By Daniel Hunter

Business activity in the service sector improved over the three months to May and optimism rose, according to the CBI’s quarterly Service Sector Survey.

Although business and professional services saw weaker growth than expected, consumer services experienced a sharp turnaround in business volumes.

The business & professional service sector, which includes accountancy, legal and marketing firms, saw activity staying broadly flat over the quarter. But while overall profitability fell, optimism regarding the business situation rose at its fastest rate since February 2010, as expectations for the next quarter are somewhat brighter.

In contrast, consumer services, such as hotels, bars, restaurants and the travel and leisure industries, saw business volumes rise at their fastest pace since August 2007. As a result, overall profitability of consumer businesses rose for the first time since November 2007, in spite of employee costs continuing to increase. However, there are concerns among firms over a shortage of internal finance and an inability to access external funding.

The survey of 170 companies revealed expectations of a firm quarter ahead, with business and professional services expecting solid growth in both the value and volume of business. Consumer services firms predict that growth in business will be sustained and profits in both sectors are expected to rise strongly.

“There appears to be a sense of growing confidence in the service sector. We’ve seen some turnaround in activity this quarter, and a more positive outlook for the next," Stephen Gifford, CBI Director of Economics, said.

“While activity has been pretty flat for business and professional firms, the outlook is much stronger.

“What’s promising is that consumer services have seen growth in activity, and expect this to continue pointing to a greater willingness from people to go out and spend. “But there is concern around getting access to finance, so it’s vital that growing firms look at the full range of funding options out there on the market.

“Conditions remain tricky, with consumers still grappling with a squeeze on real incomes, and business confidence vulnerable to any adverse developments in the global economy.”

The Service Sector Survey was conducted between 26th April and 15th May — with 108 business & professional firms and 62 consumer services firms responding.

The key findings are:

Consumer Services

· Optimism about business conditions rose further on the previous quarter (+30% compared with +6%), which is the strongest increase since September 1999 (+34%) and the third consecutive quarter of improvement.

· Business volumes increased in line with expectations (+10% compared with an expectation of +11%) and similar growth is predicted next quarter (+11%).

· Profitability saw its sharpest rise (+21%) since November 2007 (+27%) and is expected to grow further in the coming quarter (+34%).

· Numbers employed fell slightly (-5%), disappointing predictions of a rise (+15%), but are expected to flatten out in the quarter ahead (+3%).

· Firms are expecting to expand their business modestly over the next 12 months (+4%).

· Planned spending on IT in the year ahead remains modestly positive (+8%, compared with +16% in the previous survey), but there has been a leap in concerns that both a shortage of internal finance (39%, the highest citation since August 2009) and an inability to raise external finance (27%, the highest citation since November 2009) will constrain capital expenditure over the next 12 months.

Business and Professional Services

· Optimism about business conditions rose significantly, (+29%), at its fastest rate since February 2010 (+34%).

· Business volumes were flat (-1%), disappointing expectations of growth (+12%), but firms are confident that business will pick up solidly in the next quarter (+21%).

· Profitability fell faster than expected (-16%, rather than -7%), but is predicted to rise in the next three months (+25%).

· Numbers employed unchanged for the second consecutive quarter, but are expected to rise in the next quarter (+21%). Spending on training was broadly flat, (+1%) in line with expectations (+2%).

· Investment plans have softened for the 12 months ahead, with a little extra spend planned for IT (+8%) and land & buildings (+6%). More firms expect to expand their business over the next 12 months (+14%).

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