By Daniel Hunter

Business conditions in the UK services sector remained testing, as previous expectations for stronger activity failed to materialise, the CBI said today (Tuesday).

Both Consumer Services and Business and Professional Services reported further falls in business volumes and values in the three months to August, against expectations that growth would turn positive.

The latest quarterly CBI Service Sector Survey was conducted between 27th July and 15th August, with 196 firms participating. Respondents 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.

Firms in Consumer Services reported volumes and values falling at a similar pace to the previous quarter, while optimism regarding the business situation (-23%) was significantly lower than three months ago (-2%).

A balance of -10% of firms saw a fall in the volume of business having expected an increase in this quarter (+12%). The value of their business conveys a similar picture, with a balance of -12% reporting a fall, where there had been expectations of a rise in this period (+22%).

Average selling prices were unchanged (0%), the weakest rate of inflation since November 2009, and defying expectations that inflation would moderate but remain positive (+8%). However, total costs per person employed continued to rise strongly (+26%) and, combined with falling business volumes and flat prices, this led to a decline in profitability among Consumer Services firms.

The number of people employed in Consumer Services fell modestly (-8%) and training/re-training expenditure was reduced (-16%).

Business activity is expected to see little change over the next three months, with firms envisaging that business volumes will fall at a similar rate (-11%) and that the pace of decline in business values will accelerate (-17%). Profitability is expected to fall more sharply next quarter (-26%), due to expectations of falling business volumes combined with faster growth in total costs per employee (+37%) and price deflation (-17%). The rate of job shedding is also expected to increase (-19%).

In Business and Professional Services, the rate of decline in business volumes intensified (-21%) contrary to expectations of a slight rise in volumes (+4%). This was repeated in the figures for the value of business, with a balance of -16% reporting a fall, versus positive expectations (+7%).

Optimism among Business and Professional Services about the business situation was also lower in the three months to August (-11%) than it was three months ago (+8%).

Total costs per employee stabilised unexpectedly (+2%). However, selling prices fell at a rate close to their long-run average (-13%, compared to a long-run average of -10%) and this, combined with falling business volumes, led to an unexpected fall in profitability (-19% against expectations of +6%). Numbers employed remained stable (+3%) rather than increasing as expected (+18%).

Over the next three months, business volumes are expected to continue falling, albeit more moderately (-8%), and business values are expected to be broadly flat (-1%). Companies expect profitability to continue declining at a similar rate (-14%), with average selling price deflation expected to continue (-14%) and costs per employee projected to rise slightly (+5%). Headcount is expected to remain fairly stable over the coming quarter (+4%).

“Conditions in the service sector have not improved as expected this quarter, with firms now more negative about the overall business situation than they were three months ago," Anna Leach, CBI Head of Economic Analysis, said.

“Companies selling services to consumers continue to face challenging times, with price-cost pressures and a weak business environment squeezing profits.

“While business and professional services firms are continuing to see business volumes fall, they have also seen labour costs stabilise, helping to support headcount.”

Investment intentions in both sectors remained weak this quarter. Within Consumer Services, capital expenditure plans for the year ahead, compared to last year, remain depressed relative to long run averages: spending plans have been scaled back on land and buildings (-16%), vehicles, plant and machinery (-32%), and to a lesser extent, IT (-6%). Meanwhile, although Business and Professional Services expect to increase their expenditure on IT (+10%), firms plan to spend less on land and buildings (-10%) and vehicles, plant and machinery (-10%).

Uncertainty over the level of demand/sales remains the biggest factor in limiting capital expenditure authorisations for both sub-sectors. Consumer Services reported a balance of +56%, while Business and Professional Services (+70%) returned their highest figure since February 2011 (+73%), with both sub-sectors above their long-run averages (+48%, +59%).

Replacement remains the strongest reason for capital expenditure in the next 12 months for both sub-sectors (Consumer +69%, Business and Professional +67%). Expanding capacity within Business and Professional Services (+44%), was comfortably above its long-run average (+31%) with the highest number of citations since November 2007 (+49%).

While neither sub-sector on balance plans to expand business further in the coming year than they did last year, the results (Consumer -13%, Professional and Business -8%), were slightly above those recorded in the past four quarters.

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