By Daniel Hunter
The UK services sector as a whole saw steady growth in the three months to February but some sharp contrasts in fortunes are emerging, according to the latest quarterly CBI Service Sector Survey.
Optimism continued to rise, marking two years of continuous improvement, though growth in sentiment remained less bullish than a year ago.
Business volumes expanded in both consumer and business & professional services in the three months to February, but business & professional services firms in particular are feeling the pinch of intensifying competition, which appears to be restricting profit growth and posing a greater threat to business expansion.
The survey of 182 firms shows that growth in volumes weakened a little in business & professional services over the last three months. But it was strong in consumer services, and growth remained above long-run averages in both sectors. Overall, services firms also expect volumes growth to pick up next quarter, with the consumer sector again leading the way.
But there was a contrast in average selling price inflation between the two sectors. While average selling prices were still rising in consumer services, they fell in the business & professional services sector at the fastest pace in two years.
Both sub-sectors saw their costs increase strongly, but competitive pressures are making it much harder for business & professional services companies to pass rising costs on to customers, with the result that their profitability is being hit harder.
Rain Newton-Smith, CBI Director for Economics, said: “With the economic upswing now well entrenched, it’s no surprise that optimism is growing at slower rates than seen in the earlier phase of the UK’s upturn.
“Sentiment is still improving across the service sector but marked contrasts are developing: fierce competition in business & professional services is making it harder for companies to raise prices, and skill shortages are rising up the agenda.
“The good news is there’s more investment and jobs growth to come in this part of the service sector, as firms aim to improve efficiency and fight to secure new custom.”
Whereas consumer services have now seen a full year of robust profit growth, with a marked strengthening expected next quarter, business & professional services have seen flat profitability for the past two quarters, with only a very slight rise expected.
Even so, both sub-sectors are hiring, with good jobs growth expected to continue and spending on training rising strongly. But the potential for labour shortages to constrain expansion in business & professional services has become an increasing concern since mid-2014, alongside the strength of domestic competition.
