Business Confidence Across Services Sector Falls Sharply As Cost Pressures Accelerate

Business confidence across the services sector deteriorated sharply again in the quarter to May, according to the CBI’s latest Service Sector Survey. Business volumes also fell again, across both business & professional services and consumer services.

Additionally cost pressures ramped up sharply across the services sector, while prices increased at their fastest in two years. Business & professional services recorded a particularly sharp hike in price inflation compared to the previous quarter, to its highest since May 2023. Consumer services also witnessed an increase in prices, although this was more in line with the pace of inflation seen over the previous quarter.

With business volumes continuing to fall, cost pressures accelerating and margins remaining depressed, profitability continued to fall at pace across the services sector. Services firms also reported another decline in headcount, driven particularly by another significant fall in employment among consumer services firms.

Looking ahead, firms across the services sector anticipate activity to fall sharply again over the quarter ahead. Cost growth is set to remain elevated by historical standards, and to continue running ahead of selling price inflation (which is nonetheless expected to remain elevated). Adding to this challenging outlook, employment across services firms is tipped to decline at a faster rate over the quarter ahead, with consumer services once again expecting to see a heavier rate of decline compared to that in business & professional services.

With demand conditions weak, services firms show reservations about their investment plans over the year ahead, with both sub-sectors set to continue cutting back spending on land & buildings and vehicles, plant & machinery. Spending in IT is expected to be cut back for the first time since November 2022.

“It’s been a tough first half of the year for the services sector. The double whammy of both cost and price pressures ramping up is particularly worrying, given the Bank of England’s concern about the persistence of domestic inflationary pressures. Businesses continue to cite the impact of higher employer NICs and the National Living Wage both hitting their own cost base and depressing demand from clients. The recent backdrop of global volatility has only served to further stoke caution.

“Recent developments on the international stage in the form of the UK/EU reset and trade deals with the US and India may give some businesses reason to be positive. But more needs to be done to counteract tough domestic trading conditions, as our survey shows the gloomy picture is set to persist into the summer.

“In just a fortnight’s time, the government needs to use the long-awaited Spending Review and Industrial Strategy to unlock growth enablers like an ambitious goal for R&D spending, making it easier to invest in skills and taking measures to reduce the regulatory burden on business – to boost business confidence, giving firms the right incentives to invest and grow.”

The survey based on the responses of 215 services firms found that: 

Optimism about the general business situation deteriorated for the third consecutive quarter (-43%, from -28% in February).

Business volumes declined in the quarter to May, at a similar pace to the quarter to April (-18%, from -20% in the quarter to April). Volumes are expected to fall again, at a faster pace, in the three months to August (-29%).

Growth in total costs per person employed rose strongly in the quarter to May (+60%, from +46% February; and ahead of the long run average of +30%). Costs growth is expected to remain elevated in the next quarter (+63%).

Overall profitability deteriorated in the quarter to May, and at a similar pace to the previous quarter (-34% from -37% in February). Overall profitability is expected to deteriorate further over the next quarter, at a faster pace (-47%).

Growth in average selling prices accelerated in the three months to May, to the fastest pace in two years (+26%, from +9% in February; and well above the long-run average of -2%). Firms expect selling prices to rise at a similar pace in the quarter to August (+24%).

Headcount was broadly flat in the quarter to May after declining for five consecutive rolling quarters (-2%, from -23% in April). Headcount is expected to resume declining in the quarter to August (-11%).

Investment intentions for the next twelve months were weak. Firms expect to cut investment in land & buildings (-15%, from -21% in February), in vehicles, plant & machinery (-14%, from -21%) and in IT (-7%, from +19%, marking the first negative expectation since November 2022).

Uncertainty about demand was the most cited factor limiting investment (cited by 67% of respondents, above the long-run average of 56%). This was followed by those citing inadequate net returns (29%) and a shortage of internal finance (29%).

Consumer Services

Optimism amongst consumer services firms deteriorated in the quarter to May, for the eighth consecutive quarter (-42%, from -55% in February).

Business volumes declined in the quarter to May (-36%), extending a period of flat or falling volumes that began in March 2022. Firms expect volumes to decline again in the three months to August (-43%).

Growth in total costs per person employed accelerated in the quarter to May and stand well above the long-run average (+70%, from +55% February; long-run average of 40%. Costs growth is expected to remain elevated in the next quarter (+66%).

Overall profitability deteriorated (-43%, from -35% in February). Profitability is expected to decline again in the next three months (-47%).

The pace of growth in average selling prices decelerated slightly in the quarter to May (+32% from +36%), though remained well above the long-run average (+14%). Selling price inflation is expected to decelerate again in the three months to August (+21%).

Headcount fell amongst consumer services firms in the three months to May (-28%, from -47% in April). Numbers employed are expected to fall again, and at a faster pace in the three months to August (-36%).

Investment intentions for the next twelve months were weak. Firms expect to cut investment in land & buildings (-42%, from -35% in February), in vehicles, plant & machinery (-40%, from -34%) and in IT (-36%, from -32%).

Uncertainty about demand was the most cited factor limiting investment (cited by 56% of respondents, above the long-run average of 48%). This was followed by those citing inadequate net returns (43%), labour shortages (20%), and a shortage of internal finance (20%).