Optimism improved for firms across the service sector in the three months to November, according to the latest Service Sector Survey from the CBI – however cost growth in both sub-sectors continued to pick up, growing at the fastest pace since survey records began in 1998.
For business and professional services firms, sentiment about the business situation continued to improve in the quarter to November, albeit at a slower pace than in the preceding three months. Sentiment among consumer services companies improved markedly last quarter, following a deterioration in the three months to August.
Business volumes continued to grow at a strong pace across the service sector in the three months to November. However, there are signs of slowing growth, as business and professional services firms expect volumes growth to ease next quarter – while expectations within consumer services are for volumes to be unchanged.
Cost pressures are building with both consumer services and business and professional services seeing costs grow at the fastest pace in survey history – with firms in both sectors anticipating the pace to pick up even further next quarter, also the strongest expectations on record. As a result, selling price growth accelerated too, with expectations for significantly faster growth in the coming quarter for both sub-sectors.
Despite elevated cost pressures, profitability grew in both business and professional and consumer services, with the strongest growth since February 2018 for the latter. With strong price and cost growth expected to persist into the next quarter, expectations in both consumer services and business and professional services are for profits growth to stall in the three months to February.
Employment growth within business and professional services picked up in the three months to November, recording the fastest growth in more than six years. This pace of growth is expected to continue into next quarter. Consumer services also saw employment return to growth in the three months to November, following unchanged headcount in the previous quarter. This too is expected to continue at a similar rate in the three months to February.
Firms’ investment prospects have strengthened, as services firms expect to ramp up their spending plans over the next 12 months, particularly on IT. Respondents from the business and professional services sector reported the strongest investment intentions for vehicles, plant and machinery investment since 2016, and the for IT in more than 20 years. Consumer services firms expect to increase spending on land and buildings, as well as vehicles, plant and machinery – both the strongest expectations since 2017. Capital expenditure on IT is also tipped to remain strong for consumer services.
Charlotte Dendy, CBI Head of Economic Surveys and Data, said: “The service sector continued to report a strong recovery in the three months to November, with volumes, profits and employment all showing solid growth.
“However, record growth in costs is threatening to put a winter freeze on the service sector recovery next quarter. With firms’ cost growth expectations the strongest in survey history in both sub-sectors, businesses expect services profits growth to stall in the coming quarter.
“With Covid still a concern, with impacts for consumer confidence, together with cost and supply chain issues continuing to bite, a difficult winter lies ahead. It is therefore vital that the Government works with business to help address these challenges, ease cost and supply pressures, giving businesses the platform to ensure the recovery does not fizzle out before Christmas.”
