Optimism, profits and volumes fall in UK services sector

Business conditions across the UK services sector continued to fall sharply in the three months to May 2019. Sentiment, business volumes and profitability all declined, according to the latest quarterly Services Sector Survey by the Confederation of British Industry (CBI).

Sentiment declined in both services subsectors. In the business and professional services sector – which includes accountancy, legal and marketing firms – optimism about the business situation fell for the fourth quarter in a row, albeit at a slower pace than in the previous quarter. Meanwhile, sentiment in the consumer services sector – which includes hotels, bars, restaurants, travel and leisure firms – fell for the third consecutive quarter.

Business volumes also deteriorated across the services sector in the quarter to May. Business and professional services saw business volumes fall at the sharpest pace since August 2012, and volumes are set to decline further in the three months to August 2019. Meanwhile, consumer services firms saw business volumes fall for the third consecutive quarter, but volumes are expected to grow slightly in the quarter to August.

Meanwhile, cost pressures edged higher in both subsectors. Selling prices grew at a steady pace in business and professional services, while price inflation slowed in consumer services.

Against this backdrop, business and professional services firms reported that profitability plummeted – at the fastest pace since November 2011 – while consumer services reported the fifth consecutive quarter of heavily falling profits. Profitability is expected to decline in both subsectors over the quarter to August, albeit at slightly slower paces.

Across the economy as a whole, stock building is likely to have supported economic growth in early 2019. However, business surveys suggest that underlying conditions remain more subdued, as Brexit uncertainty and slower global growth bite further on activity. For more detail on the CBI’s view of the outlook, see its most recent economic forecast.

“Politicians have wasted six critical weeks”

CBI Deputy Chief Economist Anna Leach commented: “Brexit paralysis continues to take a toll on the UK’s services firms. Profits, optimism and investment spending are falling sharply amidst a torrid operating environment.

“Politicians have wasted six critical weeks, allowing uncertainty to tighten its stranglehold on the British economy. Business and the country need Westminster to rule out No Deal, and deliver an urgent resolution to the Brexit mess.”

Key findings from the survey

Business and professional services:

  • Optimism regarding the general business situation fell (-8%) in the quarter to May, but at a slower pace than in the previous quarter (-34%).
  • Business volumes fell (-19%, down from -12% in February) at the fastest pace since August 2012 (-21%).
  • Profits also fell sharply (-24%), at the quickest pace since November 2011 (-29%). Profitability is expected to decline at a slower pace over the next quarter (-13%).
  • Growth in total costs per person edged higher (+39% from +33% in February), remaining above average (+28%). Cost growth is expected to be broadly steady next quarter (+41%).
  • Growth in average selling prices was stable (+4%), and is expected to remain so in the three months to August (+4%).
  • Numbers employed (+10%) grew after headcount was stable in the quarter to February (-1%), and employment growth is set to edge higher next quarter (+15%).
  • Investment intentions were markedly subdued: firms expect to cut back spending on land and buildings sharply in the year ahead (-19% – the weakest balance since August 2010 (-22%)). They expect to modestly increase spending on vehicles, plant and machinery (+4%) and on IT (+6%), although the latter is the weakest level since May 2013 (+6%).
  • Firms remain extremely negative about the outlook for expanding their business over the year ahead (-20%).

Consumer services:

  • Optimism about the general business situation continued to deteriorate in the quarter to May (-12%), but at a slower pace than in the quarter to February (-28%).
  • Business volumes fell (-7%) at a pace similar to that in the previous quarter (-5%). Volumes growth is expected to recover somewhat in the three months to August (+5%).
  • Profitability fell for the fifth consecutive quarter (-25%) and at a similar pace to the previous quarter (-26%), and is expected to fall again next quarter (-15%).
  • Growth in total costs per person picked up (+56% from +46% in February), remaining above the long-run average (+37%). Cost growth is expected to ease slightly in the quarter to August (+51%).
  • Average selling price growth eased (+9%) on the previous quarter (+21%), to below the long-run average (+14%). Selling price inflation is expected to pick up next quarter (+15%).
  • Employment returned to growth (+17%) after dipping in February (-6%). Solid growth in headcount is expected next quarter (+25%).
  • Investment in IT is set to increase in the year ahead (+15%). However, firms expect to cut back on spending on land and buildings (-19% – the weakest balance since August 2013 (-24%)) – and on vehicles, plant and machinery (-25% – the weakest balance since August 2012 (-32%)).
  • Firms remain extremely negative about the outlook for expanding their business in the year ahead (-31%).

Is Brexit paralysis taking its toll on your business? For advice on preparing for all potential scenarios, email me or call me on 020 7099 2621.