WIREDGOV

Business sentiment and activity across the service sector continued to fall in the quarter to February, albeit at a slower pace, according to the CBI’s latest Service Sector Survey.

In addition, with cost pressures continuing to grow for the twenty-second consecutive quarter, and selling price inflation remaining modest, profitability continued to drop. This extended a period of declining profitability that began in February 2022. As a result, employment continued to contract. The same story was apparent in both the business & professional service and consumer service sub-sectors.

Looking ahead to next quarter, consumer services are set to see a similar sharp drop in volumes, while business and professional services expect to see volumes grow following fifteen consecutive months of negative expectations.

Despite selling price inflation being tipped to accelerate in the quarter to May, it is still expected to be outpaced by persistently strong cost growth. Consequently, profitability is set to fall, and headcount is expected to be reduced further, especially amongst consumer service firms.

With demand conditions remaining challenging, service sector firms continue to show caution around their investment plans for the year ahead. Consumer service firms expect to cut back capital expenditure in all investment categories. Business & professional service firms expect to reduce investment into tangible assets but increase IT investment for the first time since February 2025. Uncertainty about demand is the main limitation to capital spending across the service sector, while inadequate net return also remains a key limiting factor.

Charlotte Dendy, Economic Surveys & Data Manager, CBI, said:

“Despite some pockets of improvement, our latest survey indicates that conditions across the service sector remain challenging. Cost pressures continue to outpace selling price inflation, while demand remains subdued. This has squeezed profit margins and prompted firms to scale back headcounts.

“Looking ahead, prospects for the business and professional services sub-sector appear somewhat brighter. However, with little sign of improvement in consumer services, overall momentum is likely to remain weak – weighing on investment and employment prospects.

“The Chancellor must use the Spring Forecast to build growth mission momentum. Service sector firms want to see the government continuing to find appropriate landing zones on the Employment Rights Act and accelerating cuts to the regulatory burden – both critical to tacking the high cost of doing business.”

The survey based on the responses of 351 services firms found that:

Business & Professional Services

• Optimism about the general business situation was broadly unchanged in the three months to February, marking the end of five consecutive quarters of deteriorating confidence (-3% from -50% in November).
• Volume of business continued to decline in the quarter to February, but at a slower pace than in the quarter to January (-8% from -33% in January) and at the slowest pace since November 2024. Volumes are expected to grow slightly in the quarter ahead (+4%), the most positive expectations since October 2024.
• Growth in costs per person employed remained elevated in the three months to February. Although growth has slowed compared to the three months to November (+43% from +58% in November), it remained above the long-run average (+31%). In the quarter ahead, cost growth is expected to accelerate and remain elevated (+54%).
• Profitability declined (-28%) for the seventeenth consecutive quarter, albeit at the slowest pace since Q3 2024 (-4%). Overall, profitability is expected to continue falling in the quarter ahead but at a slightly slower pace (-24%).
• Average selling prices grew gradually in the three months to February (+6% from 0% in November), and growth is expected to accelerate in the next quarter (+19%).
• Employment continued contracting in the three months to February, albeit at a slower pace than in the three months to January (-15% from -26% in January) and at the slowest pace since May 2025 (-2%). Headcount is expected to fall at a broadly unchanged pace in the quarter to come (-14%).
• Uncertainty about demand was the most cited factor limiting capital expenditure (cited by 55% of respondents). This was followed by inadequate net returns (33%), a shortage of internal finance (23%), and the cost of finance (21%).
• Firms anticipate cutbacks in investment into both land & buildings (-9% from -24% in November) and vehicles, plant & machinery (-17% from -23% in November). Meanwhile, IT investment is expected to pick up (+17% from -5% in November), the most positive expectations in a year.

Consumer Services

• General optimism continued to deteriorate sharply for the eleventh consecutive quarter, and at a broadly unchanged pace compared to the quarter to November (-45% from -47% in November).
• Business volumes declined further in the three months to February, albeit at a slower pace than in the three months to January (-37% from -50% in January). This extends a period of flat or falling volumes that began in March 2022. In the next three months, volumes are expected to continue declining at a broadly unchanged pace (-35%).
• Total costs per person employed continued rising in the quarter to February, but at a slower pace than in the quarter to November (+46% from +66% in November). Cost growth remains above the long-run average (+40%), and expectations are for cost pressures to rise again in the next three months (+60%).
• Overall profitability fell again sharply in the quarter to February (-49% from -49% in November), at the joint fastest pace since May 2023. Profitability is expected to continue declining in the quarter ahead, and at an unchanged pace (-49%).
• Average selling price growth picked up in the three months to February, after being broadly flat in the three months to November (+9% from +1% in November). This is the nineteenth consecutive quarter of flat or growing selling prices. In the three months to come, selling prices are expected to grow further and at a faster pace (+28%).
• Headcount continued to fall for the twenty-first consecutive month, albeit at a slower pace than in January (-32% from -39% in January). In the three months to May, employment is expected to continue declining sharply (-36%).
• Uncertainty about demand remained the most cited factor limiting investment (cited by 58% of respondents). This was followed by inadequate net returns (43%) and a shortage of internal finance (28%).
• Firms are expecting to cut back capital expenditure in all investment categories: land & buildings (-16% from -32% in November), vehicles, plant & machinery (-31% from -29% in November), and IT (-7% from -1% in November).