Service sector ‘ticking along’ but costs set to pinch

CBI chief economist Rain Newton-Smith said the business environment looks set to become tougher. Picture: Contributed
CBI chief economist Rain Newton-Smith said the business environment looks set to become tougher. Picture: Contributed
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The service sector is “ticking along”, with a slight increase in demand in the three months to February, although increasing costs are expected to tighten their grip, according to survey results published today by the Confederation of British Industry (CBI).

The quarterly study found that increasing activity in consumer services outweighed a more “subdued” picture among business and professional services.

Firms anticipate increasing pressure on margins over the next quarter

Rain Newton-Smith

Consumer services companies, which include hotels, bars, restaurants, travel and leisure, saw volumes grow at the fastest rate since August 2015, with a balance of +33 per cent, due to 43 per cent reporting an increase and 10 per cent flagging a drop.

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In contrast, for firms in the business and professional category, covering areas like accountancy, legal and marketing, the balance came in flat at +1 per cent, with 24 per cent of firms reporting they were up from the previous quarter, and 23 per cent saying they were down.

In terms of optimism, among consumer services firms it rose for the first time since May 2016, at a balance of +7 per cent after falling for two quarters, while sentiment stabilised in their business and professional services counterparts at -1 per cent, after three quarters of negative feeling.

Rain Newton-Smith, CBI chief economist, said: “The service sector is ticking along with business volumes holding up this quarter and a less pessimistic outlook on the office and shop floor than in recent months.

“Firms anticipate increasing pressure on margins over the next quarter, with the strongest expectations for price growth in ten years, making the business environment that bit tougher.”

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For business and professional services businesses, expectations for growth in average selling prices for the next three months came in at +18 per cent, the highest since February 2007, when the level was +21 per cent. In the consumer services space, the balance was +42 per cent, the fastest pace since February 2008 when the level was +45 per cent.

Yet despite higher prices, profitability is forecast to fall in both sub-sectors next quarter. In consumer services, for example, the expectation was -11 per cent, up from the -8 per cent seen in February, and furthermore its predictions of hiring next quarter were the worst since August 2015.

Returning to business and professional services firms, overall a clear majority expect to grow their business in the coming year, with the net balance of opinion at +25 per cent the highest since May 2015 when the level was +28 per cent. In contrast, among consumer services firms this is the worst since May 2012, with a balance of -18 per cent.

Newton-Smith also looked at measures to help firms regarding business rates, saying the UK government “should use next month’s Budget to bring forward the switch from retail price index to consumer price index uprating to 2018/19”.

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