Sentiment and activity deteriorate across services sector - CBI Service Sector Survey

Sentiment within the services sector deteriorated in the three months to November, according to the CBI’s latest quarterly Service Sector Survey.

Optimism fell among business & professional services firms, after three consecutive quarters of rising sentiment. Consumer services firms also saw another sharp decline in optimism, at the fastest pace in over two years. Consumer services firms also reported a notable decline in business volumes, and expect another hefty fall in the three months to February.

Similarly, business & professional services firms reported that volumes fell, albeit marginally, in the quarter to November. This marked the first decline in a year, and volumes are expected to fall again in the three months to February.

Costs per person employed in the services sector grew strongly over the last quarter. While the rise was slower than in the three months to August, cost pressures remained above the long-run average. Costs growth is expected to pick up further in the quarter ahead, particularly for business & professional services firms.

In contrast, selling prices rose only modestly over the last three months. As a result, services firms reported another decline in profitability, that is set to accelerate in the three months to February. Profits in the sector have now fallen for three full years.

Headcount fell marginally across the services sector in the three months to November, driven by a bigger fall in employment among consumer services firms. Employment is expected to fall at a faster pace in the quarter to February, with both major sectors predicting a reduction in hiring.

Plans for investment over the year ahead remain tepid. Across the sector, firms expect to cut capital expenditure on vehicles, plant & machinery and land & buildings. Investment plans for IT remain positive, but are at their weakest in two years. Uncertainty about demand has picked up as a constraint to capital investment, rising materially above average in the consumer services sector.

Alpesh Paleja, CBI Interim Deputy Chief Economist, said:

“Our latest data does not paint a pretty picture of the services sector. Falling sentiment, weaker hiring intentions and firming cost pressures are all at least a partial response to the forthcoming rise in employer National Insurance Contributions.

“This is all coming against the backdrop of weakening demand and squeezed margins. And middling business conditions don’t look set to improve anytime soon.

“The Government must act on the pressing challenges facing business – including a faster timetable for business rates reform and a plan for the long-term through a competitive industrial strategy. Business stands ready to work with politicians to improve the UK’s economic prospects.”

The survey, based on the responses of 411 services firms, found:

Business & Professional Services

• Optimism about the general business situation fell, after having risen for three consecutive quarters (-29%, from +9% in August).
• Business volumes fell slightly in the three months to November, following a small rise in the quarter to October (-5% from +4%). Volumes are expected to fall again in the three months to February (-7%).
• Growth in total costs per person employed remained elevated in the quarter to November (+42% from +47% in August). Costs growth has generally remained above its long-run average (+30%) since mid-2021, and is set to accelerate next quarter (+62%).
• Average selling prices rose marginally in the three months to November (+6% from +8% in August). Firms expect prices to rise again, at a similar pace, in the three months to February (+7%).
• Headcount rose marginally for the third consecutive quarter (+4% from +7% in August). Headcount is expected to fall in the quarter ahead (-10%) which, if realised, would be the first decline in headcount in over four years.

Consumer services

• Optimism about the general business situation deteriorated for the fifth consecutive quarter (-55%, the fastest fall since August 2022, from -19% in the previous quarter).
• Business volumes fell sharply in the quarter to November (-33%), after falling more moderately in the three months to October (-9%). Consumer services firms expect volumes to fall strongly again in the three months to February (-33%).
• Costs growth eased in the three months to November (+44% from +64% in August), standing close to the long-run average (+39%). Firms expect costs growth to accelerate next quarter (+50%).
• Average selling price inflation rose moderately in the three months to November (+10%), broadly unchanged from August and slower than the long-run average (+14%). Nevertheless, average selling price growth is expected to rise at a quick pace next quarter (+21%).
• Employment fell amongst consumer services firms in the three months to November (-24%, from -9% in August). Numbers employed are expected to fall at a faster pace in the three months to February (-34%).