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Service sector continues its recovery in the quarter to November, but costs see record growth – CBI

Optimism improved for firms across the service sector in the three months to November, according to the latest Service Sector Survey from the CBI – however cost growth in both sub-sectors continued to pick up, growing at the fastest pace since survey records began in 1998.

For business and professional services firms, sentiment about the business situation continued to improve in the quarter to November, albeit at a slower pace than in the preceding three months. Sentiment among consumer services companies improved markedly last quarter, following a deterioration in the three months to August.

Business volumes continued to grow at a strong pace across the service sector in the three months to November. However, there are signs of slowing growth, as business and professional services firms expect volumes growth to ease next quarter – while expectations within consumer services are for volumes to be unchanged.

Cost pressures are building with both consumer services and business and professional services seeing costs grow at the fastest pace in survey history – with firms in both sectors anticipating the pace to pick up even further next quarter, also the strongest expectations on record. As a result, selling price growth accelerated too, with expectations for significantly faster growth in the coming quarter for both sub-sectors.

Despite elevated cost pressures, profitability grew in both business and professional and consumer services, with the strongest growth since February 2018 for the latter. With strong price and cost growth expected to persist into the next quarter, expectations in both consumer services and business and professional services are for profits growth to stall in the three months to February.

Employment growth within business and professional services picked up in the three months to November, recording the fastest growth in more than six years. This pace of growth is expected to continue into next quarter. Consumer services also saw employment return to growth in the three months to November, following unchanged headcount in the previous quarter. This too is expected to continue at a similar rate in the three months to February.

Firms’ investment prospects have strengthened, as services firms expect to ramp up their spending plans over the next 12 months, particularly on IT. Respondents from the business and professional services sector reported the strongest investment intentions for vehicles, plant and machinery investment since 2016, and the for IT in more than 20 years. Consumer services firms expect to increase spending on land and buildings, as well as vehicles, plant and machinery – both the strongest expectations since 2017. Capital expenditure on IT is also tipped to remain strong for consumer services.

Charlotte Dendy, CBI Head of Economic Surveys and Data, yesterday said:

“The service sector continued to report a strong recovery in the three months to November, with volumes, profits and employment all showing solid growth.

“However, record growth in costs is threatening to put a winter freeze on the service sector recovery next quarter. With firms’ cost growth expectations the strongest in survey history in both sub-sectors, businesses expect services profits growth to stall in the coming quarter.

“With Covid still a concern, with impacts for consumer confidence together with cost and supply chain issues continuing to bite, a difficult winter lies ahead. It is therefore vital that the Government works with business to help address these challenges, ease cost and supply pressures, giving businesses the platform to ensure the recovery does not fizzle out before Christmas.”

Key findings

Figures are balance statistics unless otherwise stated.

Business and professional services

  • Sentiment about the general business situation continued to improve in the quarter to November, albeit at a slower pace compared to the previous quarter (+16% from +31%).
  • Business volumes saw strong growth again in the three months to November, picking up slightly from the quarter to August, (+32% to +40%). Volumes growth is expected to continue into the next quarter at a slightly slower pace (+21%).
  • Cost growth continued to pick up pace (+56% compared to +39% in the three months to August), growing at the quickest rate since our survey records began (November 1998) and is set to pick-up further next quarter (+70%), also the highest expectations on record.
  • Average selling price growth also picked up compared to the previous quarter (+17% from +13%) to a survey record high, with expectations of even faster growth next quarter (+24%).
  • Profitability saw solid growth in the three months to November, a similar rate to the previous quarter (+20% from +20% in the quarter to May 2021). Profits growth is however set to stall next quarter (+1%).
  • Employment growth picked up again in the quarter to November (+31% from +19%) - the fastest growth since August 2015, with headcount over the quarter ahead expected to grow at a similar rate (+32%).
  • Firms expect their investment in land and buildings to remain unchanged over the next 12 months (+1%), and spending on vehicles, plant and machinery is set to increase at a faster pace (+14%, from +5% in the three months to August), the strongest expectations since May 2016. Expectations remain solid for spending on IT, the strongest expectations since February 2001 (+47%, from +29% in the three months to August).
  • Uncertainty about demand (cited by 46% of respondents) is once again the biggest factor weighing on investment plans for the next 12 months, although less so than in the three months to August. Concerns about labour shortages remained high historically as a factor to limit investment plans in the three months to November (cited by 30% of respondents).
  • Notably, inadequate net returns are an increasing factor also weighing on investment plans, cited by 27% of respondents (compared to 18% the previous quarter).

Consumer services

  • Optimism about the general business situation improved in the three months to November, after a deterioration in the previous quarter (+23% compared to -17% in the three months to August).
  • Business volumes saw solid growth once again in the quarter to November, a similar rate to the previous quarter’s growth (+28% compared to +30%). However, expectations for the next quarter are less promising, as consumer services volumes are set to be unchanged (+2%).
  • Costs per person picked up pace in the three months to November (+78% from +43% the previous quarter), the fastest rate of growth since our records began (November 1998). It is also set to pick up again over the next quarter (+87%), the strongest expectations on record.
  • As a result, average selling price growth edged higher (+20% from +13%, compared to a long-run average of +12%). This is the strongest growth since February 2019 and is expected to significantly pick up pace over the next three months (+40%), the strongest expectations since February 2017.
  • Profitability accelerated over the quarter to November (+14% from +8%), the strongest growth since February 2018. However, expectations are for profits growth to stall next quarter (-3%).
  • Employment grew in the three months to August (+10%), following unchanged headcount in the previous quarter. With headcount growth set to be similar next quarter (+12%).
  • Consumer services firms expect to increase their capital expenditure on land and buildings (+9% compared to -3% the previous quarter), as well as their spending on vehicles, plant and machinery (+8% from -7%) over the next 12 months, both the strongest expectations since 2017. Spending on IT, meanwhile, is set to remain strong (+35%), with expectations far above the long run average (+6%). Uncertainty about demand (53%) remained the biggest factor weighing on investment plans for the next 12 months, followed by concerns around labour shortages (cited by 40% of respondents) with the second highest number of citations on record.

 

Original article link: https://www.cbi.org.uk/media-centre/articles/service-sector-continues-its-recovery-in-the-quarter-to-november-but-costs-see-record-growth-cbi/

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