Service sector

The service sector sees better days ahead

Optimism in the services sector improved significantly in the three months to May, according to the CBI’s latest quarterly services sector survey.

Sentiment in business and professional services saw record improvement this quarter, while optimism in consumer services rose at the fastest pace since May 2014.

The picture was more mixed for volumes, with business and professional services volumes growing at the fastest pace on record last quarter, while consumer services volumes continued to decline, but at a much slower pace. Both sub-sectors expect strong volume growth in the next quarter.

The news is more positive in terms of profitability, with both sub-sectors returning to growth. This is expected to continue into the next quarter, with the pace of growth expected to pick up across the services sector.

Employment also showed signs of significant improvement in both subsectors, with consumer services recording the strongest growth since the end of 2015. Meanwhile, business and professional services saw the fastest growth in five years. The workforce is expected to continue to grow over the next three months, with growth in business and professional services expected to accelerate further.

Meanwhile, investment intentions for the year ahead were also more positive, with expectations for IT spending in particular rising sharply across both sub-sectors, with spending plans for consumer services being the strongest for more than two decades.

Ben Jones, CBI Senior Economist, said:

“With the reopening roadmap on track and the rollout of the vaccine, it’s no surprise to see renewed optimism across the sector. Both sub-sectors expect strong business growth over the next few months as restrictions continue to lift.

“Strong IT spending intentions indicate a sector that has adapted and is adapting to new ways of working and delivering services. Clarity on future social distancing requirements and workplace testing would help more to facilitate the path to recovery.”

Main conclusions

Unless otherwise stated, figures are balance statistics.

Business and professional services

  • Sentiment regarding the general business situation improved significantly compared to the previous quarter (+63% vs. +23%), growing at the fastest pace ever.
  • Business volumes returned to growth, at the highest rate ever recorded, in the three months ending in May (+50%, compared to -21% in the previous quarter), after constant declines since the end of 2018. This growth should continue in the following quarter at an equally sustained rate (+52%).
  • Cost growth slowed slightly (+19% vs. +23%) in the three months to May but is expected to pick up sharply in the next quarter (+46%).
  • Average selling prices increased for the first time in more than 12 months (+15% vs -7% in the previous quarter), with expectations of similar growth in the next quarter.
  • Profitability has returned to growth, at the fastest pace in three years (+14% against -26% in the February 2021 quarter), and should accelerate in the next quarter (+41%).
  • Employment has returned to growth (+25% after -5%), with growth in the workforce over the coming quarter expected to accelerate (+53%).
  • Businesses expect investment in land and buildings to remain broadly unchanged (-2%) over the next 12 months, and spending on vehicles, plant and machinery (+7%) to increase slightly . On the other hand, expectations are significantly higher for IT spending (+40%) – the highest since May 2016.
  • Uncertainty about demand (cited by 36% of respondents) remains the main factor weighing on investment, although significantly less than in previous quarters over the last 12 months (and against 56% in the previous quarter).
  • Notably, labor shortages accelerated as a factor weighing on investment plans for the next 12 months (+27% vs. +10% in the previous quarter).

Consumer services

  • Optimism about the general business situation improved at the fastest pace since May 2014 in the three months ending in May (+47% vs -39% in the three months ending in February 2021).
  • Case volumes continued to decline, albeit at the slowest pace in over a year in the three months ending May (-19% vs. -76% in the prior quarter) and also achieved performance much better than expected (-55%). Expectations for the next quarter show that consumer services volumes will return to growth (+33%).
  • Costs fell in the three months to May for the first time in four quarters (-9% vs. +28% in the previous quarter), but expectations are for a strong cost rebound in the next quarter (+52% ).
  • Average selling prices continued to decline, but at a slower pace (-8% after -14%), but are expected to grow over the next three months (+32%).
  • Profitability returned to growth (+5% versus -48%), marking the first increase since February 2018. Profits should continue to grow at a faster pace in the next quarter (+15%).
  • Employment saw the strongest growth since the end of 2015 in the three months to May (+38% vs. -47%) and is expected to grow at a similar pace in the next quarter (+39%).
  • Consumer services companies plan to increase capital spending over the next 12 months, with plans for IT spending (+49%) at their highest level since 1999, while spending on land and buildings ( +5%) and in vehicles, installations and machinery (+7%) should experience more modest growth.
  • Demand uncertainty (54%) was the biggest factor weighing on investment plans for the next 12 months.