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Demand in the services sector weakened in the three months to November, as consumer services saw business volumes fall at the fastest pace since February 2012, according to the CBI’s latest quarterly Service Sector Survey.

Business and professional services firms – which include accountancy, legal and marketing firms – reported that business volumes were stable, but volumes are expected to fall slightly in the three months to February. Meanwhile, after a disappointing performance in the quarter to November, consumer services companies – which include hotels, bars, restaurants, travel and leisure – expect volumes to edge up slightly in the three months to February. 

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Cost pressures eased across the services sector in the three months to November, but remained strong compared with long-run averages. Consumer services firms raised their selling prices at the fastest pace since May 2008, but with volumes falling, profitability declined for the seventh straight quarter. Prices increased at a steady pace in business and professional services, with profitability remaining flat for the fourth consecutive quarter.

Sentiment in the services sector remains mixed. Optimism among business and professional services firms improved slightly compared with three months earlier, and a majority of firms expect to expand their business over the year ahead. However, consumer services firms have become more pessimistic over the last three months, with the prospects for business expansion in the year ahead also deteriorating.

Anna Leach, CBI Head of Economic Intelligence, said:

“It’s no surprise that consumer services firms are having a tough time, as people feel the pinch in their pockets from higher inflation. While weaker demand appears to have hit employment in consumer services last quarter, firms are looking to resume hiring next quarter as demand stabilises.

“Conditions for business and professional services also remain tough, and signs that firms are pulling back on their investment plans for the year ahead are concerning. Now is the time for the Government to make significant progress in the EU negotiations and agree transitional arrangements by the end of the year.”

Employment trends were mixed over the last quarter. Within consumer services, numbers employed fell at the fastest pace since August 2012, but with demand expected to stabilise next quarter, employment is expected to increase. The pace of hiring among business and professional services firms eased over the last three months, against expectations of acceleration, with employment growth expected to slow a little further next quarter. 

Investment intentions have weakened a little across the services sector. In particular, spending on IT by business and professional services over the year ahead is predicted to increase at the slowest pace since May 2013, with other forms of capital spending expected to be largely stable. Investment in IT in consumer services firms is expected to hold up better, but similarly spending in other areas is predicted to remain stable.

Key findings:

Business and professional services

• Optimism about the business situation increased slightly (+5%)
• Growth in business volumes slowed (+1%, from +8% last quarter), with 19% of firms reporting volumes were up compared with the previous quarter, and 18% saying they were down. Volumes are expected to fall slightly over the coming quarter (-6%)
• Average selling prices increased at a similar to the previous quarter (+8%, from +9%)
• Growth in total costs per person slowed (+29%), but is expected to edge up slightly over the next quarter (+33%)
• 21% of firms said the overall profitability of business was up on the previous quarter, and 23% said it was down, giving a balance of -2%
• 24% of businesses said numbers employed were up on three months ago, and 9% said they were down, giving a rounded balance of +16%
• Investment intentions for the year ahead were broadly flat for land and buildings (+4%) and vehicles, plant and machinery (0%), with planned IT spending expected to increase more slowly than was the case last quarter (+9%, down from +25% in August)
• 58% of firms said they expected to expand their business over the year ahead, and 42% said they did not, giving a balance of +16%.

Consumer services

• Optimism about the business situation deteriorated for a second quarter (-21% - the lowest balance since November 2011 (-23%)) – 11% of firms said they were more optimistic than three months ago, whilst 32% said they were less optimistic
• 9% of firms reported a rise in business volumes, compared with 29% saying they were down in the last three months, giving a balance of -20% (down from +9% last quarter and the weakest growth since February 2013). Volumes are expected to increase slightly over the next three months (+5%)
• Growth in average selling prices accelerated over the last three months (+35%, up from +7% in the previous quarter and the highest since May 2008)
• Growth in total costs per person slowed (+44%, from 63% last quarter), but is expected to pick up again over the next quarter (+55%)
• Profitability declined in November (-30%) and at the fastest rate since November 2011 (-31%). Profitability is expected to deteriorate less sharply next quarter (-18%)
• Numbers employed fell modestly (-7%, the first fall since August 2013), but headcount is expected to grow again over the next three months (+34%)
• Capital expenditure is expected to be fairly steady for land and buildings (-2%), and vehicles, plant and machinery (+1%), with IT investment expected to grow at a solid pace (+25%)
• Uncertainty about demand and sales was cited as the main factor likely to limit capital expenditure (by 52% of respondents)
• 39% of firms said they expected to expand their business, and 60% said they did not, giving a balance of -21%. The principle factor cited as likely to limit the level of business was the level of demand/sales (81% of respondents), while the proportion concerned that domestic competition could limit the level of business was at a survey high (70%).