Sentiment falls as the growth outlook deteriorates
Sentiment fell sharply across the services sector in May amid rapid increases in costs and prices, and a worsening growth outlook.
That’s according to the latest CBI Service Sector Survey, based on responses from 174 services firms and conducted between 28 April and 13 May.
Growth in consumer services came to a standstill, with business volumes flat in the three months to May and expected to contract in the quarter ahead. By contrast, business and professional services firms reported that growth in business volumes accelerated last quarter, though volumes are predicted to be flat in the quarter ahead.
Costs and average selling prices in the services sector grew rapidly once again over the three months to May. Business and professional services firms expect selling price inflation to accelerate a little further in the three months to August, but the pace of price inflation in consumer services is expected to slow somewhat as demand also cools. Services firms are sharing the burden of higher costs with their customers/clients, with profitability falling in both sub-sectors for the second quarter in a row and a further fall expected next quarter.
Ben Jones, CBI lead economist, said: “Services firms are feeling pretty despondent about their immediate prospects in the face of cost pressures and high inflation. The squeeze on household incomes is already having an impact on activity in consumer services, with fears of worse to come over the summer.
“Businesses across the services sector are continuing to hire new staff and although concerns over shortages of labour are still widespread, they have eased a bit. But falling profitability is beginning to take its toll on investment plans, which have softened.
“The Government should act now in support of those on lower incomes but also help restore business confidence and get firms investing. An extension to the successful Recovery Loan Scheme would be an astute move as the cash flow crunch continues for firms.”
Business & professional services
- Business optimism fell at the fastest pace since November 2020 (balance of -21%, from +9% in the quarter to February)
- Business volumes grew strongly last quarter (+28%, from +3%) but are expected to be broadly unchanged next quarter (-1%)
- Costs per person employed grew at a survey record pace (+64%, from +62%) in the three months to May, with expectations pointing to a further increase next quarter (+67%)
- Average selling prices also rose at the fastest rate on record (+23%, from +20%), and expectations for the next quarter were the highest on record (+29%).
- Profitability fell for a second consecutive quarter (-12%, from -19%) with the expectations for a further decline in the coming quarter (-19%)
- Employment continued to grow strongly in the last quarter (+33%, from +23%) and headcount is expected to rise at a similar pace in the quarter to August (+36%)
- Spending on training/retraining rose at an above average pace last quarter (+27% ,from +19%; vs average of +7%), and is tipped to rise further next quarter (+23%)
- Growth in investment in IT is expected to pick in the 12 months ahead (+28%, from +20%), but spending on vehicles, plant & machinery is set to be unchanged (+2%, from +20%). Spending on land and buildings is set to be cut back further (-10%, from -12%).
Consumer services
- Optimism about the general business situation fell in the quarter to May (balance of -23%, from +13% in the quarter to February)
- Business volumes were flat over the last three months (0%, from +10%) and are expected to fall next quarter (-23%)
- Costs continued to rise at a historically strong pace (+77%, from +65%) with the rate expected to pick up next quarter (+85%)
- Average selling prices rose at the fastest pace since November 2006 (+47%, from +42%), although the rate of increase is expected to temper slightly next quarter (+37%)
- Stronger cost pressures weighed on profitability (-21%, from -11%) with consumer services firms expecting profitability to deteriorate further in the next quarter (-47%)
- Employment edged up slightly in the quarter to May (+5%, from +18%) with a stronger increase in headcount expected in the quarter to August (+23%)
- Spending on training/retraining was broadly flat last quarter (-2%, from +42%), but growth is expected to accelerate next quarter (+17%)
- Investment intentions for the year ahead remained above average, but have softened since February across all categories: IT (+25%, from 53%); vehicles, plant & machinery (+19%, from +36%), land & buildings (+8%, from +22%).
