A buoyant travel industry was one of the few bright notes in an otherwise gloomy new CBI report on sentiment in the UK.Sentiment has deteriorated again across the services sector in the last three months as profitability fell at a record rate for consumer-facing companies and was flat for business services firms, according to the report.

The only consumer services sector to report significant growth was travel. Companies have posted a healthy demand for holidays, with people more inclined to take a well-earned break as rising costs put greater demands on household spending. However, these firms incurred rapid cost rises and, with limited ability to pass these onto customers, their profitability fell at the fastest rate for five years.

Elsewhere the picture was even more bearish. Levels of business volumes and values remained weak for the sector as a whole, and neither consumer nor business services firms are positive about business expansion over the coming year. They have also become more concerned about their ability to raise external finance and the cost of doing so.

Consumer services firms, such as hotels, bars & restaurants, cinemas and gyms endured an even worse quarter than they had feared. Business volumes and values fell at rates not seen since the end of 2001. At the same time, costs accelerated rapidly and profitability sank at a record rate.

Numbers employed by consumer services firms fell for the second quarter running, but this should be short-lived as firms plan modest job increases next quarter. Job numbers rose in business & professional services firms and are expected to continue doing so, albeit at a slower rate.

Firms transporting goods & post saw volumes and values of business fall faster than they have since just after the survey began in 1998, with profitability the weakest for eight years and numbers employed decreasing fast.

In business & professional services, there was a divide in the performance of the sub-sectors. While the profitability of office & personnel services, management & legal and property firms deteriorated, other sectors such as marketing and telecomms & IT saw their ability to make profits improve.

Services firms such as lawyers, accountants and management consultants saw well below normal volumes and values of business for the second quarter in a row. These firms’ staff numbers were unchanged after two and a half years of continuing expansion and training expenditure was cut back at the fastest rate for five years.

Meanwhile, marketing firms saw profitability rise at a record rate, with survey high balances for business volumes and values. Expectations in this sector are not as positive, though, with flat volumes and values and large cost increases thought to be on the way, leading to broadly flat selling prices and profits.

In the telecomms & IT sector, aggressive cuts in selling prices were accompanied by fast rises in volumes and values of business. These drove further rapid growth in profitability in a sector where numbers employed continue to grow at a healthy rate.

Ian McCafferty, the CBI’s Chief Economic Adviser said: “Services sector firms are concerned about their business prospects. Consumers are reining in spending on leisure, entertainment and eating out, while professionals offering services such as accountancy, property and law have seen their profits flatten off as costs continue to grow strongly.”
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