WIREDGOV

Headcount increased across the services sector in the three months to May, rising at the fastest rate pace in two years, according to the CBI’s latest quarterly Service Sector Survey. Employment is expected to increase further in the quarter ahead.  

Meanwhile, costs per person employed continued to grow at an above-average pace over the past quarter. And with average selling price inflation slowing to its weakest in three years, services firms reported a further decline in profitability. 

Business sentiment within the service sector was mixed. Optimism among business & professional services firms improved at the fastest rate for two-and-half years, as business volumes rose marginally following two consecutive months of decline. In contrast, optimism among consumer services firms declined, albeit more slowly than the previous quarter. Consumer services firms reported that business volumes fell again during the three months to May, having failed to register any increase for over two years. As a result, business volumes across the services sector as a whole were stable in the three months to May.  

Looking ahead, total business volumes are expected rise only modestly in the three months to August, as a further decline in consumer services is offset by a slight pick-up in business & professional services. With demand generally still subdued, services firms are being selective about their investment plans. Across the sector, firms expect to increase spending on training in the quarter ahead. And growth in IT investment is expected to accelerate across the board in the year ahead. However, firms plan to cut back or freeze capital expenditure in other areas.  

Ben Jones, CBI Lead Economist, said:  

“Demand across the services sector remains fairly subdued, but conditions are expected to become a little brighter through the summer. And services firms appear to have become more positive about their hiring and investment plans.  

“With businesses still facing significant cost pressures and a continued squeeze on profitability, there are strong incentives for focusing investment spending on training and new technology to drive efficiency gains.  

“Following the General Election in July, firms will be looking to the new Government for measures that give them confidence to invest in new technology. This could include expanding the Made Smarter programme to all sectors of the economy, giving businesses the support, advice and funding they need to grow.”

The survey, based on the responses of 300 services firms, found that: 

Business & Professional Services  

• Optimism about the general business situation improved, and at the fastest pace for two and a half years (balance of +12%, from +4% in Feb).
• Business volumes edged up in the three months to May, following two consecutive months of decline (balance of +4%, from -19% in Apr), with growth expected to accelerate over the quarter ahead (+10%).
• Cost pressures remained strong in the quarter to May (balance of +45%, from +45% in Feb). Although growth in costs per person has slowed over the past year, it remains historically strong. Cost growth is set to accelerate slightly next quarter (+50%).
• Average selling prices continue to rise modestly for the third consecutive quarter (balance of +9%, from +8% Feb) having slowed sharply compared with the previous couple of years. Firms expect prices to increase at a similar pace next quarter (+11%).
• Employment returned to growth (balance of +17%, from -2% in Apr) for the first time since October 2023 (+4%), with headcount rising at the fastest pace since August 2022 (+26%). Headcount is expected to rise at a more moderate pace in the quarter ahead (+13%).

Consumer services 

• Optimism about the general business situation deteriorated for a third quarter running (balance of -11%, from -24% in Feb).
• Business volumes declined in the quarter to May (balance of -23%, from -30% in Apr), continuing the trend seen through much of the previous two years. However, firms expect the decline in volumes to ease significantly next quarter (-5%).
• Costs continued to rise at a robust pace in the three months to May (balance of +51%, from Feb +55%), marking three years of above average growth. Firms expect costs growth to accelerate slightly next quarter (+59%).
• Average selling price inflation slowed to its weakest in three years in the quarter to May (balance of +11%, from +8% in Feb), falling below the long run average (+14%). Nevertheless, average selling price growth is expected to pick up moderately next quarter (+23%).
• Employment growth accelerated in the three months to May (balance of +18%, from +9% Apr), with headcount rising at the strongest pace for almost two years. Numbers employed are expected to grow at a similar pace in the next three months (+19%).