CBI: Service sector less optimistic as profitability falls

28 Nov 2016 12:10 PM

The service sector saw a decline in optimism in the three months to November, although the fall was less sharp than in the previous quarter.

In the CBI's latest quarterly Service Sector Survey, business and professional services firms – which include accountancy, legal and marketing firms – reported that business volumes barely increased and they are expected to fall slightly next quarter. Meanwhile, consumer services companies – which include hotels, bars, restaurants, travel and leisure – saw business volumes grow modestly, with expectations for faster growth in the next three months.

The combination of sluggish volumes growth and rising costs per person employed has led to a drop in profitability across the services sector, with a further decline expected. The share of firms expecting to expand their business over the year ahead were in a clear minority in both sub-sectors.

Nonetheless, hiring intentions remain strong with employment growth expected to accelerate next quarter. Growth in spending – and intentions to spend – on training and retraining are encouraging, particularly in consumer services.

Investment intentions were mixed. Firms expect overall capital expenditure on IT to rise at a robust pace, but plan to cut back investment in other areas, like land and buildings, vehicles, plant and machinery.

Rain Newton-Smith, CBI Chief Economist, said:

“Optimism among firms in the UK service sector has fallen this quarter, as rising costs and sluggish volumes of business have led to a drop in profitability.

“We’re also seeing diverging fortunes in the service sector. Business and professional services expect to see weaker growth in volumes next quarter while the resilience of the British shopper is boosting the outlook for consumer services.

“But employment growth remains strong and service sector firms are looking to hire in the months ahead. Many firms still plan to invest in IT, but uncertainty over future demand could act as a restraint.

“The Autumn Statement will have offered some comfort to businesses as the Government looks to build on the UK’s economic strengths, with an Industrial Strategy that helps deliver growth across the country.”

Key findings:

Business and professional services

• Optimism about the business situation dropped (-19%), as 18% said they were more optimistic than three months ago, whilst 38% said they were less optimistic.
• The volume of business was broadly unchanged over the quarter (+2%), with 29% of firms reporting volumes were up compared with the previous quarter, and 27% saying they were down. Volumes are expected to fall slightly over the coming quarter (-4%, the weakest expectations since August 2012, -8%).
• Average selling prices rose (a balance of +8%), and are expected to rise a little further next quarter (+5).
• 24% of firms said the overall profitability of their business was up on the previous quarter, and 41% said it was down, giving a balance of -18%.
• 24% of businesses said numbers employed were up on three months ago, and 18% said they were down, giving a balance of +6%. Hiring is expected to accelerate (+17%) over the next quarter.
• Businesses citing uncertainty about demand/sales as a factor limiting capital expenditure (69%) is at the highest since May 2013 (69%).
• Firms plan to increase spending on IT (+29%), while expenditure on land and buildings (-14%) and vehicles, plant and machinery (-5%) is set to fall.
• 41% of firms said they expected to expand their business over the year ahead, and 58% said they did not, giving a balance of -17%.

Consumer services

• Optimism about the business situation fell slightly (-4%) as 13% of firms said they were more optimistic than three months ago, whilst 18% said they were less optimistic.
• 30% of firms reported a rise in business volumes, compared with 22% saying they were down in the last three months, giving a balance of +8%. Growth is expected to strengthen in the next three months (+16%).
• Profitability declined over the quarter to November (-15%), but is expected to be stable over the next quarter (0%).
• Growth in numbers employed increased at the fastest pace for a year. 45% of businesses said numbers employed were up on three months ago, and 12% said they were down, giving a rounded balance of +34%. Employment growth is expected to be similar next quarter (+31%).
• Investment plans for the year ahead are stable if unspectacular – with firms planning modest increases in spending on land and buildings (+2%), IT (+13%) and vehicles, plant and machinery (+7%).