By Claire West

The fortunes of the UK services sector continued to diverge over the past three months, the CBI said this week.

While business volumes in consumer services fell, firms selling business and professional services saw a return to growth with the first quarter of significant growth in nearly three years.

The latest quarterly CBI Service Sector Survey was conducted between 31 January and 16 February, and covered 171 firms. They 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 value and volume of business continued to fall, marking a full year of decline. Of those surveyed, 20% said the value rose and 35% said it fell, giving a balance of -15%, the fastest fall since May 2009 (-30%). Looking at the volume of business, 24% reported a rise, and 34% a drop, giving a rounded balance of -11%. This was less negative than expected (-20%), however, and firms expect business volumes to be flat in the coming quarter (-1%).

Firms’ average selling prices rose, but at a slightly slower rate (+9%) than the previous quarter (+11%). At the same time, total costs per person employed continued to rise (+23%) and profitability fell at a faster rate (-13%) than expected (-6%). Firms foresee a further deterioration in profitability over the coming quarter (-15%).

In Business & Professional Services, the value and volume of business rose, at balances of +4% and +8% respectively. The rise in business volumes, though modest, was the fastest since May 2008 (+10%), and the balance of firms expecting an increase in the next quarter (+13%) is the highest since August 2009 (+19%).

Average selling prices continued to fall at a rapid rate (-26%), while total costs per person employed rose (+20%) more quickly than had been expected. Helped by volumes growth, firms’ profitability stabilised (-2%) despite these trends, after falling for ten quarters in a row, and a small increase is expected next quarter (+5%).

Ian McCafferty, CBI Chief Economic Adviser, said:

"These findings on the service sector reveal much about the broader economy. On the one hand, consumer spending is constrained, held back by rising prices and squeezed real incomes. On the other, there are signs that spending by businesses is picking up, helping to re-balance the economy away from consumer-driven growth.

"For the past year, consumers have been cutting back on leisure activities and other discretionary spending, with no indication of improvement any time soon.

"Business and professional services firms managed to grow their business volumes modestly in the past three months, and in turn steadied their profitability in the face of falling prices and rising costs. Signs that firms plan to invest more in IT and equipment are encouraging."

Consumer services firms do not expect to expand their business over the coming year (-17%). For the second quarter running, the highest proportion of firms since the survey began in November 1998 (89%) cites prospective demand as the most significant factor likely to inhibit business growth in the year to come. Numbers employed by consumer service firms fell at the fastest rate for a year (-24%), and firms felt less optimistic about the general business situation (-11%) than they did three months ago.

Firms selling services to the consumer are planning to invest more in Information Technology (+31%) in the coming 12 months, however, with the biggest motivation being to replace existing equipment, followed closely by increasing efficiency/speed and exploiting new technology. The highest balance of firms (+10%) since November 2007 (+30%) expects to spend more on training in the next three months.

Prospects for business expansion in Business & Professional Services look more positive, with a balance of +24% expecting to grow their business, the highest since August 2007 (+30%). Level of demand is by far the most likely factor to limit expansion, followed by domestic competition, cited by the highest proportion of firms (65%) since May 2004 (66%). For the first time since May last year, firms in this sector are more optimistic about the general business situation (+10%) than they were three months ago.

Business & Professional Services firms plan to invest more in IT and vehicles, plant & machinery in the coming year, with the highest proportion of firms in the survey’s history seeking to replace depreciated equipment (77%). Adequacy of systems capacity was cited by the most firms (12%) since February 2005 as a possible reason for inhibited business growth in the coming 12 months. Numbers employed are expected to grow modestly in the next three months (+9%).