Services cost pressures ease significantly but business sentiment deteriorates

Sentiment within the service sector deteriorated over the quarter to November, against a background of falling business volumes and profitability, highlighting a continuation of difficult conditions across the sector – according to the CBI’s quarterly service sector survey.

In the three months to November, business & professional services volumes fell at the same pace for the third consecutive month, while the pace of decline in consumer services volumes eased. As a result, optimism in the service sector deteriorated at the fastest pace since the start of the year.  Next quarter, volumes in business & professional services are set to stabilise, while modest growth is tipped to return in consumer services.

However, growth in average costs eased in the quarter to November, marking the weakest growth since May and August 2021 for business & professional and consumer services firms respectively.  Next quarter, cost growth is set to accelerate in both sub-sectors.

Average selling prices witnessed a similar trend with prices continuing to grow in the service sector, but at a slower pace. Growth eased to the slowest pace since February 2021 in business & professional services while they slowed marginally in consumer services. Next quarter, consumer services prices are anticipated to grow further but at a weaker rate while growth is set to pick up slightly in business & professional services.

Despite an easing in average cost growth, paired with declining volumes, profits continued to fall at pace across the sector in the quarter to November. Next quarter, the ongoing fall in profits in business and professional services is expected to continue at a faster rate, while it is set to fall at the same pace in consumer services.

Meanwhile, business and professional services employment stagnated over the quarter to November following two consecutive months of modest growth. In consumer services, employment continued to grow at pace in the three months to November. Next quarter, sub-sector employment conditions are set to trade places with growth in consumer services stalling, and business and professional services headcount growth accelerating.

Against a backdrop of higher interest rates, the cost of finance remains a key factor in limiting investment for services firms, reaching a record high in consumer services and the third highest percentage in survey history for business & professional services. Nevertheless, uncertainty about demand remains the top concern cited across the service sector. As a result, although investment intentions remain weak they have seen a slight improvement compared with the previous quarter.

Charlotte Dendy, CBI Economic Surveys and Data Manager, said: 

“Our latest survey highlights yet another difficult period for the service sector with volumes and profitability falling. While cost and price growth eased last quarter, firms will be bracing for stronger growth across both in the months ahead, putting additional pressure on the sector.

“Although measures announced in the Chancellor’s Autumn Statement will be transformative for business investment overall, services firms are likely to see less of a benefit than those in other sectors. With trading conditions set to remain challenging for some time, it’s important to for government to find ways to support our world class services sector, including as we look ahead to the Spring Budget.”

Key survey figures for this quarter include: 

Business & Professional Services

• Sentiment about the general business situation dropped at the fastest pace since February 2023 (-14%), after remaining broadly unchanged over the last two quarters (+3% Aug and -2% May).
• Business volumes continued to fall at a similar pace in the three months to November (-9% from -7% Oct and -9% Sep). Volumes are expected to stabilise next quarter (-1%).
• Costs continued to grow in the quarter to November (+27%), however this marks the weakest growth since May 2021 (+19%) and indicates that growth is now in line with the long run average (+29%). Nevertheless, cost growth is set to accelerate sharply next quarter (+53%).
• Average selling price growth also slowed significantly (+8% from +25% Aug, +27% May). Nonetheless, the pace of growth is set to edge higher over the next three months (+13%).
• Profitability fell for the eighth consecutive quarter (-15%), with profits expected to fall at a faster rate next quarter (-23%).
• Employment stagnated over the quarter to November (-2%), following two consecutive months of modest growth (+4% Oct and +6% Sep). However, headcount is set to return to growth over the quarter ahead (+12%).
• Firms continue to see cutbacks in spending on land and buildings (-5% from -17%) and vehicles, plant & machinery (-7% from -18%), albeit at a much lesser degree than the previous quarter. However, investment in IT is set to continue over the next year at a pace in line with the long run average (+21%).
• Uncertainty about demand continues to be the biggest factor weighing on investment (55% from 42%), while the cost of finance reached the third highest percentage on record (+24%).

Consumer Services

• Optimism about the general business situation dropped modestly (-6%) following two consecutive quarters of broadly unchanged sentiment (-3% Aug and +3% May).
• Business volumes continued to decline in the three months to November (-5% from -10% Oct), albeit at a slightly slower rate. However, volumes are set to return to modest growth next quarter (+4%).
• Costs continued to grow in the quarter to November (+48%), albeit at a much slower rate than the previous quarter (+70% Aug) marking the weakest growth since August 2021. Nevertheless, expectations are for growth to pick up pace next quarter (+63%).
• Average selling prices have eased slightly but remain above average (+29% from +33%), nevertheless, they are set to ease further in the quarter to February (+18%).
• Profitability fell for the eighth consecutive quarter (-27%), with profits expected to fall at around the same rate next quarter (-26%).
• Nevertheless, employment continued to grow at pace in the quarter to November (+13% from +14%), with headcount expected to be unchanged (0%) in the three months to February.
• Cutbacks in investment for consumer services firms are set to continue in both land and buildings (-20% from -22%) and IT (-5% from -9%) over the year ahead. However, investment in vehicles, plant & machinery is expected to be unchanged (+1% from -29%).
• Uncertainty about demand (+50%) and cost of finance (+47%) were the biggest factors weighing on investment, with the latter reaching the highest on record.