Services sector declined in August

Business confidence in the UK’s services sector has significantly declined in the quarter to August, albeit at a somewhat slower pace, according to the latest CBI survey.

Companies are facing profit squeezes due to rising costs and falling sales, leading to reduced hiring and investment. With average selling prices rising at a much slower pace than over the last two quarters, profitability dropped further. This was the case across both major sub-sectors, though price inflation remained comparatively higher in consumer services. In addition, services firms also reported another decline in headcount, albeit at a slower pace than in the previous rolling quarter.

Looking ahead, firms across the services sector expect to see business volumes decline again over the quarter ahead, though at a somewhat slower pace. Cost growth is also set to ease in the three months to November, albeit at rates that are still high by historical standards. With the rise in costs still expected to outpace selling price inflation, profits are expected to fall significantly again – albeit at a somewhat slower pace in business & professional services.

With demand conditions weak and cost pressures strong, services firms continue to show reservations around their investment plans over the year ahead. Both sub-sectors are set to continue cutting back spending on land & buildings and vehicles, plant & machinery, while IT spending is anticipated to remain unchanged relative to last year. Uncertainty about demand remains the main limitation to capital spending across the services sector, while concerns around internal finance shortages are still above the long-run average.

Alpesh Paleja, Deputy Chief Economist, CBI, said “While there are pockets of resilience, our latest survey paints a grim picture of the services sector. Rising employment costs continue to drive cost pressures higher, while subdued demand conditions are holding pricing power in check. The impact is being felt in lower hiring, investment and profits, with companies increasingly shifting focus to short-term fire-fighting.

“If the government is to achieve its long-term growth ambitions, it must start delivering the short-term certainty required to boost business confidence. With the business tax burden already at a 25-year high, this starts with the government committing to no further tax rises on business at the Autumn Budget. This must go hand in hand with a rethink of the Employment Rights Bill, which risks layering unnecessary costs onto employers, further undermining their hiring and investment plans.”