Business volumes among business and professional services companies grew in the three months to May 2018 at the fastest rate since August 2015, while volumes fell for consumer services. That’s according to the latest quarterly Service Sector Survey by the Confederation of British Industry (CBI).
Business and professional services companies – which include accountancy, legal and marketing firms – expect to see volumes grow at a similarly robust pace over the next quarter. At the same time, firms’ optimism about the business situation has improved at its fastest pace for a year.
Meanwhile, after solid growth in the previous quarter, volumes fell in the three months to May in the consumer services sector – which includes hotels, bars, restaurants, travel and leisure firms. Optimism in the subsector deteriorated over the last quarter, but consumer services companies expect volumes growth to return next quarter.
Stronger cost pressures fed into higher price inflation
Cost growth picked up again in the consumer services sector, matching the strong rates seen in Q2 and Q3 2017, while cost growth in business and professional services growth edged higher. Stronger cost pressures fed through into higher price inflation in both subsectors.
Profitability strengthened in business and professional services, at its fastest rate since August 2015, but profits in consumer services fell amidst falling volumes and surging costs. Employment continued to grow in business and professional services, while growth in headcount slowed somewhat in the consumer services sector to around the long-run average. Both sectors spent more on training and retraining over the last three months, and both expect spending to continue to grow next quarter.
Neither business and professional services nor consumer services expect to expand their businesses over the year ahead. Meanwhile, investment intentions for the year ahead remain strong in IT in both subsectors. Replacement is the dominant driver of investment plans in consumer services, while business and professional companies cite both replacement and increasing efficiency as drivers of investment.
“A tale of two sectors”
CBI Chief Economist Rain Newton-Smith commented: “It’s a tale of two sectors in services this quarter as business and professional services pick up a head of steam, but the fortunes of consumer services, like hotels and restaurants, continue to be squeezed.
“For all services, rising costs are exerting pressure on margins, but in business and professional services, sales volumes are helping profitability to kick on.
“With inflation coming down and wage growth creeping up, the worst of the squeeze on household incomes appears to be over. However, conditions for consumer-facing firms are likely to remain challenging for a while yet, not least in light of the high burden of business rates on our high streets.”
Key findings from the survey
Business and professional services:
- Optimism regarding the general business situation improved at the fastest pace in over a year (+14% this quarter compared with +14% in May 2017).
- Growth in business volumes accelerated (+25%), with volumes growing at the fastest pace since August 2015 (+33%). Growth is expected to remain robust in the three months ahead (+26%).
- Average selling prices picked up (+10%), after broadly unchanged prices in the three months to February (+3%). Price growth is expected to pick up further in the coming quarter (+14%).
- Profit growth strengthened (+18%) and growth is expected to edge higher next quarter (+23%).
- Numbers employed (+13%) grew at a similar steady pace to the three months to February (+14%), and are expected to grow at a slightly faster rate next quarter (+20%).
- Growth in total costs per person picked up (+38% from +33% in February), and a similar story is expected over the next three months (+42%).
- Firms expect to keep spending unchanged on land and buildings (+1%), while they expect to modestly reduce spending on vehicles, plant and machinery (-4%). Firms expect to spend more on IT (+27% from +20%), the strongest expectations in a year.
- However, firms remain negative about the outlook for business expansion in the year ahead (-9%).
- Optimism about the general business situation deteriorated in the three months to May (-11%).
- Business volumes fell (-12%), after solid growth in the previous quarter (+32%), but volumes growth is expected to recover in the three months to August (+8%).
- Growth in total costs per person surged (+61%), following elevated cost growth in the three months to February (+43%). Costs per person are expected to ease but remain historically elevated in the three months to August (+51%).
- Profitability fell in the three months to May (-16%) and is expected to fall – but at a slower pace – next quarter (-5%).
- Average selling price growth accelerated (+26%), but it is expected that the pace of growth will slow next quarter (+15%).
- Employment growth slowed (+10% compared with +34% last quarter) but headcount is expected to be flat next quarter (-2%).
- Investment intentions were positive for all categories: IT (+28%), vehicles, plant and machinery (+5%) and land and buildings (+4%).
- However, consumer services are more pessimistic about the outlook for business expansion in the year ahead (-10% from +14%).
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