While business and professional services saw another quarter of modest growth in both volume and value of trade, the Confederation of British Industry reports that consumer services firms have witnessed an unexpectedly sharp decline in both.
The latest quarterly CBI Service Sector Survey was conducted between 27 April and 18 May and covered 175 firms. They are divided into business and professional services (such as accountancy, legal and marketing firms) and consumer services (encompassing hotels, bars and restaurants, travel and leisure operations).
In business and professional services, the volume and value of business rose for the second successive quarter. The rise in the value of business (a balance of +12%) was the fastest since November 2007 (+29%), and broadly in line with expectations (+12%).
Volume growth over the past quarter (a balance of +5%) did not pick up as expected (+13%), but those firms questioned predict much stronger growth in the coming three months (+20%).
Firms also expect a faster rise in the value of business next quarter (+20%).
The positive trends in activity among business and professional services firms are also reflected in employment. Staff numbers rose over the past three months (a balance of +12%) at the fastest rate since May 2008 (+15%).
A stronger increase in employment (+30%) is expected in the next quarter, and the expectation is the highest since November 2007 (+31%).
Scrutiny of average selling prices
While average selling prices declined slightly (-7%), this was the least deflationary performance since August 2008 (-2%). Growth in total costs per person employed is nudging upwards.
A balance of +23% over the past quarter was in line with expectations, and total costs are predicted to grow at a faster rate in the coming three months (+28%), with expectations for costs the strongest since August 2008 (+45%).
Despite the gain from growing volume and value of business, higher costs are causing profitability among business and professional firms to decline unexpectedly (-17%) after levelling off in the last quarter. However, this appears to be a temporary impact, as firms expect profitability to stabilise next quarter.
Trends among consumer services firms
The trends among consumer services firms have been much weaker in comparison, as the volume and value of business have now declined for five consecutive quarters.
Of those surveyed, 16% said volumes rose and 39% stated they fell. The resulting balance of -23% is lower than in February, and is the weakest balance since November 2009 (-35%).
Meanwhile, the decline in the value of business over the past quarter (-16%) was similar to that in February.
The declines in the volume and value of business for consumer services firms were unexpected, as firms had predicted no change (-1%).
However, the pace of decline is expected to slow over the next quarter, with a balance of -10% indicating an expected fall in the volume of business and -6% a decline in value.
Firms’ average selling prices have risen at a faster pace over the past quarter (+18%), in line with expectations (+19%). However, costs per employee have also increased more rapidly; a balance of +43% marks the strongest growth since August 2008 (+62%).
Faster decline in profitability
Unexpectedly weak trends in activity among consumer services firms have resulted in a much faster decline in profitability than had been predicted: a balance of -41% marks the steepest fall since August 2009 (-46%).
The number of people employed has also fallen heavily. 2% of firms said numbers employed had grown, and 52% that they were lower. The resulting balance of -50% is the lowest since the survey began in November 1998.
Speaking about the survey results, Ian McCafferty – the CBI’s chief economic advisor – said: “Business and professional services firms are feeling more optimistic about their business situation. They have seen further growth in the volume and value of trade in the past quarter, albeit fairly modest, and these look set to strengthen in the coming three months, with expectations the highest since 2007.”
McCafferty added: “Numbers of employees have also increased, and are expected to continue to do so. These are all sure-fire signs that business spending is picking up, which will help drive the recovery.”
However, he continued: “This is all in stark contrast with the performance of consumer services firms. This survey shows further evidence of weak demand for consumer services in the UK, though firms expect that conditions will not be as difficult over the next quarter.”
In conclusion, McCafferty explained: “When times are tough, consumers cut back their discretionary spending on holidays, leisure pursuits and meals out, and we are seeing that rising prices and squeezed incomes are holding back household spending.”
Prospects for business expansion
Business and professional services organisations are positive about the prospects for business expansion in the coming year for the third consecutive quarter, with a balance of +10% expecting to grow their business.
Level of demand and domestic competition are given as the most significant expansion-limiting factors, though these have edged down as likely constraints.
Business confidence in this sub-sector has also risen for the second consecutive quarter (+23%).
More firms also plan to raise the amount spent on IT for the seventh successive quarter.
In contrast, consumer services firms do not expect to expand their business over the coming year (-6%), and they expect to spend less on IT.
Businesses have become less concerned about domestic competition as a factor likely to limit expansion in the coming 12 months, but the availability of professional staff has crept up as a likely constraint since the last CBI survey was conducted in February.
For further information on the CBI access the website (a dedicated link is provided at the foot of this page)
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