Service sector cost pressures continue to mount in the quarter to May - CBI Service Sector Survey

Business optimism in both services sub-sectors remained broadly unchanged in the three months to May, according to the CBI’s latest quarterly Service Sector Survey. This is despite a fall in profitability for the sixth consecutive quarter for both business and professional services, as well as consumer services.

Business volumes continued to fall across the two sub-sectors, but more sharply in consumer services. Next quarter, volumes growth is set to return in business and professional services, the strongest expectations since April 2022, while volumes are expected to stabilise in consumer services. Meanwhile, optimism about the business situation was unchanged across the service sector following a year of deteriorating sentiment.

The survey also highlighted a continuation of strong cost and price pressures in the services sector. Cost growth within business and professional services remained at a pace far above the long-run average while costs grew in the consumer services sector at the second fastest rate on record. Expectations are for growth to continue in both sub-sectors but to ease slightly in consumer services next quarter. Average selling prices also grew at some of the strongest rates on record in both sub-sectors. Growth is expected to ease slightly next quarter but to remain well above the long-run average.

As a result, profitability is set to fall once again across the sector, for the sixth consecutive quarter. With strong cost and price growth set to continue, profits are expected to fall further next quarter, but at a slightly slower rate.

Nevertheless, employment grew in the quarter to May across the service sector and growth is expected to accelerate over the next quarter in both sub-sectors.

Over the year ahead, the service sector as a whole expects little change in spending on land and buildings, however, investment in IT is set to continue at a pace in line with the long run average. While business and professional services expect investment to modestly return in vehicles, plant and machinery, consumer services firms anticipate continued cutbacks albeit to a lesser extent than recent quarters. Demand uncertainty across both sub-sectors continues to be the biggest factor hampering investment.

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

“It is encouraging that the quarter ahead looks brighter for services firms’ trading conditions. Business volumes are set to return to growth in the next three months, underpinning expectations of stronger employment growth and improved investment intentions.

However, rapid cost growth continues to squeeze services firms’ margins and adds to mounting evidence that underlying inflationary pressures remain strong.”

Key survey figures for this quarter include: 

Business & professional services:

Sentiment about the general business situation was broadly unchanged (-2%), following four consecutive quarters of deteriorating sentiment.

Business volumes continued to fall at a modest pace in the three months to May (-4% from –7% in April). However, volumes are set to return to growth next quarter (+20%).

Cost pressures continue to build (+61% from +58%) at a pace far above the long-run average and are set to grow at a similar pace next quarter (+59%).

Average selling prices grew at a strong pace (+27% from +21%), and are expected to continue to grow next quarter, but at a slightly slower pace (+23%).

Profitability fell for the sixth consecutive quarter (-29%), with profits expected to fall at a much slower rate next quarter (-11%).

Nevertheless, employment grew in the quarter to May after declining for two consecutive months (+12% from –7% in April). Headcount growth over the next quarter is expected to edge higher (+17%).

Firms expect little change in spending on land and buildings (-1%). However, investment in IT is set to continue (+17% from +15%), and growth is set to return in vehicles, plant & machinery (+4% from –14%).

Uncertainty about demand continues to be the biggest factor weighing on investment (+57% from +52%).

Consumer Services

Optimism about the general business situation was broadly unchanged (+3%), following four consecutive quarters of deteriorating sentiment.

Business volumes fell sharply (-24% from –7% in April) with volumes set to stabilise next quarter (-3%).

Cost growth accelerated in the three months to May (+81% from +73%), the second fastest rate of growth on record. Next quarter, growth is expected to remain strong but ease slightly (+74%).

Average selling price growth also edged higher (+39% from +31%), with expectations for continued growth next quarter (+30%), albeit at a slightly slower rate.

Profitability dropped for the sixth consecutive quarter in the three months to May (-53% from -48% Feb). Profits are expected to decline at a slower pace next quarter (-40%).

Employment growth picked up slightly over the quarter to May (+8% from +4% in April). Headcount growth is set to accelerate over the quarter ahead (+17%).

Firms expect little change in spending on land and buildings (-2%). However, investment in IT is set to pick up pace (+17% from +9%) while continued cutbacks are anticipated in vehicles, plant & machinery (-5% from –10%).

Uncertainty about demand (+39%) and shortages of labour (+37%) continue to be the biggest factors weighing on investment.