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Service Sector on the up

Service sector firms reported healthy growth in levels of business for the three months to August, with optimism improving at the fastest pace for a year, according to the latest quarterly CBI Service Sector Survey.

Both business volumes and values expanded in business & professional services – which includes accountancy, legal and marketing firms – and consumer services – which includes hotels, bars, restaurants, travel and leisure firms. Business and professional services reported that levels of business in value terms were significantly above normal – and a survey record high – reflecting the strongest growth in business volumes since 2001. Consumer services also reported a brisk increase in business volumes.

The survey of 176 firms highlighted a strong performance across the service sector with an expectation for similar results in the next quarter. Both sub-sectors recorded robust rises in profitability – underpinned by the growth in business volumes – and remain optimistic regarding their business situation.

Rain Newton-Smith, CBI Director for Economics, said:

“After a weaker start to the year, the UK services sector is now seeing healthy growth across the board with firms becoming more profitable, driven by a surge in business volumes.

“Companies are still looking to invest in people and capital, especially in IT which will help them exploit new technology and boost productivity.

“But difficulties in finding staff with the right skills for firms to grow is a mounting concern, and with recent turbulence in the markets risk management skills are likely to be in demand.”

Firms in both sectors expect to raise investment spending over the next 12 months, with business and professional services firms in particular anticipating strong increases in IT investment, mainly to increase efficiency and exploit new technologies.

Evidence that the labour market is tightening continues to grow. Both sectors cited availability of professional staff as limiting business expansion to the greatest extent since prior to the financial crisis in 2008. Meanwhile, firms across the services sector reported strong growth in numbers employed, but recruitment is expected to be flat in consumer services over the coming quarter, and to slow somewhat in business and professional services.

Key findings:

Consumer Services

  • Optimism regarding the business situation improved, with 44 per cent of firms saying they were more optimistic than three months ago compared with 7 per cent saying they were less optimistic, giving a balance of +37 per cent
  • 48 per cent of firms reported a rise in business volumes, compared with 15 per cent saying they were down in the last quarter, leaving a balance of +33 per cent. Business values also grew at a solid pace (+30 per cent)
  • 22 per cent of firms said they had increased selling prices, while 7 per cent said they were down, leaving a balance of +14 per cent
  • Costs per person employed grew at a slightly slower rate (+37 per cent) than the previous survey (+42 per cent), with expectations for the next quarter (+52 per cent) the highest since November 2013 (+52 per cent)
  • 47 per cent said overall profitability was up while 16 per cent said it was down leaving a balance of +31 per cent. Profitability is expected to strengthen further over the next quarter (+39 per cent)
  • 57 per cent of firms said that numbers employed had risen, with 9 per cent saying they were down, leaving a balance of +49 per cent, the highest since November 2002 (+57 per cent). However, expectations for the next three months are for no growth (-3 per cent)
  • Capital expenditure plans continue to expand in land and buildings (+11 per cent), IT (+13 per cent) and vehicles, plant and machinery (+14 per cent), though investment intentions have weakened from the previous survey. The main reason for capital expenditure is replacement (cited by 69 per cent of respondents)
  • Uncertainty about demand is the main potential barrier to capital expenditure (cited by 43 per cent of respondents)
  • Both domestic competition (32 per cent previous survey, 52 per cent this survey) and availability of professional staff (15 per cent previous survey, 23 per cent this survey – highest since August 2007 (24 per cent)) are growing concerns that could limit levels of business in the next year.

Business and Professional Services

  • Optimism regarding the business situation rose further, with 40 per cent of firms saying they were more optimistic than three months ago compared with 8 per cent saying they were less optimistic, giving a balance of +32 per cent
  • 43 per cent of firms said business volumes were up compared with three months ago, and 10 per cent said they were down, giving a balance of +33 per cent. Business values also expanded robustly (+37 per cent), with the balance of firms reporting that levels of business values were above normal setting a survey record (+25 per cent)
  • 16 per cent said they had increased their selling prices but 9 per cent said they had cut them, leaving a balance of +7 per cent
  • Growth in costs per person employed accelerated, with a balance of +36 per cent this quarter comparing with +28 per cent in the previous quarter.
  • Growth in profitability (+31 per cent) was the highest since November 2007 (+34 per cent)
  • 45 per cent of firms said the number of employees had increased in the last three months, with 6 per cent saying they were down, giving a balance of +39 per cent Headcount is expected to rise at a slower rate next quarter (+20 per cent)
  • Firms plan to increase capital expenditure on IT (+39 per cent) over the next year mostly to increase efficiency/exploit new technologies (62 per cent).
  • 43 per cent of firms cite uncertainty of demand a factor that could limit capital expenditure, with 54 per cent noting that availability of professional staff could limit levels of business in the next 12 months, the highest since February 2008 (+65 per cent).

 

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