Fragility of service sector seen in CBI survey

By DOMINIC JEFF
Published on 25/02/2013 00:00

Consumer services such as bars and hotels dragged service ­sector business levels down in the last three months, according to the worse-than-expected results of the Confederation of British Industry’s quarterly survey, which is published today.

The business and professional service sector fell far short of predictions of strong volume growth, while consumer services dropped much more steeply than expected as rising prices were outpaced by growth in ­employee costs.

Anna Leach, CBI head of ­economic analysis, said conditions remain fragile in the service sector. “Business conditions failed to improve as expected for business and professional firms, while sharply falling prices bore down on profits. Consumer ­services saw a tougher end to the year than expected, as the rate of decline in business volumes ­accelerated unexpectedly.”

But the survey of 147 firms reveals a slightly brighter picture for the next three months, with volumes in both sectors expected to rise and employment increasing more markedly.

Leach said: “Despite the disappointing quarter, optimism remained stable and the outlook is brighter for the months ahead. Business volumes in both sectors are expected to grow and employment to pick up.

“The more bullish tone from consumer firms is encouraging, but households are likely to remain cautious given the expected further squeezes on their budgets during 2013.”

In consumer services, which includes hotels, bars, restaurants and the travel and leisure industries, the proportion of firms expecting to expand over the next 12 months is at its highest level since February 2010 – the first positive reading in three years.

That is despite evidence that optimism reported at the time of the CBI’s last survey, in November, was misplaced. Although inflation meant business by value stabilised after 11 consecutive quarters of decline, the volume of business continued to fall over Christmas, and at a faster than expected rate.

Firms reported that they were hiking prices in response, following moderate rises in the last quarter, as they seek to recover profitability.

That contrasts with the business and professional service sector, which includes accountancy, legal and marketing firms, which reported its biggest fall in profitability since November 2011 as businesses cut their prices and employment costs rose.

With business volumes also lower, firms are now pencilling in another fall in margins in the current quarter, albeit less steep than in the last three months.

The CBI survey found that optimism among business and professional service firms had been knocked by the recent poor performance. In the previous survey, a large majority of firms had predicted they would expand in the coming year, but now the balance has shifted in favour of those who expect to at best stay the same.

Across the sub-sector, 72 per cent of businesses said uncertainty about demand was likely to limit capital expenditure over the year ahead.