Service sector profits decline
Small businesses in the services sector have seen profitability fall unexpectedly, according to the latest research by the Confederation of British Industry.
The quarterly survey was conducted between 28 July and 11 August and covered 165 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 and leisure.
The CBI also announced that its Service Sector Survey has been reclassified and re-weighted in line with the latest UK and European Commission classification systems, allowing easy comparison with other economic indicators. The coverage of the survey has also been widened to meet the Commission’s requirements and reflects the latest official industrial classification structure. The long-term trends in the data calculated using the previous classification, coverage and weights, and under the new system, are very similar.
In Consumer Services, both the value and volume of business fell in the past three months, when they had been expected to rise. 30% of companies said the value of business fell, and 21% said it rose, giving a rounded balance of -8%. And 25% of companies said volume fell and 20% said it rose, giving a balance of -5%. Both measures continued to be seen as well below normal by companies.
Looking to the next three months, firms expect a modest improvement in these measures, with balance figures of +8% for value of business and +9% for volume of business.
Prices continued to rise, for the third quarter in a row, with a balance of +19%, though the figure would have been lower under the previous classification, coverage and weighting, while costs also rose with a balance of +23%.
The overall profitability of business fell in consumer services, with a balance of -14%. Looking forward to the next three months, firms expect profitability to fall further, with a balance of -26%.
In Business & Professional services, value of business fell, with a balance of -13%, and volume was little changed (+2%) in line with expectations, though the measure of volume of business was lower than it would have been under the previous survey classification, coverage and weighting. As with Consumer Services, value and volume of business continued to be seen as well below normal.
Firms cut selling prices (-16%), though total costs per person employed rose (+8%). Overall profitability fell as a result, with a balance of -29%. Looking to the next three months, firms expect profitability to fall further, with a balance of -16%.
Ian McCafferty, CBI Chief Economic Adviser, said: “These survey results highlight that activity across the economy is patchy, with some sectors doing better than others. And such conditions are likely to continue into next year.
“Although our recent retail surveys have shown increased sales of high street goods, this survey shows that households are still reluctant to spend on services. Conditions remain difficult for consumer-facing firms, as volumes of business have edged lower over the past quarter.
“Firms selling to business and professional firms have seen their volumes move sideways over the past three quarters, and no growth is expected over the next three months. Unsurprisingly, business confidence in this sector has fallen for the first time in over a year.
“We will not know the precise impact of public sector spending cuts, and how they will affect employment, until the Comprehensive Spending Review late in October. In the meantime, there is uncertainty about the strength of demand in the coming year, and services firms are not optimistic about prospects for business expansion.”
Prospects for business expansion in the year ahead are negative in both survey categories – the first time in a year (since August 2009) that both have been negative at once. In Consumer Services the balance was -18%, and in Business & Professional Services it was -16%. In both areas, the level of demand is by far the most significant factor limiting expansion.
