Business volumes in the UK’s services sector grew strongly in the three months to February 2018, according to the latest quarterly Services Sector Survey by the Confederation of British Industry (CBI). Both subsectors – business and professional services and consumer services – saw a rise in profits for the first time since November 2015.
Business and professional services firms – which include accountancy, legal and marketing firms – saw business volumes grow at the fastest pace since August 2015, and growth is set to accelerate further in the three months to May 2018. Meanwhile, after a sharp decline in the previous quarter, volumes grew at the fastest pace in a year in the consumer services sector, which includes hotels, bars, restaurants, and travel and leisure firms. Consumer services growth is expected to ease next quarter, but nonetheless remain firm.
Other indicators also painted a healthier picture of the sector as a whole. Profitability grew for the first time since November 2015 in both subsectors, and similar growth is expected in the coming quarter. Employment continued to grow in business and professional services, while growth in headcount picked up in the consumer services sector.
Prices continued to rise in consumer services but were flat in business and professional services. Next quarter, price growth is expected to accelerate in both subsectors.
Optimism varies between subsectors
Sentiment in the services sector remains mixed: business and professional services firms’ optimism was unchanged from three months earlier, but optimism about the general business situation improved for consumer services companies. The latter are also more optimistic about their plans for business expansion in the year ahead (the strongest since November 2014), while business and professional services firms are more negative in their views.
Looking at growth in the economy more broadly, momentum was tepid for most of last year. The CBI expected similarly subdued growth to persist further ahead. For more detail, see the CBI’s latest economic forecast.
Underlying challenges have not gone away
CBI Chief Economist Rain Newton-Smith commented: “It’s great to see the services sector start the year off on a firm footing. Despite feeling the pinch from high inflation, business volumes have bloomed, profits have grown for the first time in over two years and hiring is on the up.
“But there are still some telling signs that the underlying challenges for business, professional and consumer services firms have not gone away. Investment plans are muted amid uncertainty, and plans for expansion among business and professional services firms have turned downwards.
“Up and down the country, businesses are plainly worried at the lack of clarity over the UK’s future relationship with its biggest trading partner, the EU. Belonging to a comprehensive customs union would go a long way to allaying these concerns, thus alleviating some of the uncertainty weighing on investment and expansion plans.”
Meanwhile, investment intentions for the year ahead remain positive for IT, improving a little in this area for business and professional services firms. However, spending in other areas is set to be cut back slightly or left unchanged.
Key findings from the survey
Business and professional services:
- Optimism regarding the general business situation changed little in February (-1%, from +5% in November 2017). However, firms have become more negative about the outlook for business expansion in the year ahead (-9%, down from +16% in November).
- Growth in business volumes (+14%) accelerated: volumes rose at the fastest pace since August 2015 (+33%), up from +1% in November 2017. Growth is expected to strengthen further in the three months to May (+23%).
- Profits grew slightly (+8%) for the first time since November 2015 (+15%), and growth is expected to edge higher next quarter (+11%).
- Growth in total costs per person edged higher (+33% from +29% in November), and costs are expected to grow at a faster pace next quarter (+43%).
- Average selling prices were relatively unchanged (+3%), the weakest balance since May 2016 (-6%). However, price growth is expected to pick up in the three months to May (+17%).
- Numbers employed (+14%) grew at a steady pace, and are expected to grow at a slightly faster rate next quarter (+22%).
- Investment intentions are mixed: firms expect to cut back slightly on land and buildings (-4%) and keep spending on vehicles, plant and machinery unchanged (+2%). Meanwhile, investment on IT is expected to increase solidly (+20%).
- Optimism about the general business situation rebounded (+8%) – rising for the first time in three quarters – with 25% of firms saying they were more optimistic than three months ago, and 17% saying they were less optimistic.
- Growth in business volumes (+32%) bounced back from the previous quarter’s decline (-20%), but is expected to ease in the three months to May (+22%).
- Profitability increased (+14%) at the fastest pace since November 2015 (+16%), and is expected to grow at a similar pace next quarter (+13%).
- Growth in total costs per person rose (+43%) at a similar pace to November 2017 (+44%), and at a pace slightly above the long-run average (+37%). Growth is expected to remain steady in the three months to May (+42%).
- Average selling price growth eased (+17%) from the previous quarter (+35%). However, growth is expected to pick up next quarter (+28%).
- Employment grew strongly (+34%), after a fall in the previous quarter (-7%), with another firm rise expected next quarter (+31%).
- Investment intentions in IT remain positive (+18%). However, firms expect to cut back on spending on vehicles, plant and machinery (-9%) and to leave investment in land and buildings unchanged (-2%).
Is uncertainty over the UK’s future trading relationship with the EU affecting your investment plans? To discuss the best way forward for your business, email me or call me on 020 7099 2621.