Service sector

Services sector continues recovery in quarter to November, but costs see record growth – CBI

Optimism has improved for businesses in the services sector in the three months to November, according to the latest CBI services sector survey. However, cost growth in both subsectors continued to accelerate, advancing at the fastest rate since surveys began in 1998. .

For business services firms and professional services firms, sentiment about business conditions continued to improve in the quarter to November, albeit at a slower pace than in the past. during the previous three months. Sentiment among consumer services companies improved markedly in the last quarter, after deteriorating in the three months to August.

Business volumes continued to grow at a healthy pace across the services sector in the three months to November. However, there are signs of slowing growth as business services companies and professional services firms expect volume growth to slow in the next quarter, while forecasts within consumers expect volumes to remain unchanged.

Cost pressures are intensifying, with both consumer services and business and professional services seeing costs rise at the fastest rate in survey history – with companies in both sectors expecting the pace to increase will accelerate further in the next quarter, which is also the strongest expectation ever. As a result, sales price growth has also accelerated, with expectations of significantly faster growth in the next quarter for both sub-sectors.

Despite elevated cost pressures, profitability increased 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 continue into the next quarter, forecasts in consumer services and business and professional services expect earnings growth to slow in the three months to February.

Employment growth in business and professional services accelerated in the three months to November, recording the fastest growth in more than six years. This rate of growth should continue in the next quarter. Consumer services also saw employment return to growth in the three months to November, after an unchanged workforce in the previous quarter. This too is expected to continue at a similar pace in the three months leading up to February.

The outlook for business investment has strengthened, with service firms planning to increase their spending plans over the next 12 months, particularly in information technology. Respondents from the business and professional services sector reported the strongest investment intentions in vehicles, plant and machinery since 2016, and in IT for more than 20 years. Consumer services companies expect to increase their spending on land and buildings, as well as vehicles, plant and machinery, the two strongest expectations since 2017. IT investment spending is also expected to remain strong for consumer services.

Charlotte Dendy, Head of Economic Studies and Data at CBI, said:

“The services sector continued to show a strong recovery in the three months to November, with volumes, profits and employment all posting solid growth.

“However, record cost growth threatens to freeze the service sector’s recovery in the next quarter. With expectations for business cost growth the strongest in survey history in both sub-sectors, businesses are skeptical. expect services earnings growth to stagnate in the next quarter.

“With Covid still a concern, with impacts on consumer confidence as well as cost and supply chain issues continuing to bite, a tough winter lies ahead. It is therefore essential that the government works with businesses to help address these challenges, easing cost and supply pressures, giving businesses the platform to ensure the recovery does not die out before Christmas.

Main conclusions

Unless otherwise stated, figures are balance statistics.

Business and professional services

  • Sentiment regarding the general business situation continued to improve in the quarter ended November, although at a slower pace compared to the previous quarter (+16% vs. +31%).
  • Business volumes returned to strong growth over the three months ending in November, slightly up on the August quarter, (+32% to +40%). Volume growth is expected to continue in the next quarter at a slightly slower pace (+21%).
  • Cost growth continued to accelerate (+56% vs. +39% in the three months to August), growing at the fastest pace since our survey records began (November 1998) and is expected to continue to grow. accelerating in the next quarter (+70%), also the highest expectations ever.
  • Average selling price growth also accelerated from the previous quarter (+17% vs. +13%) to a survey record, with expectations of even faster growth in the next quarter (+24%) .
  • Profitability saw solid growth in the three months ending November, a similar rate to the previous quarter (+20% vs. +20% in the quarter to May 2021). However, profit growth should stall in the next quarter (+1%).
  • Employment growth resumed in the quarter ending November (+31% vs. +19%) – the fastest growth since August 2015, with employment in the coming quarter expected to grow at a similar pace (+ 32%).
  • Businesses expect their investment in land and buildings to remain unchanged over the next 12 months (+1%), and spending on vehicles, plant and machinery is expected to grow at a faster rate (+14% , versus +5% in the three months to August), the strongest expectations since May 2016. Expectations remain strong for IT spending, the strongest expectations since February 2001 (+47%, versus +29% on three months to August).
  • Demand uncertainty (cited by 46% of respondents) is once again the biggest factor weighing on investment plans for the next 12 months, although less so than in the three months to August . Concerns about labor shortages remained historically high as a factor limiting investment plans in the three months to November (cited by 30% of respondents).
  • Notably, insufficient net returns are a growing factor also weighing on capital projects, cited by 27% of respondents (compared to 18% the previous quarter).

Consumer services

  • Optimism about the general business situation improved in the quarter ending in November, after deteriorating in the previous quarter (+23% compared to -17% in the quarter ending in August).
  • Business volumes again experienced solid growth during the quarter ended in November, a pace similar to the growth of the previous quarter (+28% against +30%). However, expectations for the next quarter are less promising, with consumer services volumes unchanged (+2%).
  • Costs per person accelerated in the three months to November (+78% vs. +43% in the prior quarter), the fastest rate of growth since our records began (November 1998). It should also pick up again in the next quarter (+87%), the strongest expectations on record.
  • As a result, average selling price growth increased slightly (+20% versus +13%, versus a long-term average of +12%). This is the strongest growth since February 2019 and should accelerate significantly over the next three months (+40%), the strongest expectations since February 2017.
  • Profitability accelerated in the quarter to November (+14% vs. +8%), the strongest growth since February 2018. However, earnings growth is expected to stagnate in the next quarter (- 3%).
  • Employment rose in the three months to August (+10%), after an unchanged number in the previous quarter. With workforce growth expected to be similar in the next quarter (+12%).
  • Consumer services companies expect to increase their investment spending on land and buildings (+9% vs -3% in the previous quarter), as well as their spending on vehicles, plant and machinery (+8% vs – 7%) over the next 12 months, the strongest expectations since 2017. IT spending, meanwhile, is expected to remain strong (+35%), with expectations well above the long-term average (+6% ). Uncertainty about demand (53%) remained the main factor weighing on investment plans for the next 12 months, followed by worries about labor shortages (cited by 40% of respondents) with the second highest number of quotes recorded.