By Marcus Leach

The fortunes of businesses in the UK service sector diverged further over the past three months, the CBI said today (Thursday).

While business and professional services saw another quarter of modest growth in both volume and value of trade, consumer services firms saw an unexpectedly sharp decline in both.

The latest quarterly CBI Service Sector Survey was conducted between 27 April and 18 May, and covered 175 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 Business & Professional Services, the volume and value of business rose for the second successive quarter. The rise in the value of business (a balance of +12%) was the fastest since November 2007 (+29%), and in line with expectations (+12%). Volume growth over the past quarter (a balance of +5%) did not pick up as expected (+13%), but firms predict much stronger growth in the coming three months (+20%). Firms also expect a faster rise in the value of business next quarter (+20%).

The positive trends in activity among business and professional services firms are also reflected in employment. Staff numbers rose over the past three months (a balance of +12%) at the fastest rate since May 2008 (+15%). A stronger increase in employment (+30%) is expected in the next quarter, and the expectation is the highest since November 2007 (+31%).

While average selling prices declined slightly (-7%), this was the least deflationary performance since August 2008 (-2%). Growth in total costs per person employed is nudging upwards. A balance of +23% over the past quarter was in line with expectations, and total costs are predicted to grow at a faster rate in the coming three months (+28%), with expectations for costs the strongest since August 2008 (+45%).

Despite the gain from growing volume and value of business, higher costs are causing profitability among business and professional firms to decline unexpectedly (-17%), after levelling off in the last quarter. But this appears to be a temporary impact, as firms expect profitability to stabilise next quarter.

The trends among Consumer Services firms have been much weaker in comparison, as the volume and value of business have now declined for five consecutive quarters. Of those surveyed, 16% said volumes rose and 39% said they fell. The resulting balance of -23% is lower than in February, and is the weakest balance since November 2009 (-35%). Meanwhile, the decline in the value of business over the past quarter (-16%) was similar to that in February.

The declines in the volume and value of business for consumer services firms were unexpected, as firms had predicted no change (-1%). However, the pace of decline is expected to slow over the next quarter, with a balance of -10% indicating an expected fall in the volume of business and -6% a decline in value.

Firms’ average selling prices have risen at a faster pace over the past quarter (+18%), in line with expectations (+19%). However, costs per employee have also increased more rapidly; a balance of +43% marks the strongest growth since August 2008 (+62%).

Unexpectedly weak trends in activity among consumer services firms have resulted in a much faster decline in profitability than had been predicted; a balance of -41% marks the steepest fall since August 2009 (-46%). The number of people employed has also fallen heavily. 2% of firms said numbers employed had grown, and 52% that they were lower. The resulting balance of -50% is the lowest since the survey began in November 1998.

Ian McCafferty, CBI Chief Economic Adviser, said:

“Business and professional services firms are feeling more optimistic about their business situation. They have seen further growth in the volume and value of trade in the past quarter, albeit fairly modest, and these look set to strengthen in the coming three months, with expectations the highest since 2007. Numbers of employees have also increased and are expected to continue to do so. These are all sure-fire signs that business spending is picking up, which will help drive the recovery.

“There is a stark contrast with the performance of consumer services firms, however. This survey shows further evidence of weak demand for consumer services in the UK, though firms expect that conditions will not be as difficult over the next quarter. When times are tough, consumers cut back their discretionary spending on holidays, leisure pursuits and meals out, and we are seeing that rising prices and squeezed incomes are holding back household spending.”

Business & Professional Services are positive about the prospects for business expansion in the coming year for the third consecutive quarter, with a balance of +10% expecting to grow their business. Level of demand and domestic competition are given as the most significant expansion-limiting factors, though these have edged down as likely constraints. Business confidence in this sub-sector has also risen for the second consecutive quarter (+23%).

Business & Professional Services firms also plan to invest more in the coming year on vehicles, plant and machinery (+15%), the highest balance since November 2004 (+16%), and investment intentions for land and buildings are positive and above average. More firms also plan to raise the amount spent on IT for the seventh successive quarter.

In contrast, consumer services firms do not expect to expand their business over the coming year (-6%), and they expect to spend less on each of land and buildings, vehicles, plant and machinery, and IT. Businesses have become less concerned about domestic competition as a factor likely to limit expansion in the coming year, but the availability of professional staff has crept up as a likely constraint since the last survey in February.