Cost pressures weigh on profits in key services sector

Rising costs dented profits in Britain's crucial services sector in the three months to May as demand remained flat for the fourth consecutive quarter, says today's latest survey from the CBI.

The CBI report found slowing growth in volumes among consumer services such as restaurants and hotels. Picture: Chris Hondros/Getty Images

Business and professional services firms – including accountancy, legal and marketing – reported “relatively unchanged” volumes. Consumer services, ranging from hotels, bars and restaurants to travel and leisure, saw slowing growth in volumes.

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The survey said that the pattern was expected to reverse in the three months to August, when business and professional services expect volumes to pick up, but volumes for the consumer sub-sector are expected to fall at the fastest pace since August 2012.

CBI chief economist Rain Newton-Smith said the squeeze on household incomes was hitting demand in the services sector. Picture: Contributed

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Recent economic data, including latest GDP figures for the first quarter of 2017 released yesterday, suggest consumer spending is being reined in by a mixture of squeezed earnings growth and rising inflation.

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Rain Newton-Smith, CBI chief economist, said: “Rising inflation is squeezing household incomes, which is hitting demand in the consumer services sector.

CBI chief economist Rain Newton-Smith said the squeeze on household incomes was hitting demand in the services sector. Picture: Contributed

“At the same time, cost pressures are building across the board, painting a difficult picture for services firms. Despite these pressures, services firms expect to hire more workers and to continue to invest.

“Firms in business and professional services cut back on employment over the last quarter, but expect to increase headcount over the next three months. While employment growth slowed in consumer services, firms are expecting a slight pick-up next quarter.”

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The CBI said a total of 24 per cent of firms said the overall profitability of business was up on the previous quarter, and 30 per cent said it was down, giving a negative balance of -6 per cent.

However, the survey said overall optimism about the situation in business and professional services improved to a net +14 per cent, for the first time since November 2015, while optimism in consumer services was up a more modest +7 per cent.

Firms expect profits growth to resume again in the next quarter (+12 per cent). Newton‑Smith added that the report suggested capital expenditure is expected to increase over the year ahead in both sub-sectors.

She said investment among consumer services firms will be “increasingly driven by the need to replace old equipment and improve efficiency”.

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