By Daniel Hunter
Business conditions in the UK service sector are showing signs of stabilising, the CBI said today (Sunday).
Firms across both service sub-sectors expect business activity to pick up in the next three months, accompanied by an improvement in profitability.
Confidence, too, is stabilising, after the sharp falls of the last nine months.
The quarterly May CBI Service Sector Survey was conducted between 27th April and 16th May, 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 there was a further slackening in the pace of contraction, with volumes and values falling more slowly than expected.
A balance of -11% of firms stated that volumes fell, which was a smaller fall than expected (-21%), and the slowest pace of decline since February 2011 (-11%).
The decline in the value of business (-8%) also slowed compared with the previous quarter (-19%), and exceeded expectations (-12%).
Firms expect both the volume and value of business to increase in the coming quarter. The balance of firms expecting volumes growth is in positive territory (+12%) for the first time since August 2010 (+9%), while the expected rate of value growth (+22%) is the highest since November 2007 (+29%).
Total costs per employee rose sharply (+41%), and at a faster rate than expected (+19%), while average selling prices also rose (+15%), in line with their long-run average, but by less than expected (+28%).
Stronger selling prices, combined with the slowing decline in business activity, led to Consumer Services firms seeing the smallest decline in profitability (-6%) since November 2010 (-3%), a better performance than expected (-17%). Firms predict that the decline in profitability will come to an end in the coming three months, with an expectations balance of +2%.
The number of people employed in Consumer Services fell for the tenth consecutive quarter (-12%), although less rapidly than in the previous quarter (-19%), and less than expected (-20%). Firms expect the fall in employment to slow further in the coming three months (-4%).
In Business & Professional Services, business volumes declined moderately over the past three months (-15%), but faster than expected (-6%).
The decline in the value of business was less marked (-10%), however, and was considerably slower than in the previous three months (-31%), defying expectations of that trend continuing to May (-26%).
Firms have positive expectations for both the volume (+4%) and value (+7%) of business in the coming three months, for the first time in a year.
Optimism about the general business situation among Business & Professional Services firms rose compared to three months ago, for the first time in a year, with a balance of +8%.
Total costs per employee rose (+21%), but by less than expected (+31%), while the rate of deflation in average selling prices (-4%) eased to its weakest since August 2008 (-2%).
The combination of weaker deflation in selling prices and falling volumes left profitability flat in the three months to May (-1%), slightly better than expected (-6%). Business & Professional Services firms predict a slight increase in profitability in the coming quarter (+6%).
Despite persistent cost pressures over the quarter, employment continued to grow for a fifth consecutive quarter (+4%), although slightly slower than expected (+8%). The rate of growth in headcount is expected to accelerate over the next three months (+18%).
“Despite the continued uncertainty emanating from Europe, there are some signs that conditions in the UK service sector are beginning to improve slightly,” Ian McCafferty, CBI Chief Economic Adviser, said.
“In Consumer Services firms, confidence is stabilising, and firms expect a somewhat better performance into the summer. The rate of decline in business volumes has slowed further, and growth is predicted next quarter for the first time since August 2010.
“Business and professional services firms saw similar rates of decline in business volumes this quarter as last, but are also predicting a return to growth next quarter for the first time in a year.”
Consumer Services firms’ investment intentions weakened this quarter across all categories. Less is expected to be spent in the coming year on land and buildings (-26%), and vehicles, plant & machinery (-22%). Investment intentions for IT are for spending to be relatively unchanged over the coming year (-2%), compared with last year.
In contrast, investment intentions improved for Business & Professional Services firms, who plan to spend slightly more in the year ahead on IT (+10%) and vehicles, plant & machinery (+5%) than they did last year, while leaving spending on land and buildings stable (-3%).
Firms in both sub-sectors again saw uncertainty about demand/sales as the single biggest constraint on capital expenditure authorisations, with above-average balances in Consumer Services (+55% against a long-run average of +47%) and in Business & Professional Services (+63% against a long-run average of +58%), while replacement remained the strongest investment motive in both sub-sectors (balances of +55% and +80% respectively).
Financial constraints remained elevated as factors limiting investment for Consumer Services firms. Concerns about a shortage of internal finance (+28%), inability to raise external finance (+16%), and cost of finance (+14%) are expected to limit Consumer Services firms’ capital expenditure authorisations in the coming year, with balances in all three measures remaining above their long-run averages (the long-run averages are +22%, +9%, and +9% respectively).
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