Weak expectations for consumer services as profits fall for ninth time in a row - latest CBI Service Sector Survey

In the three months to February, optimism amongst business and professional services firms improved slightly as business volumes returned to growth, according to the CBI’s latest Service Sector Survey. In contrast, sentiment deteriorated sharply in consumer services as business volumes continued to drop. Looking ahead, volumes growth is expected to strengthen in business and professional services next quarter, while consumer services are set to see a continued decline, pointing to further differences between the two sub-sectors.

Cost growth accelerated across the service sector in the three months to February while average selling prices grew at the same pace as the last quarter in both sub-sectors. Consequently, profits continued to fall across the sector for the ninth consecutive quarter. Next quarter, services cost growth is set to remain elevated as prices are anticipated to grow at an accelerated pace for business and professional services and consumer services growth is expected to ease slightly. As a result, profitability is expected to fall at a sharper pace in consumer services while the pace of decline is set to ease significantly for business and professional services in the three months to May.

Business and professional services employment stabilised last quarter after falling in the three months to January. In consumer services, employment declined for a third consecutive month, albeit at a slower pace. In the three months to May, business and professional services employment growth is set to accelerate, while consumer services headcount is expected to decline sharply, pointing to a further divergence in conditions by sub-sector.

Investment prospects look to remain weak over the year ahead, as both services sub-sectors are tipped to continue to cut back on spending on all investment categories except IT for business and professional services firms. Service sector firms cited that uncertainty about demand remained the greatest factor limiting investment.

Charlotte Dendy, CBI Economic Surveys Manager, said:

“Our latest Service Sector Survey emphasises that firms continue to face challenging conditions with profits falling for the ninth quarter in a row. Consumer services in particular anticipate a difficult quarter ahead, with firms expecting further drops in volumes, employment and profits. Additionally, prospects for investment remain weak across the sector, with firms telling us that uncertainty regarding demand continues to be the greatest factor holding business back.

“At next week’s Spring Budget, firms will be looking out for measures that build confidence to invest in our economic future and prop up the UK’s labour market. The CBI’s Spring Budget submission lays out what steps the Government can take to support firms – such as increasing the total that can be raised from Enterprise Investment Scheme investments for Knowledge Intensive Companies. To get the UK growing again, it’s key that the Chancellor removes the roadblocks in the way of success for firms across the UK."

Key survey figures for this quarter include:  

Business & Professional Services

• Sentiment about the general business situation improved slightly (+4%), after deteriorating in the previous quarter (-14%).
• Business volumes returned to growth for the first time since June 2023 (+4%). Volumes growth is set to pick up over the next three months (+12%).
• Cost growth accelerated in the three months to February (+45%) with expectations for growth to continue at a similar pace next quarter (+42%).
• Average selling prices continue to grow modestly (+8%), at the same pace as last quarter, with the pace of growth set to accelerate over the next three months (+18%).
• Profitability dropped for the ninth consecutive quarter (-15%), with profits expected to fall at a slower rate next quarter (-6%).
• Employment was unchanged (+2%) in the three months to February, following a decline in the three months to January (-9%). Headcount is set to return to growth over the quarter ahead (+13%).
• Firms continue to see cutbacks in physical assets: land and buildings (-14% from -5%), and vehicles, plant & machinery (-6% from -7%). However, investment in IT is set to continue over the next year (+11% from +21%).
• Uncertainty about demand continues to be the biggest factor weighing on investment (52% from 55%).

Consumer Services

• Optimism about the general business situation deteriorated at the fastest pace since November 2022 (-24% from -6%).
• Business volumes declined rapidly for the second month running in the quarter to February (-27% from -25%) and are set to decline at a similar pace over the next quarter (-22%).
• Cost growth picked up in the three months to February (+55%) compared to the previous quarter (+48%). Expectations are for growth to be similar next quarter (+58%).
• Profitability fell at a quicker pace and for the ninth consecutive quarter (-36%), with profits expected to fall at a faster rate next quarter (-47%).
• Average selling prices grew at a similar pace to the previous quarter (+28% from +29%) and are expected to continue to grow at a slower pace in the three months to May (+21%).
• Employment continued to fall for the third month running (-5%, from -9%). Headcount is set to drop sharply over the next quarter (-17%).
• Firms expect continued cuts in spending on land and buildings (-14% from –20%), vehicles, plant & machinery (-22% from +1%) and IT (-4% from -5%).
• Uncertainty about demand continues to be the biggest factor weighing on investment (+33% from +55%), nevertheless, this marks the lowest percentage of firms citing this factor since February 2015. As a result, other factors such as internal finance (29%), external finance (26%) and inadequate net return (25%) also appeared to be key factors for consumer services firms.