Service sector divided over outlook - CBI

Optimism among service sector firms was mixed in the three months to August, according to the latest quarterly Service Sector Survey from the CBI. While sentiment about the general business situation continued to improve amongst business and professional services, consumer services saw sentiment fall compared to the previous quarter. 

Business and professional services saw strong volumes growth, with similar expectations for the three months ahead. Business volumes within consumer services grew for the first time in three years, marking the strongest growth since February 2018. However, prospects for the coming quarter looked bleaker with a fall in volumes expected.   

Costs per person grew over the three months to August, with growth in both sub-sectors the strongest in around two years. Cost pressures are set to build further over the next quarter. Selling prices also grew in both sub-sectors, with prices in consumer services growing at the fastest rate since February 2019. Price growth is set to ramp up further in the coming quarter. 

Nevertheless, following strong growth in volumes, profitability in business and professional services grew at its fastest pace in six years. Profitability also grew within consumer services at a similar rate to the previous quarter. Next quarter, prospects are set to diverge between sub-sectors, with a fall in profits in consumer services and continued growth in business and professional services. 

Employment remained the same in the three months to August for consumer services, with headcount growing at an above average rate in business and professional services. Next quarter, employment prospects are set to diverge further with a decline expected in consumer services while headcount growth is expected to strengthen in business and professional services. 

Charlotte Dendy, CBI Principal Economist, said:

“It’s clear that the service sector has performed well over the three months to August, revealing strong volumes and profits growth in our latest survey as the economy reopened over the summer. However, the outlook between sub-sectors is set to diverge over the quarter ahead, with a deterioration in prospects expected in consumer services.  

“Firms in sectors such as hotels, restaurants and travel, do not expect this strength to persist into the next quarter, reflecting the pressure that consumer services firms continue to face.  

“With the vaccine roll-out continuing to deliver, it is vital that this autumn is used by the Government to help unlock investment in the private sector to cement the economic recovery. Major reform of an unfair, uncompetitive and unproductive business rates system would be a good place to start.” 

Key findings 

Figures are balance statistics unless otherwise stated. 

Business and professional services 

• Sentiment about the general business situation continued to improve in the quarter to August, albeit at a slower pace than the previous quarter (+31% from +63%).
• Business volumes saw strong growth again in the three months to August (+32%, from +50% in the previous quarter). Volumes growth is expected to continue into the next quarter at a similar pace (+30%).
• Cost growth picked up pace (+39% compared to +19% in the three months to May) growing at the quickest rate in two years and is set to pick-up further next quarter (+48%).
• Average selling prices grew at a similar rate to the previous quarter (+13% from +15%), with expectations of faster growth next quarter (+21%).
• Profitability grew at the fastest pace in six years in the three months to August (+21% from +14% in the quarter to May 2021), with expectations of the same rate of growth next quarter (+21%).
• Employment growth slowed slightly (+19% from +25%), with headcount growth over the quarter ahead expected to pick up pace once again (+32%).
• Firms expect their investment in land and buildings to increase slightly over the next 12 months for the first time since November 2017 (+5%), and spending on vehicles, plant and machinery (+5%, from +7% in the three months to May) is set to continue to increase at a similar rate. However, the expectations remain strong for spending on IT (+29%), at a rate above the LR average (+20%). 
• Uncertainty about demand (cited by 52% of respondents) is once again the biggest factor weighing on investment, more so than in the three months to May.
• Notably, concerns about labour shortages continued to grow as a factor to limit investment plans in the three months to August, reaching a record high (+35% compared to +27% in the previous quarter).

Consumer services 

• Optimism about the general business situation fell in the three months to August after a solid improvement in the previous quarter (-17% compared to +47% in the three months to May 2021).
• Business volumes saw growth for the first time in three years in the quarter to August (+30% compared to -19% in the previous quarter). This marks the strongest growth since February 2018. However,  expectations for the next quarter are rather bleak, as consumer services volumes are set to fall once again (-10%).
• Costs grew at an above average pace in the three months to August (+43% from -9% the previous quarter), and growth is set to pick up sharply over the next quarter (+60%).
• As a result, average selling prices returned to growth (+13% from -8%), the strongest since February 2019 and are expected to pick up pace in the next three months (+17%).
• Profitability grew at a similar pace to the previous quarter (+8% from +5%). However, expectations are for profits to decline next quarter (-19%). 
• Employment remained the same in the three months to August, following strong growth in the previous quarter (0% from +38%). With headcount set to see a steep decline next quarter (-35%). 
• Consumer services firms expect to keep their capital expenditure on land and buildings broadly unchanged (-3%) and expect to cut back on vehicles, plant and machinery (-7%) over the next 12 months. However, spending on IT is set to remain strong (+32%), albeit more modest than what was expected last quarter (+49%). 
• Uncertainty about demand (56%) remained the biggest factor weighing on investment plans for the next 12 months. However, concerns around labour shortages have gained ground as a concern (+46%, compared to +9% in the previous quarter), receiving the highest number of citations on record.