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Services sector sales and profits disappointing

Firms selling services to consumers saw their volumes of sales fall in the last three months, while sales volumes in business and professional services remained flat, disappointing expectations, the latest CBI Services Sector Survey reveals.


Services sector sales and profits disappointing

The quarterly survey was conducted between 28 April and 12 May and covered 151 service sector firms. They are divided into Business and Professional Services, such as accountancy, legal and marketing firms, and Consumer Services, such as hotels, bars and restaurants, travel and leisure.

The value and volume of business in Consumer Services fell in the last three months, having risen slightly in the previous quarter. 14% of firms reported the volume of business rose, while 35% said it fell, making a balance of -21%. For value of business, the balance was -5%, and expectations that both would rise were disappointed. Firms considered their level of business, in both volume and value terms, to be well below normal in the past quarter.

The overall profitability of firms selling services to consumers fell, with a balance of -34%, the most negative since August last year.

The rate at which prices rose (+18%) was slower than expected, but there was a faster-than-expected rise in costs. This quarter the balance saying costs rose was +20%, and a balance of +26% expects an increase in costs next quarter, the highest since November 2008.

In Business and Professional Services, the volume of business was unchanged on three months ago, which disappointed expectations of an increase, whereas the value of business rose slightly, with a balance of +8%. Levels of both the volume and value of business were still considered well below normal in the sector.

The profitability of firms selling business and professional services has now fallen consistently for two years, with a balance of -18% saying their profitability declined in the past three months, compared to the small increase expected. Firms’ selling prices continued to fall and, although the balance of -20% was the least deflationary since November 2008, at the same time their costs increased at the fastest rate since August 2008 (+28%).

After seven quarters when staff numbers fell in Business and Professional Services, there was little change in the past three months. In Consumer Services, employment fell compared with three months ago, but the rate of fall was less than feared (a balance of -8% against an expected -33%).

Ian McCafferty, CBI Chief Economic Adviser, said: “These figures for the UK service sector show there is some way to go before the recovery gets up to speed, and firms selling services to the consumer are finding it tougher than those in business and professional services.

“Consumers are still being cautious about spending on discretionary activities like eating out in restaurants or bars, and leisure and personal services, such as haircuts or beauty. But it is interesting to see that travel services firms are doing better, which suggests people still want to take a well-earned break.

“Firms selling business and professional services are feeling slightly more optimistic than three months ago, but are still finding it hard to make a profit, as prices continue to decrease and costs accelerate. These firms no longer expect volumes of business to grow in the next three months.”

Firms are generally planning to reduce capital expenditure in the coming year, with the exception of modest increases in Consumer Services firms’ investment in land and buildings, and Business and Professional Services’ spending on IT. There is a lower-than-average interest in capacity expansion as a reason to invest across the sectors, and greater concern that the net return on investment will prove inadequate.

Expansion plans for the coming year are quite muted. Domestic competition was felt likely to limit business expansion in the coming 12 months by 48% of consumer services and 60% of Business and Professional Services firms, the highest since May and August 2007 respectively.

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