Service sector sentiment plummets at record pace

Business optimism plunged across the service sector in the three months to May, according to the latest quarterly CBI Service Sector Survey. Following an uptick in sentiment over the previous quarter, optimism among business & professional services fell at the fastest pace since the financial crisis, while consumer services saw the sharpest decline in the survey’s history.

Business volumes in both sub-sectors continued to fall in the last quarter, with business & professional services volumes dropping at the quickest pace since February 2009 and consumer services declining at the fastest pace on record.

Looking to the coming quarter, companies across the service sector are more pessimistic about growth than they’ve ever been. The decline in business volumes is expected to accelerate among business & professional services firms, and, while expectations among consumer services firms are for volumes to decline less rapidly compared with the previous quarter, they are nonetheless more negative about the near-term outlook.

Meanwhile, the beneficial impact of the job retention scheme on business costs appears to be apparent. Costs per person in business & professional services fell at the sharpest pace in eleven years, while costs in consumer services fell at a survey record pace. Prices also fell in both sub-sectors, at the fastest pace since February 2012 in business and professional services and at the quickest rate in survey history in consumer services. Costs and prices are set to fall at the sharpest pace on record in the three months to August.

Unsurprisingly, this survey shows sharp declines in headcount across the service sector, with employment across the sector falling at the quickest rate since 2010. Next quarter, employment is expected to be cut back at a faster rate - the quickest since the survey began. Almost half of services firms reported making temporary staff layoffs (likely furloughed staff under the Government’s job retention scheme), while 20% had made permanent layoffs. Meanwhile, 63% of firms stated that they implemented remote working for a majority of staff.

Investment intentions deteriorated across the sector, with firms expecting to cut back on all areas of investment in the year ahead at the fastest pace since the financial crisis: land and buildings, IT, vehicles, plant and machinery and training – investment in IT is expected to be cut back to a lesser degree than other investment categories.

Our special COVID-19 questions revealed that 94% of services firms believed that the pandemic had had a negative impact on domestic business volumes. This comes as no surprise, with 44% of services firms stating that they had to completely shut down their offices or activity in May, while 59% had implemented a partial shutdown. 82% of services firms confirmed an impact on sales from social distancing or weaker demand, while 58% and 54% stated an impact from travel/meeting restrictions or cancelled events/conferences/trade shows respectively.

62% of services firms cited cash flow difficulties, with many mentioning constraints on the availability of internal and external finance.

Anna Leach, CBI Deputy Chief Economist, said: 

“COVID-19 has had a dramatic impact on the service sector, with our survey reporting record falls across many key indicators. Nine out of ten services firms have said that the pandemic has had a negative impact on domestic business volumes, with the majority of businesses facing disruption from cancelled events, travel restrictions and social distancing measures.

“Clearly, many companies have benefitted from the support of the job retention scheme in particular in helping to contain costs and alleviate the impact of collapsing demand on employment. As we look ahead to the restart, the service sector – a vital engine of growth in the UK economy – must get the support it needs to recover and thrive.

“With the sector supporting many jobs across the country, services will play a key role in longer term ambitions to level-up the country, drive productivity and help us to meet important carbon reduction targets. We must also recognise the strategic importance of the services sector and put it at the heart of our plans for securing ambitious new trading relationships with the EU and beyond.”