Business Falling at Slower Rate in Service Sector

Business conditions weakened for the UK services sector in the three months to February, the CBI said today (Tuesday).

However, business activity fell at a slower rate than in the previous quarter in Consumer Services, and for Business & Professional firms by less than expected. In addition, the decline in both sectors is expected to slow further in the coming three months.

The February quarterly CBI Service Sector Survey was conducted between 30 January and 15 February, and covered 167 firms. Respondents are divided into Business & Professional Services, such as accountancy, legal and marketing firms, and Consumer Services, such as hotels, bars and restaurants, travel, and leisure.

In Consumer Services, the fall in business volume and value continued, but at a slower pace than during the previous quarter.

A balance of -25% of firms said that volumes of business fell, broadly in line with expectations (-23%), and significantly less negative than the balance of -41% in the last survey.

The decline in values of business (-19%) also slowed compared with the previous quarter (-40%), and was broadly in line with expectations (-17%).

The pace of decline in business value and volume is expected to slow further in the coming quarter (balances of -12% and -21% respectively).

Total costs per employee were broadly stable (-3%) for the first time since August 2009 (+3%). Selling prices rose this quarter (+9%), but at a below average pace (+14%), and less than expected (+22%).

Profitability fell, as expected, for the fifth consecutive quarter (-24%), although at a slightly slower pace than in the previous quarter (-31%).

The number of people employed in Consumer Services also fell (-19%), for the ninth consecutive quarter, although the fall was smaller than had been expected (-33%). Firms anticipate a further similar fall in employment in the coming quarter (-20%).

In Business & Professional Services, over the past three months business volumes declined at a slower pace (-11%) than had been expected (-20%). The decline in business values was more marked (-31%).

Both measures are expected to fall more slowly in the coming three months. A balance of only -6% of firms expect a fall in business volumes, while -26% of firms expect business values to fall.

Total costs per person employed rose (+24%) in line with expectations (+23%), while average selling prices fell (-20%) more quickly than anticipated (-11%).

The combination of a fall in volumes and the squeeze on margins led to profitability declining (-10%), though by less than expected (-19%). The squeeze in profitability is expected to diminish over the next quarter, with balances of -10% and +31% for prices and costs respectively.

Despite the tough marketplace of the past quarter, numbers employed in Business & Professional Services grew (+10%) for a fourth quarter running, defying expectations of a decline (-11%). Firms expect headcount to continuing rising at a similar pace in the coming three months (a balance of +8%).

Ian McCafferty, CBI Chief Economic Adviser, said:

“Although volumes of business activity continued to worsen across the UK services sector in the past quarter compared with the previous quarter, there are some tentative signs that conditions may be levelling out.”

“There’s been a slowdown in the rate of decline in business volumes for consumer services firms, and they expect this to continue in the coming three months.”

“Meanwhile, firms providing business and professional services have seen business activity deteriorate, but not to the extent they had anticipated, and they too are expecting a more modest decline in the coming quarter.”

“Business confidence remains fragile, and will continue to be so given the continuing uncertainty in the Eurozone. However, there are some signs that after the very sharp fall in confidence at the height of the crisis last autumn, sentiment is stabilising.”

Business & Professional Services firms plans for capital spending in the coming year have been lowered after a period of growth, with plans to spend less than last year on land and buildings (-15%), IT (-2%), and vehicles, plant & machinery (-10%). Investment intentions for IT were at their lowest since August 2009 (-19%).

Consumer Services firms’ investment intentions for land and buildings (-5%), IT (+7%) and vehicles, plant and machinery (-9%) are in line with the long-run averages in all three categories (-6%, +8% and -9% respectively).

Both services sub-sectors cited replacement as a strong investment motive, with an above-average score for Consumer Services firms (+64% against +58% long-run average), and a survey high for this measure in Business & Professional Services (+81%).

Prospective demand/sales remained the single biggest factor likely to constrain expansion in the coming year, with a balance of +89% in Business and Professional Services and a survey-high +92% in Consumer Services.

Business Falling at Slower Rate in Service Sector

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