finance

Service sector optimism fell back in last three months



Business optimism in the service sector fell in the three months to November but at a slower pace than before, according to the CBI Service Sector Survey.

Sentiment declined in both business and professional services sub-sector and the consumer services sub-sector with both reporting falling sentiment for more than a year.

Business & professional services – which includes accountancy, legal and marketing firms – saw volumes decline over the last quarter after a brief stabilising period in the three months to August.

Volumes are expected to fall at a similar pace in the three months to February 2020.

In consumer services – which includes hotels, bars, restaurants, travel and leisure firms – volumes declined at a sharper rate in the three months to November, marking the fifth consecutive quarterly fall. Consumer services volumes are set to fall at a faster pace next quarter, the CBI said.

Meanwhile, cost pressures eased in both sectors. Yet cost inflation continues to outpace price growth in services, putting pressure on profitability.

In business and professional services, profitability fell particularly sharply in the three months to November, matching the pace in the previous quarter, which was the fastest decline since November 2011.

Profitability is expected to fall at the same pace next quarter. Consumer services profitability also declined. Next quarter, profits are expected to fall at a quicker rate in consumer services.

Employment fell at the fastest pace since May 2017 in business & professional services, with headcount set to fall at the same pace next quarter.

But job numbers expanded at a steady pace in consumer services, in line with the long-run average.

Over the year ahead, business and professional services firms expect to cut back on investment in land and buildings, as well as in vehicles, plant and machinery – with the latter experiencing the weakest expectations since August 2010.

Business and professional firms expect to increase spending on IT, but to a lesser extent than in the August survey.

Meanwhile, consumer services firms expect to keep spending on land and buildings and vehicles, plant and machinery broadly the same.

Capital spend on IT is expected to increase over the year ahead, marking an improvement from the previous quarter, when investment was expected to be unchanged.

Business and professional services firms are pessimistic about the prospects for business expansion over the year ahead, but to a lesser extent than in the previous survey (which was the most negative balance since February 2009).

Consumer services are neutral about the outlook for business expansion in the year ahead.

CBI chief economist Rain Newton-Smith said: “The current economic climate is holding back UK services firms, which are reporting falling sentiment, declining volumes and weaker profitability.

“Neither is the outlook expected to improve, with firms pessimistic about their prospects for expansion, investment plans having been scaled back and hiring on hold.

“Whoever forms the next Government, it’s essential they commit to refocusing on the domestic agenda, to propel the UK economy forward – prioritising skills and infrastructure investment, as well as reaching net zero by 2050.

“And securing a good Brexit deal which protects our world-beating services sector, which forms 80 per cent of our economy.”



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