Service sector firms reported healthy growth in levels of business for the three months to August, with optimism improving at the fastest pace for a year, according to the latest quarterly CBI Service Sector Survey (CBI Service Sector Survey_August).

Both business volumes and values expanded in business & professional services – which includes accountancy, legal and marketing firms – and consumer services – which includes hotels, bars, restaurants, travel and leisure firms. Business and professional services reported that levels of business in value terms were significantly above normal – and a survey record high – reflecting the strongest growth in business volumes since 2001. Consumer services also reported a brisk increase in business volumes.

The survey of 176 firms highlighted a strong performance across the service sector with an expectation for similar results in the next quarter. Both sub-sectors recorded robust rises in profitability – underpinned by the growth in business volumes – and remain optimistic regarding their business situation.

Rain Newton-Smith, CBI Director for Economics, said:

After a weaker start to the year, the UK services sector is now seeing healthy growth across the board with firms becoming more profitable, driven by a surge in business volumes.

Debit Card (PD)“Companies are still looking to invest in people and capital, especially in IT which will help them exploit new technology and boost productivity.

“But difficulties in finding staff with the right skills for firms to grow is a mounting concern, and with recent turbulence in the markets risk management skills are likely to be in demand.”

Firms in both sectors expect to raise investment spending over the next 12 months, with business and professional services firms in particular anticipating strong increases in IT investment, mainly to increase efficiency and exploit new technologies.

Evidence that the labour market is tightening continues to grow. Both sectors cited availability of professional staff as limiting business expansion to the greatest extent since prior to the financial crisis in 2008. Meanwhile, firms across the services sector reported strong growth in numbers employed, but recruitment is expected to be flat in consumer services over the coming quarter, and to slow somewhat in business and professional services.

Key findings:

Consumer Services

  • Optimism regarding the business situation improved, with 44% of firms saying they were more optimistic than three months ago compared with 7% saying they were less optimistic, giving a balance of +37%
  • 48% of firms reported a rise in business volumes, compared with 15% saying they were down in the last quarter, leaving a balance of +33%. Business values also grew at a solid pace (+30%)
  • 22% of firms said they had increased selling prices, while 7% said they were down, leaving a balance of +14%
  • Costs per person employed grew at a slightly slower rate (+37%) than the previous survey (+42%), with expectations for the next quarter (+52%) the highest since November 2013 (+52%)
  • 47% said overall profitability was up while 16% said it was down leaving a balance of +31%. Profitability is expected to strengthen further over the next quarter (+39%)
  • 57% of firms said that numbers employed had risen, with 9% saying they were down, leaving a balance of +49%, the highest since November 2002 (+57%). However, expectations for the next three months are for no growth (-3%)
  • Capital expenditure plans continue to expand in land and buildings (+11%), IT (+13%) and vehicles, plant and machinery (+14%), though investment intentions have weakened from the previous survey. The main reason for capital expenditure is replacement (cited by 69% of respondents)
  • Uncertainty about demand is the main potential barrier to capital expenditure (cited by 43% of respondents)
  • Both domestic competition (32% previous survey, 52% this survey) and availability of professional staff (15% previous survey, 23% this survey – highest since August 2007 (24%)) are growing concerns that could limit levels of business in the next year.

Business and Professional Services

  • Optimism regarding the business situation rose further, with 40% of firms saying they were more optimistic than three months ago compared with 8% saying they were less optimistic, giving a balance of +32%
  • 43% of firms said business volumes were up compared with three months ago, and 10% said they were down, giving a balance of +33%. Business values also expanded robustly (+37%), with the balance of firms reporting that levels of business values were above normal setting a survey record (+25%)
  • 16% said they had increased their selling prices but 9% said they had cut them, leaving a balance of +7%
  • Growth in costs per person employed accelerated, with a balance of +36% this quarter comparing with +28% in the previous quarter.
  • Growth in profitability (+31%) was the highest since November 2007 (+34%)
  • 45% of firms said the number of employees had increased in the last three months, with 6% saying they were down, giving a balance of +39% Headcount is expected to rise at a slower rate next quarter (+20%)
  • Firms plan to increase capital expenditure on IT (+39%) over the next year mostly to increase efficiency/exploit new technologies (62%).
  • 43% of firms cite uncertainty of demand a factor that could limit capital expenditure, with 54% noting that availability of professional staff could limit levels of business in the next 12 months, the highest since February 2008 (+65%).

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