Service sector sees brighter days ahead

Optimism across the service sector improved significantly in the three months to May according to the latest quarterly Service Sector Survey from the CBI.

Sentiment across business and professional services saw a record improvement this quarter, while consumer services optimism rose at the quickest pace since May 2014.

The picture was more mixed for volumes, with business and professional services volumes rising at the fastest rate on record last quarter, while consumer services volumes continued to decline but at a much slower pace. Both sub-sectors expect strong growth in volumes in the quarter ahead.

There was more positive news in terms of profitability, with both sub-sectors returning to growth. This looks set to continue into the next quarter, with the pace of growth set to accelerate across the service sector.

Employment also showed signs of significant improvement across both sub-sectors, with consumer services experiencing the strongest growth since the end of 2015. Meanwhile, business and professional services saw the fastest growth in five years. Headcount is tipped to continue growing in the next three months, with business and professional services growth set to accelerate further.

Meanwhile investment intentions for the year ahead were also more positive, expectations for IT spending in particular rose sharply across both sub sectors, with spending plans for consumer services the strongest in over two decades.

Ben Jones, CBI Principal Economist, said:

"With the reopening roadmap on track and the vaccine rollout delivering, it’s no surprise to see an uptick in optimism across the sector. Both sub-sectors are expecting strong business growth over the next few months as restrictions continue to lift.

“Strong intentions for IT spending point to a sector that has adapted and is adapting to new ways of working and service delivery. Clarity on future social distancing requirements and workplace testing would go further towards smoothing the route to recovery.”

Key findings

Figures are balance statistics unless otherwise stated.

Business and professional services

• Sentiment about the general business situation improved considerably on the previous quarter (+63% from +23%), rising at the fastest pace on record.
• Business volumes returned to growth, at the strongest pace on record, in the three months to May (+50%, from -21% in the previous quarter), after consistent declines since the end of 2018. This growth is expected to continue into the next quarter at a similarly strong pace (+52%).
• Cost growth slowed slightly (+19% compared to +23%) in the three months to May but is set to pick up strongly next quarter (+46%).
• Average selling prices grew for the first time in over 12 months (+15% from -7% the previous quarter), with expectations of similar growth next quarter.
• Profitability returned to growth, at the fastest pace in three years (+14% from -26% in the quarter to February 2021), and is set to pick up pace next quarter (+41%).
• Employment returned to growth (+25% from -5%), with headcount growth over the quarter ahead expected to accelerate (+53%).
• Firms expect investment in land and buildings to remain broadly unchanged (-2%) over the next 12 months, and spending on vehicles, plant and machinery (+7%) to increase slightly. However, expectations are markedly stronger for spending on IT (+40%) - the strongest since May 2016.
• Uncertainty about demand (cited by 36% of respondents) remained the biggest factor weighing on investment, although markedly less so than in previous quarters over the last 12 months (and compared to 56% in the previous quarter).
• Notably, labour shortages picked up as a factor weighing on investment plans for the next 12 months (+27% compared to +10% in the previous quarter).

 Consumer services

• Optimism about the general business situation improved at the fastest rate since May 2014 in the three months to May (+47% compared to -39% in the three months to February 2021).
• Business volumes continued to decline, albeit at the slowest pace in over a year in the three months to May (-19% from -76% in the previous quarter) and also performed considerably better than was expected (-55%). Expectations for the next quarter show that consumer services volumes are set to return to growth (+33%).
• Costs fell in the three months to May for the first time in four quarters (-9% from +28% the previous quarter), but expectations are for a strong rebound in costs next quarter (+52%).
• Average selling prices continued to fall, but at a slower rate (-8% from -14%), but are expected to grow over the next three months (+32%).
• Profitability returned to growth (+5% from -48%), marking the first rise since February 2018. Profits are expected to continue to grow at a faster rate next quarter (+15%).
• Employment saw the strongest growth since the end of 2015 in the three months to May (+38% from -47%), and is expected to grow at a similar rate next quarter (+39%).
• Consumer services firms expect to increase their capital expenditure over the next 12 months, with spending plans on IT (+49%) at their strongest since 1999, while spending on land and buildings (+5%), and vehicles, plant and machinery (+7%) is set to see more modest growth.
• Uncertainty about demand (54%) was the biggest factor weighing on investment plans for the next 12 months.