Slim pickings for services industry as cost pressures grow and optimism slumps - CBI Service Sector Survey

In the three months to August, cost pressures and average selling prices grew at record rates of growth for the services sector. Consequently, sentiment about the general business situation for both business & professional services and consumer services have deteriorated sharply.

• While business volumes were flat for business & professional services, they are expected to fall sharply next quarter, while consumer services are already seeing volumes drop for the first time in a year.
• Cost pressures appear to have impacted profitability, while investment intentions have deteriorated.
• Uncertainty about demand/sales was the biggest factor weighing on plans to invest in the services sector.
• Nevertheless, employment in business and professional services continued to grow last quarter, if at a slightly slower pace than the three months to May, while consumer services headcount was unchanged.

That’s according to the latest CBI Service Sector Survey, based on responses from 199 services firms. The survey was conducted between 26 July and 15 August.

Charlotte Dendy, CBI Head of Economic Surveys, said:

“There are slim pickings for those looking for positive signals in the services sector over the last quarter. Just as rising inflation is hurting households and every business sector, the services industry is no different.

“Average selling prices grew at a record pace and profitability in the sector fell once more, with uncertainty over demand the main reason why investment intentions deteriorated. Nevertheless, business & professional services fared somewhat better than consumer services, with employment continuing to grow, as well as investment in training and IT.

“Come 5 September, business will be looking to the next Prime Minister to move swiftly and effectively to help shore up confidence. That means supporting vulnerable households and businesses with high energy prices and setting out plans to get the UK economy back on a growth trajectory.”

Business & Professional Services

• Sentiment about the general business situation has seen the sharpest decline (-39%) since May 2020 (-79%).
• Business volumes were flat (-1%) following growth in the previous quarter (+28%) but are set to fall next quarter (-16%), the weakest expectations since November 2020.
• Cost pressures continue to build (+69% from +64%) witnessing record rates of growth, with growth set to remain strong next quarter (+65%).
• Average selling price growth also accelerated at a record pace (+31% from +23%), with expectations for similar growth next quarter (+30%).
• Profitability continued to drop in the quarter to August (-11%) at a similar pace to the previous quarter (-12%), with profits expected to decline more quickly over the next quarter (-25%).
• Nevertheless, employment continued to grow in the quarter to August, but at a slower pace compared to the three months to May (+26% from +33%) with headcount growth over the quarter ahead expected to ease further (+16%).
• Firms expect little change in spending on land and buildings (-2%) and vehicles, plant & machinery (-3%) over the year ahead. However, investment is set to continue to increase but to a lesser extent than the previous quarter for training (+21% from +27%) and IT (+18% from +28%).
• Uncertainty about demand (55%) was the biggest factor weighing on investment.

Consumer Services

• Optimism about the general business situation deteriorated at the fastest rate (-64%) since May 2020 (-86%).
• Business volumes dropped (-37%) for the first time in over a year, with the pace of decline set to ease slightly next quarter (-29%).
• Costs continued to grow in the three months to August (+88%) at the quickest rate on record, with cost growth expected to ease slightly but remain well above average (+77%) over the next quarter.
• Average selling prices continued to grow (+52%) at the quickest pace since May 2006, with the pace of growth tipped to edge higher over the next three months (+56%).
• Profitability continued to fall in the three months to August (-64%) at the sharpest rate in the last two years, with profits expected to fall further next month, the weakest expectations on record (-84%).
• Employment stagnated over the last quarter (0%) and is expected to decline over the next three months (-5%).
• Consumer services firms expect to cut back on spending on IT (-16%, weakest since August 2020) and vehicles, plant & machinery (-31%, weakest since November 2020). Spending on training (+1%) and land and buildings (-3%) is set to remain broadly the same.
• Uncertainty about demand/sales (65%) was the biggest factor weighing on investment, with the highest percentage of firms citing it as a factor since February 2021.