Falling prices hit the service sector but optimism on the up says CBI

Published on Sunday 23 August 2009 22:00

PROFITS in the UK's giant service sector are being hit by falling prices, despite indications that the recession is easing, the CBI today warned.

The service sector accounts for three-quarters of the UK economy and includes a range of businesses, from shops and restaurants through to professional firms specialising in law and accountancy.

Business leaders in Scotland warned that increasing unemployment will further damage the service sector, while highlighting the need to boost bank lending to help companies expand.

Profitability fell across the sector during the second quarter of the year. Almost a third of consumer services firms – ranging from leisure and travel companies through to bars and hotels – cut their prices and just 11 per cent raised them. The balance of -21 per cent is the lowest since the CBI's survey began in 1998. The balance for business and professional services firms was -31 per cent.

In both areas, firms expect prices for their goods and services to continue to fall, but at slower rates, over the next three months.

Lai Wah Co, the CBI's head of economic analysis, said: "Business conditions remain difficult for service sector firms. They have had to cut the price of their services in order to compete for business, and this has pushed down their profitability further over the past three months."

Among professional services firms, the value and volumes of business both rose very slightly on the previous quarter for the first time since May 2008. However, both measures remain "below normal" for the seventh successive quarter.

In consumer services, business values and volumes fell slightly, at much slower rates than in the previous three quarters.

But service-sector firms did give some optimistic signals, with firms in consumer services expecting business values to stabilise in the next three months. Professional services firms expect business volumes to rise, with more firms expecting an increase than at any other point since November 2007.

Anton Colella, chief executive of the Institute of Chartered Accountants in Scotland, said businesses were beginning to move away from a defensive mind-set and were considering "careful growth".

He added: "These are still challenging times for many professional practices, but there are definitely some signs to encourage confidence. With bank lending beginning to come through more strongly, more deals will be done and that is good news for corporate finance advisers, such as chartered accountants."

A spokesman for the Federation of Small Businesses in Scotland said: "The high-level information from our members suggests that, compared to the turn of the year, fewer are seeing a drop in business and more are expressing optimism for the future.

"But, you have to be careful about generalising. Not only does the picture vary from sector to sector and across the country, it varies within the sectors too."