Activity across the services sector continues to weaken - CBI service sector survey

Business confidence and activity continued to deteriorate heavily across the services sector in the quarter to August, albeit at a somewhat slower pace, according to the CBI's latest Service Sector Survey.  

Furthermore, cost pressures continued to mount. With average selling prices rising at a much slower pace than over the last two quarters, profitability dropped further. This was the case across both major sub-sectors, though price inflation remained comparatively higher in consumer services. In addition, services firms also reported another decline in headcount, albeit at a slower pace than in the previous rolling quarter. 

Looking ahead, firms across the services sector expect to see business volumes decline again over the quarter ahead, though at a somewhat slower pace. Cost growth is also set to ease in the three months to November, albeit to rates that are still high by historical standards. With the rise in costs still expected to outpace selling price inflation, profits are expected to fall significantly again – albeit at a somewhat slower pace in business & professional services. 

With demand conditions weak and cost pressures strong, services firms continue to show reservations around their investment plans over the year ahead. Both sub-sectors are set to continue cutting back spending on land & buildings and vehicles, plant & machinery, while IT spending is anticipated to remain unchanged relative to last year. Uncertainty about demand remains the main limitation to capital spending across the services sector, while concerns around internal finance shortages are still above the long-run average. 

Alpesh Paleja, Deputy Chief Economist, CBI, said: 

“While there are pockets of resilience, our latest survey paints a grim picture of the services sector. Rising employment costs continue to drive cost pressures higher, while subdued demand conditions are holding pricing power in check. The impact is being felt in lower hiring, investment and profits, with companies increasingly shifting focus to short-term fire-fighting. 

“If the government is to achieve its long-term growth ambitions, it must start delivering the short-term certainty required to boost business confidence. With the business tax burden already at a 25-year high, this starts with the government committing to no further tax rises on business at the Autumn Budget. This must go hand in hand with a rethink of the Employment Rights Bill, which risks layering unnecessary costs onto employers, further undermining their hiring and investment plans.”  

The survey based on the responses of 396 services firms found that: 

Business & professional services 

• Optimism about the general business situation deteriorated for the fourth consecutive quarter (-29%, from -43% in May). 

• Business volumes continued to decline in the quarter to August (-30%, from -37% in the quarter to July). Volumes are expected to decline again over the quarter ahead, albeit at a much slower rate (-13%). 

• Growth in total costs per person employed remained elevated in the quarter to August (+62%, from +60% in May; and ahead of the long run average of +30%). Cost growth is expected to remain elevated in the next quarter (+51%). 

• Profitability dropped (-42%) at the fastest pace since August 2020 (-46%), and is expected to deteriorate again over the next quarter (-35%). 

• The pace of growth in average selling prices eased significantly in the three months to August (+4%, from +26% in May). Firms expect selling prices to rise at a marginally faster pace in the quarter to November (+8%). 

• Headcount fell amongst business & professional services firms in the three months to August (-16%, from -28% in July). It is set to fall at a slightly slower pace next quarter (-12%). 

• Firms anticipate significant cutbacks in investment in both land & buildings (-20% from -15% May) and vehicles, plant & machinery (-22% from -14% May), while investment in IT is expected to come to a halt (-2% from -7%). 

• Uncertainty about demand was the most cited factor limiting investment (cited by 56% of respondents). This was followed by those citing a shortage of internal finance (30%) and inadequate net returns (29%). 

Consumer Services 

• Optimism amongst consumer services firms deteriorated in the quarter to August, for the eighth consecutive quarter (-34%, from -42% in May). 

• Business volumes declined in the quarter to August (-26%), extending a period of flat or falling volumes that began in April 2022. Firms expect volumes to decline again in the three months to November (-22%).  

• Total costs per person employed continued to grow strongly in the quarter to August, with growth remaining well above the long-run average (+70%, from +70% May; long-run average of 40%). Cost growth is expected to slow somewhat next quarter, but remain elevated (+46%). 

• Overall profitability deteriorated for the fifteenth quarter running (-36%, from -43% in May). Profitability is expected to decline again in the next three months (-39%). 

• Selling price inflation decelerated in the quarter to August (+20% from +32%), and is expected to slow again in the three months to November (+14%). 

• Headcount continued to fall amongst consumer services firms in the three months to August (-36%, from -48% in July). Numbers employed are expected to decline again, albeit at a slower pace in the three months to November (-27%).  

• Firms anticipate cutbacks to investment in both land & buildings (-26% from -42% May) and vehicles, plant & machinery (-40% from -17% May). However, investment in IT is expected to be unchanged (+3% from -36%). 

• Uncertainty about demand was the most cited factor limiting investment (cited by 53% of respondents). This was followed by those citing inadequate net returns (33%) and a shortage of internal finance (30%). 

The full report is attached.