CBI quarterly Service Sector Survey - August 2023

Profits have fallen for the seventh consecutive quarter against a background of lacklustre business volumes and strong cost pressures, highlighting a continuation of challenging conditions in the sector – according to the CBI’s quarterly service sector survey. 

In the three months to August, business and professional services volumes remained unchanged for the second consecutive month while consumer services volumes continued to decline but at a slower pace. As a result, optimism in the service sector remained flat. Next quarter, volumes are set to decline in both sub-sectors. 

With costs growing at some of the strongest rates on record in both sub-sectors, profits fell sharply across the board in the quarter to August. Next quarter, with costs expected to remain well above the long run average, the ongoing fall in profits in business and professional services is expected to slow while it is set to decline at the same rate in consumer services.

Nevertheless, firms continue to feed these higher costs through to prices, with strong price growth in both sub-sectors. Next quarter, price growth is anticipated to continue but at a slower rate. Meanwhile, business and professional services employment stagnated over the quarter to August following three consecutive months of growth. In consumer services, employment returned to growth in the three months to August following a decline in the quarter to July. Next quarter, employment conditions are set to improve with growth in both sub-sectors. 

Looking to the year ahead, investment intentions have deteriorated in both sub-sectors with cut backs expected on land and buildings and vehicles, plant and machinery. This marks the weakest intentions in business and professional services since November 2020. IT expenditure is however set to continue in business and professional services but to be cut back in consumer services.

The survey highlighted that demand uncertainty across both sub-sectors continues to be the biggest factor hampering investment.  However, with rising interest rates, the cost of finance has risen up the ranks as a key factor limiting investment for services firms, with the proportion of firms citing it reaching a record high for business and professional services and the highest percentage since November 2008 for consumer services.

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

“Our latest survey highlights that it’s been a difficult period for the service sector with lacklustre volumes, strong cost pressures and falling profitability. With a deterioration in investment intentions for the year ahead, it’s noteworthy that uncertainty about demand and the cost of finance are the key factors weighting on investment, particularly against a background of rising interest rates.

“Many companies will continue to face a challenging time this autumn and winter as pressure on household budgets and tighter credit conditions continue to have an impact. Despite a fall in inflation and moderately lower energy costs, help is needed from government in the autumn budget to assist businesses in navigating another difficult winter where cost pressures are likely to continue to impact firms decisions to grow and invest.”

Key survey figures for this quarter include: 

Business & Professional Services

• Sentiment about the general business situation remains broadly the same (+3% from -2%).
• Business volumes remained unchanged (-2% from -2%) and are set to decline slightly next quarter (-4%). 
• Cost pressures remain strong (+57% from +61%) and are set to grow at a similar pace next quarter (+54%).
• Average selling price growth remains strong (+25% from +27%), with expectations of continued growth next quarter (+18%), albeit at a slower pace.

• Profitability fell for the seventh consecutive quarter (-19%), with profits expected to fall at a slower rate next quarter (-12%).
• Employment stagnated over the quarter to August (0%), following three consecutive months of growth (+7% Jul, +6% Jun and +12% May). However, headcount is set to return to growth over the quarter ahead (+15%).
• Firms expect significant cuts in spending on land and buildings (-17%) and vehicles, plant & machinery (-18%), the weakest expectations since November 2020 (-32% and -23% respectively). In contrast, investment in IT is set to continue at the same pace (+15% from +17%).
• Uncertainty about demand (42% from 57%) and the cost of finance (31% from 23%) are the biggest factors weighing on investment, with the latter the highest percentage on record.

  Consumer Services 

• Optimism about the general business situation remains broadly unchanged (-3% from +3%) for a second quarter running.
• Business volumes continued to decline for the second consecutive month in the three months to August (-22% from -34%) albeit at a slightly slower rate. The pace of decline is set to ease further next quarter (-18%).
• Cost pressures remain strong (+70% from +81%) and remain well above average. Expectations are for growth to remain strong but ease slightly next quarter (+52%).
• Average selling prices have eased slightly but remain strong (+33% from +39%) and are expected to ease further in the quarter to November (+23%)

• Profitability fell for the seventh consecutive quarter, albeit at a much slower pace (-27% from -53%) compared to the previous quarter. Profits are expected to fall at the same rate next quarter (-28%).
• Nevertheless, employment returned to growth in the three months to August (+4% from -8%) following a decline in the three months to July. Headcount is expected to grow at a similar pace in the next three months (+6%).
• Firms expect significant cuts in spending on land and buildings (-22%), vehicles, plant & machinery (-29%) and IT (-9%), the weakest expectations since November 2022 (-30%, -39% and -13% respectively). 
• Uncertainty about demand continues to be the biggest factor weighing on investment (+39% from +39%).

29 August 

Notes to Editors   

The survey was conducted between 27th July and 15th August, with 295 services sector firms responding. Launched in December 1998, the survey covers a broad range of sectors within the tertiary economy — including computer services, management consultants, hotels & catering, transport services and telecommunications.