Optimism returns to UK service sector despite falling volumes

Business optimism increased across the UK service sector in the three months to February 2020, according to the latest quarterly Service Sector Survey by the Confederation of British Industry (CBI).

This was driven by a marked improvement in sentiment in both the business and professional services sector and the consumer services sector, which rose at the fastest pace since August 2015 and February 2016 respectively.

Nevertheless, business volumes in both subsectors continued to fall. The drop in consumer services volumes quickened, while business and professional services volumes continued to fall, though at a slower pace. Looking to the quarter ahead, the outlook for volumes is mixed: consumer services volumes are set to stabilise and business and professional services volumes are expected to grow at a robust pace. Expectations for the latter are the strongest since May 2018.

While growth in total costs per person eased slightly in the business and professional services sector, cost pressures picked up in line with the long-run average in consumer services. Profitability continued to decline in both subsectors, although the pace of decline eased somewhat in business and professional services. Next quarter, cost growth is expected to accelerate in both subsectors in the three months to May. Consumer services firms expect that profitability will decline at a similar pace. Meanwhile, due to expectations of solid volumes growth, business and professional services expect profitability to grow.

Mixed picture for employment

There was a mixed picture for services employment. The business and professional services subsector returned to growth over the last quarter, while consumer services headcount was unchanged. In the three months to May, headcount is expected to grow at a faster pace in business and professional services – the strongest expectations since August 2017 – while consumer services employment is expected to remain broadly unchanged.

Investment intentions improved across the service sector compared with the previous quarter. Business and professional services expect to increase investment in IT, vehicles, and plant and machinery, but spending on land and buildings is set to be cut back. Overall, business and professional services firms are optimistic about the prospects for business expansion in the coming year, with the balance the most positive since November 2017.

Prospects for investment in the consumer services sector have also improved, although firms were negative about the outlook for business expansion over the next 12 months. Consumer services firms expect to increase spending on land and buildings and on IT, but to cut back spending on vehicles and on plant and machinery.

Firms are looking to EU negotiations for support

CBI Principal Economist Ben Jones commented: “Firms will also be looking ahead to forthcoming EU negotiations and to see what can be done to support and grow our world-class services sector. By focusing on ease of doing business and setting goals for ambitious market access, we can capitalise on renewed optimism and ensure expectations remain strong as we move forward.”

Overall, underlying momentum in the UK economy remains subdued at the start of 2020, but the CBI continues to expect a mild improvement over the course of the year. Household spending is set to remain a key driver of GDP growth, as a low unemployment rate underpins solid growth in real wages. For more details, see the CBI’s December economic forecast.

Click here for further details of the survey’s findings.

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