CBI quarterly Service Sector Survey paints a gloomy picture

The CBI's quarterly service sector survey comes against a background of lacklustre business volumes and strong cost pressures, highlighting a continuation of challenging conditions in the sector.

In the three months to August, business and professional services volumes remained unchanged for the second consecutive month while consumer services volumes continued to decline but at a slower pace. As a result, optimism in the service sector remained flat. Next quarter, volumes are set to decline in both sub-sectors.

With costs growing at some of the strongest rates on record in both sub-sectors, profits fell sharply across the board in the quarter to August.

Next quarter, with costs expected to remain well above the long-run average, the ongoing fall in profits in business and professional services is expected to slow while it is set to decline at the same rate in consumer services.

Nevertheless, firms continue to feed these higher costs through to prices, with strong price growth in both sub-sectors. Next quarter, price growth is anticipated to continue but at a slower rate.

Meanwhile, business and professional services employment stagnated over the quarter to August following three consecutive months of growth. In consumer services, employment returned to growth in the three months to August following a decline in the quarter to July. Next quarter, employment conditions are set to improve with growth in both sub-sectors.

Looking to the year ahead, investment intentions have deteriorated in both sub-sectors with cutbacks expected on land and buildings and vehicles, plant and machinery. This marks the weakest intentions in business and professional services since November 2020. IT expenditure is, however, set to continue in business and professional services but to be cut back in consumer services.

The survey highlighted that demand uncertainty across both sub-sectors continues to be the biggest factor hampering investment.  However, with rising interest rates, the cost of finance has risen up the ranks as a key factor limiting investment for services firms, with the proportion of firms citing it reaching a record high for business and professional services and the highest percentage since November 2008 for consumer services.

Charlotte Dendy, CBI head of economic surveys and data, said: "Our latest survey highlights that it's been a difficult period for the service sector with lacklustre volumes, strong cost pressures and falling profitability.

"With a deterioration in investment intentions for the year ahead, it's noteworthy that uncertainty about demand and the cost of finance are the key factors weighing on investment, particularly against a background of rising interest rates.

"Many companies will continue to face a challenging time this autumn and winter as pressure on household budgets and tighter credit conditions continue to have an impact.

"Despite a fall in inflation and moderately lower energy costs, help is needed from the government in the autumn budget to assist businesses in navigating another difficult winter where cost pressures are likely to continue to impact firms' decisions to grow and invest."