Service sector less optimistic about their future as profitability falls

Service sector confidence for the next quarter is low as businesses report little growth, a new study reveals.

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, according to the CBI’s latest quarterly Service Sector Survey.

Business and professional services firms – which include accountancy, legal and marketing firms – report 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 are 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, says that 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.

Newton-Smith adds, ‘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.’

He concludes, ‘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.’

Business and professional service

Optimism about the business situation dropped (-19 per cent), as 18 per cent say they were more optimistic than three months ago, whilst 38 per cent say they were less optimistic.

The volume of business was broadly unchanged over the quarter (+2 per cent), 29 per cent of firms report volumes were up compared with the previous quarter, and 27 per cent say they were down. Volumes are expected to fall slightly over the coming quarter (-4 per cent, the weakest expectations since August 2012, -8 per cent).

Average selling prices rose (a balance of +8 per cent), and are expected to rise a little further next quarter (+5).

24 per cent of firms say the overall profitability of their business was up on the previous quarter, and 41 per cent report it was down, giving a balance of -18 per cent.

24 per cent of businesses claim numbers employed were up on three months ago, and 18 per cent say they were down, giving a balance of +6 per cent. Hiring is expected to accelerate (+17 per cent) over the next quarter.

Businesses citing uncertainty about demand/sales as a factor limiting capital expenditure (69 per cent) is at the highest since May 2013 (69 per cent).

Firms plan to increase spending on IT (+29 per cent), while expenditure on land and buildings (-14 per cent) and vehicles, plant and machinery (-5 per cent) is set to fall.

41 per cent of firms say they expected to expand their business over the year ahead, and 58 per cent say they did not, giving a balance of -17 per cent.

Consumer services

Optimism about the business situation fell slightly (-4 per cent) as 13 per cent of firms say they were more optimistic than three months ago, whilst 18 per cent report they were less optimistic.

30 per cent of firms report a rise in business volumes, compared with 22 per cent saying they were down in the last three months, giving a balance of +8 per cent. Growth is expected to strengthen in the next three months (+16 per cent).

Profitability declined over the quarter to November (-15 per cent), but is expected to be stable over the next quarter (0 per cent).

Growth in numbers employed increased at the fastest pace for a year. 45 per cent of businesses report numbers employed were up on three months ago, and 12 per cent say they were down, giving a rounded balance of +34 per cent. Employment growth is expected to be similar next quarter (+31 per cent).

Investment plans for the year ahead are stable if unspectacular – with firms planning modest increases in spending on land and buildings (+2 per cent), IT (+13 per cent) and vehicles, plant and machinery (+7 per cent).

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