30th November 2010

The UK’s service sector had a mixed quarter with business volumes among consumer services falling unexpectedly, and firms operating in business and professional services seeing little change, according to the CBI. The latest quarterly CBI Service Sector Survey was conducted between 27 October 2010 and 10 Novembe 2010 , and covered 169 service sector firms. They are divided into Business & Professional Services, such as accountancy, legal and marketing firms, and Consumer Services, such as hotels, bars and restaurants, travel & leisure.

In Consumer Services, the value and volume of business fell unexpectedly during the quarter. Of those surveyed, 30% said the value rose and 38% said it fell, giving a balance of -8%. That was weaker than the modest growth that had been expected (+8%). Looking at the volume of business, 23% reported a rise, and 41% a drop, giving a balance of -18%. That too was weaker than expected (+9%). In the next three months, consumer services firms expect business values (-8%) and volumes (-20%) to contract further.

Average selling prices rose at a slower rate (+11%) than over the previous quarter (+19%), while the growth in total costs per person employed strengthened (+32%). Profitability stabilised during the quarter (-3%), but is expected to dip slightly in the next three months (-6%).

In Business & Professional services, the value and volume of business were both flat during the November quarter at -3% and +3% respectively. In the next quarter, values and volumes are expected to fall marginally at a balance of -4% and -7% respectively.

The fall in selling prices intensified (-29% compared to -16% in the previous quarter), and growth in total costs per person employed accelerated (+18%). As a result, profitability fell (-13%), though at a slower rate than the previous quarter. Profitability is expected to fall further in the coming quarter (-20%).

Ian McCafferty, CBI Chief Economic Adviser, said: “The recovery of the service sector is proving bumpy in the face of sluggish demand. Consumers are cutting back on leisure activities and other discretionary spending, which led to a surprise fall in business volumes and flat profits this quarter."

“Business and professional services firms are finding themselves squeezed by a combination of falling prices, rising costs and flat volumes, which is reducing profitability. Uncertainty about demand remains a real concern across the sector, and this is reflected in the fact that firms are feeling less optimistic about the business situation than three months ago.”

Prospects for business expansion in the year ahead remain negative among consumer service firms (-27%), the weakest balance since May 2009 (-35%), with the expected level of demand cited as the most significant factor likely to inhibit business growth. Numbers employed by consumer service firms dipped slightly (-9%) and sentiment about the general business situation deteriorated (-22%) compared to three months ago.

Consumer services firms are planning to invest a little more than last year on capital expenditure, with the most popular motive to replace equipment. Uncertainty about demand & sales and internal finance shortages are cited as the main likely brakes on investment plans.

Business & Professional Services are expecting to expand in the coming year (+20%), though are also concerned about the prospective level of demand limiting prospects. Investment intentions are mixed. Although firms are continuing to scale back on land and buildings (-12%), they are planning to invest a little more on IT (+9%) and vehicles, plant and machinery (+7%). Numbers employed showed their first real increase (+8%) since May 2008 (+15%). Sentiment about the business situation broadly stabilised (-4%) compared to three months ago (-17%).

About the CBI

The Confederation of British Industry (CBI) is the UK's leading business organisation, speaking for some 240,000 businesses that together employ around a third of the private sector workforce. With offices across the UK as well as representation in Brussels, Washington, Beijing and Delhi the CBI communicates the British business voice around the world.