UK service sector sentiment deteriorates further

Business optimism across the UK’s services sector fell sharply in the three months to August 2019. This decline almost matched those seen at the start of 2019, which saw the quickest fall in sentiment in three years. That’s the overall finding of the latest quarterly CBI Services Sector Survey by the Confederation of British Industry (CBI).

Sentiment declined in both the business and professional services sector, which includes accountancy, legal and marketing firms, and the consumer services sector, which includes hotels, bars, restaurants, travel and leisure firms. Both subsectors reported falling sentiment for the fourth consecutive quarter.

In the three months to August, business and professional services saw business volumes stabilise, after falling over the first half of this year, although volumes are set to decline again in the three months to November. The survey painted a bleaker picture for consumer services: firms saw a fourth consecutive quarterly fall in business volumes, and expect a further fall next quarter. Expectations among consumer services firms are at their weakest since February 2012.

Meanwhile, cost pressures remained above average in both sectors, although they eased slightly in consumer services. Costs continued to outpace selling prices, with only modest inflation in consumer services and flat prices in business and professional services.

Against this backdrop, business and professional services firms reported that profitability plummeted, at the fastest pace since November 2011. Meanwhile, the consumer services sector saw profitability stabilise in the three months to August, after over a year of decline. Nevertheless, profits are expected to fall in both subsectors over the quarter to November – markedly so in business and professional services, where expectations are the weakest in eight years.

The employment picture was broadly steady, with growth in line with the historical average in both subsectors. Looking ahead, employment growth is set to slow in the sector as a whole, driven by an expected stalling in consumer services headcount.

Prospects for business expansion have worsened in the services sector: expectations in the business and professional services sector are the weakest since February 2009, and the second lowest on record. In consumer services, expansion prospects remain negative, but to a lesser degree than in recent quarters.

In terms of investment, spending plans for the year ahead have improved modestly in the business and professional services sector. Spending on tangible goods is set to stay the same, while expected spending on IT moved back towards the historical average. The outlook was more gloomy in the consumer services sector: firms expect to cut back on investment in vehicles, plant and machinery, and land and buildings. Expectations for investment in land and buildings were the weakest since May 2012. Spending on IT is set to remain the same, but this still marks the weakest intentions since February 2015.

Across the economy as a whole, the CBI’s business surveys suggest that underlying conditions remain 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 latest economic forecast.

“Idea of a no-deal Brexit is clearly weighing down the economy”

CBI Chief Economist Rain Newton-Smith commented: “UK services firms are operating in a tough environment: activity is sluggish and profits are expected to fall in the coming months. It’s little wonder that business sentiment has plummeted again.

“The outlook for services firms is bleak at the moment, with Brexit uncertainty holding back investment and expansion plans. The idea of a no-deal Brexit is clearly weighing down the economy and is affecting businesses both big and small. So the economy can get back on track, the Government must re-double its efforts in securing a deal.”

Key findings from the survey

Business and professional services

  • Sentiment about the general business situation deteriorated at a faster pace (-31% from -8%), similar to the rate in the February survey (-34%) which was the quickest decline since the financial crisis.
  • Business volumes stabilised in the three months to August (-2% from -19% in May). However, volumes are expected to fall sharply over the next three months (-19%).
  • The number of firms citing overseas business as a factor limiting business was the highest since February 2013 (+22%).
  • Growth in total costs per person remained elevated, in line with expectations (+41% from +39%). However, growth is set to ease next quarter (+32%).
  • Prices grew marginally (+4%) in the last three months, but are set to be broadly flat next quarter (-3%).
  • Profits fell sharply in the three months to August, at the fastest pace since November 2011 (-25% from -24%) and are expected to fall at a similar pace over the next three months (-26%).
  • Employment growth was steady (+8% from +10%) and broadly in line with the long-run average. Growth is expected to be similar next quarter (+7%).
  • Firms expect to keep spending on land and buildings and on vehicles, plant and machinery the same (-2%). Investment intentions for IT (+22%) have moved back towards the historical average (+20%).
  • Replacement was cited as the main reason for capital expenditure (by 59% of respondents), to the greatest extent since November 2016.
  • Business and professional services firms remain extremely negative about the outlook for expansion over the year ahead, with expectations for expansion (-54% from -20%) at their most negative balance since February 2009, and the second lowest on record.

Consumer services

  • Optimism about the general business situation deteriorated (-28% from -12%), at a similar pace to February, which was the quickest decline since August 2016.
  • Business volumes continued to decline in the three months to August, marking the fourth consecutive quarterly fall (-8% from -7%). Volumes are set to fall further in the next quarter (-19%) – the weakest expectations since February 2012.
  • Cost growth eased but remained above average (+42% from +56%, average +38%) in the three months to August but is expected to accelerate next quarter (+58%).
  • Average selling price growth was broadly steady (+12% from +9%) and is set to remain so next quarter (+13%).
  • Profitability stabilised after five consecutive quarterly falls (+1% from -25%). However, profits are expected to fall again next quarter (-17%).
  • Employment growth eased but remained in line with the historical average (+10% from +17%, average +9%). However, growth is set to stall next quarter (-1%).
  • Consumer services remain negative about the outlook for business expansion in the year ahead, albeit less so than in previous quarters (-6% from -31%).
  • Firms expect to cut back on land and buildings investment (-26%), the weakest expectations since May 2012, while spending on vehicles, plant and machinery is also set to be cut back (-10%). Capital expenditure on IT is expected to be unchanged (-1%), marking the weakest expectations since February 2015.
  • Uncertainty about demand/sales remained the key reason to limit capital expenditure (52%).

How badly is the prospect of a no-deal Brexit affecting your business? For advice on how to prepare for the worst-case scenario, email me or call me on 020 7099 2621.