Optimism continued to improve in the UK services sector in the three months to November, despite costs growing at the fastest pace since records began.
According to the latest Confederation of British Industry (CBI) service sector survey, confidence in businesses, professionals and consumer services firms improved during the quarter, but at a slower pace. slower than in the previous three months.
Business volumes continued to grow at a healthy pace in the services sector in the three months to November, but data showed there were signs of slowing growth as companies expected volume growth to slow in the next quarter.
Cost pressures also continued to build over the period, with consumer services and business and professional services seeing their costs increase (to 56% from 39%) at the fastest rate in the history of the investigation, which began in 1998.
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Companies in both sectors now expect the pace to accelerate even further to reach 70% in the next quarter, also the strongest expectations on record.
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As a result, sales price growth has also accelerated, with expectations of significantly faster growth in the next quarter for both sub-sectors.
Despite soaring costs, profitability saw the strongest growth since February 2018 in consumer services. With strong price and cost growth expected to continue into the next quarter, forecasts in consumer services and business and professional services expect earnings growth to slow in the three months to February.
Employment growth in business and professional services accelerated in the three months to November, recording the fastest growth in more than six years. This rate of growth should continue in the next quarter.
Consumer services also saw employment return to growth in the quarter and are expected to continue at a similar pace in the next quarter, the CBI said.
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The research also showed that the outlook for business investment has strengthened, with service firms planning to increase their spending plans over the next year, particularly in information technology. Respondents from the business and professional services sector reported the strongest investment intentions in vehicles, plant and machinery since 2016, and in IT for more than 20 years.
Meanwhile, consumer services companies expect to increase their spending on land and buildings, as well as vehicles, plant and machinery – the two strongest expectations since 2017. IT investment spending should also remain strong for consumer services.
“Record cost growth threatens to freeze the recovery of the services sector in the next quarter,” said Charlotte Dendy, head of surveys and economic data at CBI.
“With expectations for business cost growth being the strongest in survey history in both sub-sectors, companies expect services earnings growth to stagnate in the next quarter.
“With COVID still a concern, with impacts on consumer confidence, as well as cost and supply chain issues continuing to bite, a tough winter lies ahead. It is therefore vital that the government works with businesses to help address these challenges, easing cost and supply pressures, giving businesses the platform to ensure the recovery does not die out before Christmas.
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