Service sector

Services sector divided on outlook – CBI

Optimism among companies in the services sector was mixed in the three months to August, according to the CBI’s latest quarterly services sector survey. While sentiment about the general business situation continued to improve in business and professional services, consumer services saw sentiment decline from the previous quarter.

Business and professional services saw strong volume growth, with similar expectations for the next three months. Business volumes in consumer services rose for the first time in three years, marking the strongest growth since February 2018. However, the outlook for the coming quarter looks bleaker with lower volumes expected.

Costs per person rose in the three months to August, with growth in both subsectors the strongest in about two years. Cost pressures are expected to intensify in the next quarter. Selling prices also rose in both subsectors, with consumer services prices increasing at the fastest pace since February 2019. Price growth is expected to accelerate further in the next quarter.

Nevertheless, after strong volume growth, profitability in business and professional services grew at its fastest pace in six years. Profitability also increased in consumer services at a similar pace to the previous quarter. Next quarter, the outlook is expected to diverge across sub-sectors, with lower profits in consumer services and continued growth in business and professional services.

Employment was flat in the three months to August for consumer services, with employment growing at an above-average rate in business and professional services. In the next quarter, employment prospects are expected to diverge further with an expected decline in consumer services while employment growth is expected to strengthen in business and professional services.

Charlotte Dendy, CBI Senior Economist, said:

“Clearly the services sector performed well in the three months to August, revealing strong volume and profit growth in our latest survey as the economy reopened over the summer. However, the outlook across subsectors is expected to diverge in the coming quarter, with a deterioration in the outlook expected in consumer services.

“Companies in industries such as hotels, restaurants and travel do not expect this strength to persist into the next quarter, reflecting the pressure that consumer services companies continue to face.

“With the ongoing vaccine rollout, it is critical that this fall be used by the government to help unlock private sector investment to cement economic recovery. A major reform of an unfair commercial pricing system, uncompetitive and unproductive would be a good place to start.

Main conclusions

Unless otherwise stated, figures are balance statistics.

Business and professional services

  • Sentiment regarding the general business situation continued to improve during the quarter ended in August, although at a slower pace than in the previous quarter (+31% against +63%).
  • Business volumes returned to strong growth over the three months ending in August (+32%, compared to +50% in the previous quarter). Volume growth should continue in the next quarter at a similar pace (+30%).
  • Cost growth accelerated (+39% vs. +19% in the three months to May) at the fastest pace in two years and is expected to accelerate further in the next quarter (+48%).
  • Average selling prices increased at a similar pace to the previous quarter (+13% vs. +15%), with expectations of accelerated growth in the next quarter (+21%).
  • Profitability grew at the fastest pace in six years in the three months to August (+21% vs. +14% in the quarter to May 2021), with expectations of the same growth rate in the following quarter ( +21%).
  • Employment growth slowed slightly (+19% vs. +25%), with growth in the workforce over the coming quarter expected to pick up again (+32%).
  • Businesses expect their investment in land and buildings to rise slightly over the next 12 months for the first time since November 2017 (+5%), and spending on vehicles, plant and machinery (+5% , versus +7% in the three months to May) is expected to continue to rise at a similar pace. On the other hand, expectations remain strong for IT spending (+29%), at a rate above the LR average (+20%).
  • Uncertainty about demand (cited by 52% of respondents) is once again the main factor weighing on investment, more than in the three months preceding May.
  • Notably, concerns about labor shortages continued to grow as a factor limiting investment plans in the three months to August, reaching a record high (+35% vs. +27% in previous quarter).

Consumer Services

  • Optimism about the general business situation fell in the three months ending in August after a solid improvement in the previous quarter (-17% against +47% in the three months ending in May 2021).
  • Business volumes increased for the first time in three years during the quarter ended in August (+30% against -19% in the previous quarter). This is the strongest growth since February 2018. However, expectations for the next quarter are rather gloomy, as consumer services volumes are expected to decline further (-10%).
  • Costs rose at an above-average rate in the three months to August (+43% vs. -9% in the previous quarter) and growth is expected to pick up sharply in the next quarter (+60 %).
  • As a result, average selling prices have returned to growth (+13% against -8%), the strongest since February 2019 and should accelerate over the next three months (+17%).
  • Profitability grew at a similar pace to the previous quarter (+8% vs. +5%). However, we expect a decline in profits in the next quarter (-19%).
  • Employment remained the same in the three months ending in August, after strong growth in the previous quarter (0% against +38%). With the workforce expected to experience a sharp drop in the next quarter (-35%).
  • Consumer services companies expect to keep capital expenditure on land and buildings broadly unchanged (-3%) and plan to reduce vehicles, plant and machinery (-7%) over the next 12 month. However, IT spending should remain strong (+32%), although more modest than what was expected in the last quarter (+49%).
  • Demand uncertainty (56%) remained the main factor weighing on investment plans for the next 12 months. However, worries about labor shortages gained ground (+46%, compared to +9% in the previous quarter), receiving the highest number of citations ever.