Growth slows in service sector but firms remain upbeat

26 Aug 2014 10:43 AM

Strong employment growth in business and professional services sector 

The pace of the recovery in the service sector slowed somewhat in the three months to August, but optimism continued to increase, according to the latest CBI Services Sector Survey. Furthermore, there are expectations for a return to growth in the coming quarter.

Growth in business volumes eased compared with recent quarters, and profitability also rose at a slower pace, but this came after multi-year highs in the previous quarter.

Other indicators in the survey painted a healthier picture of activity in the sector. Growth in numbers employed in the business and professional services sector – which includes accountancy, legal and marketing firms – reached its highest rate in nearly seven years, with expectations for the coming three months at a record high since the survey began in 1998. Investment intentions for the year ahead in the consumer services sector – which includes hotels, bars, restaurants, travel and leisure firms – are particularly robust, with plans for spending on vehicles, plant and machinery also at a record high.

However, the survey of 215 firms revealed there is increased concern that the availability of professional and clerical or other staff is likely to limit business expansion over the next year.

Katja Hall, CBI Deputy Director-General, said:

“The slowing in the pace of growth and profits in the service sector reflects our view that momentum in the economy will ease in the second half of the year.

“But this doesn’t necessarily mean a gear change in the recovery. It’s encouraging that our service sector firms continue to feel upbeat, especially when looking ahead to the next quarter.

“Employing more staff and planning to increase investment are positive steps in the quest for sustainable growth. However, skills shortages mean it is increasingly hard for firms to find and hire the right people. It’s important that business and government address this issue together, to put the economy of the future on the right footing.”

Key findings:

Consumer Services

• Optimism regarding the business situation rose strongly (a rounded balance of +43%), with 48% of firms saying they were more optimistic than three months ago, and 4% saying they were less optimistic
• 43% of firms said business volumes were up compared with three months ago, and 17% said they were down, giving a balance of +25%. Whilst remaining well above average (-1%), this was the slowest pace of growth in a year, since August 2013 (+15%). More robust growth is expected next quarter (+39%)
• 17% of businesses said numbers employed were up on three months ago, 12% said they were down, giving a balance of +5%. A balance of +12% expect numbers employed to go up in the next quarter
• Investment intentions in the year ahead are robust, with a balance of +16% of firms intending to increase investment in land and buildings, the highest since 2010 (+40%), and +29% in vehicles, plant & machinery, a survey record high (since November 1998)
• 47% of firms expect the rate of business expansion to increase in the year ahead, whilst 52% do not, giving a balance of -5%. The availability of professional and clerical/other staff are cited as factors likely to limit expansion (by 12% and 7% of firms respectively, up from 7% and 1% in the previous survey).

Business and Professional Services

• Optimism about the business situation rose (+31%), as 44% of firms said they were more optimistic than three months ago, whilst 13% said they were less optimistic.
• Business volumes expanded for a fifth consecutive quarter, with 33% of firms reporting they were up compared with the previous quarter, and 17% saying they were down, giving a balance of +16%. This was as expected three months ago (+17%). More robust growth is expected next quarter (+34%)
• With 44% of businesses saying numbers employed were up on three months ago, and 11% saying they were down, employment grew at its fastest pace since November 2007 (+33%). Expectations for employment growth in the next quarter reached a record high of +46% (since November 1998)
• 63% of firms expect the rate of business expansion to increase in the year ahead, and 36% do not, giving a balance of +27%, the lowest since May 2013 (+14%), but well above the average of +3%. The availability of professional staff is cited as a factor likely to limit expansion in the year ahead by 45% of firms, the most since May 2008.

The Service Sector Survey was conducted between 25^th July and 13^th August 2014. 136 Business and Professional Service firms and 79 Consumer Service firms replied