over the quarter to May (+17%) and are expected to rise at a similar pace in the three months to August (+15%).
• Growth in capital expenditure is expected to slow over the next 12 months on land and buildings (balance of +12% in May, compared with +33% in February) and IT (+38% in May, down from +46% in February), but in both cases expectations remain strong from a long-term perspective. Meanwhile, expenditure on vehicles, plant and machinery is expected to accelerate (balance of +18% in May, up from +9% in February).
• Businesses cited inadequate net returns as the most important factor limiting capital expenditure (38% of firms), with the share citing uncertainty about demand/sales falling slightly (to 35%, from 41% in February).
• 40% of businesses said numbers employed were up on three months ago, and 15% said they were down, giving a rounded balance of +26% (+23% in February). Employment growth is expected to accelerate next quarter (balance of +35%).