Service sector firms are feeling bullish about their prospects following a second successive quarter of solid growth in activity, according to the CBI's quarterly Service Sector Survey.
In the three months to November, optimism across the sector as a whole increased at the strongest pace since the start of the survey in 1998, while business volumes rose at the quickest rate since November 2007. Against this backdrop, the rise in headcount also reached a six-year high.
Consumer services firms reported particularly strong activity in the quarter to November. Hotels, bars, restaurants, travel and leisure firms and others in consumer-facing sectors saw business volumes far outstrip expectations, to grow at the strongest pace since 2007. Average selling prices increased, so that despite a rise in total costs per person, profitability also improved. Firms reported the level of business to be above normal for the first time in over six years, and to the greatest extent since 2005. In the coming quarter, firms expect the fastest growth in both the volume and value of business since the start of the survey in 1998.
The business and professional services sector, which includes accountancy, legal and marketing firms, saw business volumes expand for a second successive quarter, but less quickly than had been expected. While selling prices remained stable for a second quarter, total costs per person continued to rise slightly. Profitability was stable, but business activity and profitability are expected to pick up next quarter.
The survey of 154 companies revealed numbers employed increased in both sub-sectors at the fastest rate in six years. Business and professional services firms anticipate increasing their headcount again next quarter, while numbers employed are expected to remain stable in consumer services.
Stephen Gifford, CBI Director of Economics, said:
"Business activity is up, more people are being employed, and optimism is rising fast. There are encouraging signs that the recovery is taking hold across the service sector and that investment is picking up. Both consumer and business-facing service firms finally seem to be feeling the benefit of growing confidence and spending within the UK and globally.
"Business volumes increased across the sector, with consumer services seeing particularly rapid growth in demand, and firms are expecting another strong expansion in the coming three months."
Firms in both service sectors plan to boost investment in the year ahead. Business and professional service firms' expectations of business expansion were at their highest level since May 2004, and firms in this sector plan to authorise more capital spending in all investment categories for the first time in two years. They are less worried by demand uncertainty, and, having increased last quarter, concerns over the availability of professional staff did not rise further. Consumer services firms plan a strong increase in IT spending over the next 12 months—the proportion citing systems capacity as a constraint on business rose to record levels. The proportion of respondents citing demand uncertainty as a factor likely to constrain investment fell back sharply, to its lowest level since August 2007.
The Service Sector Survey was conducted between 25th October and 13th November 2013. 96 Business and Professional Service firms and 58 Consumer Service firms responded.
The key findings are:
• Optimism about business conditions rose strongly (a rounded balance of +33%), the fastest pace since August 1999 (+34%), with 37% of firms saying they were more optimistic than three months ago and 3% saying they were less optimistic
• With 50% of firms saying business volumes were up compared with three months ago and 8% saying they were down, business volumes far exceeded expectations three months earlier (a balance of +42%, versus expectations of +26%), rising at the fastest pace since May 2007 (+44%). More robust growth in business volumes is expected next quarter (+56%), the fastest predicted growth since the start of the survey in November 1998.
• With 50% saying numbers employed were up on three months ago and 10% saying they were down, employment grew (a rounded balance of +41%) at the fastest pace since November 2007 (+46%), but are expected to remain stable in the coming quarter (+5%)
• Total costs per person employed increased strongly (+42%). With average selling prices also rising (+23), profitability improved (a rounded balance of +18%, resulting from 32% of firms saying profitability was up compared with three months previously, and 15% saying it was down). Similar growth in profitability is expected next quarter (+19%)
• Firms are cautious about their prospects for business expansion (+6%), but expect to increase investment across the board over the next twelve months, particularly IT spending (+47%, the highest since November 2006, when the balance also stood at +47%).
Business and Professional Services
• Optimism about business conditions (+43%) rose at the fastest pace since the survey began in November 1998, with 47% saying they were more optimistic than three months ago and 4% saying they were less optimistic.
• Business volumes expanded for a second successive quarter (+13%, resulting from 29% of firms saying volumes were up, compared with three months ago and 16% saying volumes were down). This was less rapid than had been expected (+26%) three months ago. Volumes growth is expected to pick up (+22%) in the coming quarter
• Headcount expanded strongly (a balance of +28%, resulting from 30% of firms saying numbers employed were up compared with three months ago, and 2% saying they were down). This was the fastest growth since November 2007 (+33%), and a further increase is expected next quarter (+26%)
• Total costs per person rose (+20%) and profitability was stable (a balance of -2% resulting from 21% of firms saying profitability was up compared with three months ago, and 23% saying it was down). Profitability is expected to rise in the next three months (+24%)
• Expectations of business expansion in the coming year were at their highest level (+43) since May 2004 (+48%)
• Investment intentions are positive across all categories for the first time in two years, with planned spending on vehicles, plant and machinery (+18%) the most positive since the survey began in November 1998.