Strong start to year for services sector

Business volumes in the services sector grew strongly in the three months to February, with both sub-sectors seeing a rise in profits for the first time since November 2015.

According to the latest quarterly CBI Services Sector Survey, business and professional services firms – which include accountancy, legal and marketing firms – saw business volumes grow at the fastest pace since August 2015, and growth is set to accelerate further in the three months to May.

Meanwhile, after a sharp decline in the previous quarter, volumes grew at the fastest pace in a year in the consumer services sector – which includes hotels, bars, restaurants, travel and leisure firms. Consumer services growth is expected to ease next quarter, but nonetheless remain firm.

Other indicators also painted a healthier picture of the sector as a whole. Profitability grew for the first time since November 2015 in both sub-sectors, with expectations of similar growth in the coming quarter. Employment continued to grow in business and professional services, while growth in headcount picked up in the consumer services sector.

Prices continued to rise in consumer services but were flat in business and professional services. Next quarter, price growth is expected to accelerate in both sub-sectors.

Sentiment in the services sector remains mixed, with business and professional services firms’ optimism remaining unchanged from three months earlier, but optimism about the general business situation improved for consumer services companies. These firms are also more optimistic about their plans for business expansion in the year ahead (the strongest since November 2014), whilst business and professional services firms are more negative in their views.

Looking at growth in the economy more broadly, momentum was tepid for most of last year.

Rain Newton-Smith, CBI chief economist, said: “It’s great to see the services sector start the year off on a firm footing. Despite feeling the pinch from high inflation, business volumes have bloomed, profits have grown for the first time in over two years and hiring is on the up.

“But there are still some telling signs that the underlying challenges for business, professional and consumer services firms have not gone away. Investment plans are muted amid uncertainty, and plans for expansion among business and professional services firms have turned downwards.

“Up and down the country, businesses are plainly worried at the lack of clarity over the UK’s future relationship with its biggest trading partner, the EU. Belonging to a comprehensive customs union would go a long way to allaying these concerns, thus alleviating some of the uncertainty weighing on investment and expansion plans.”

Meanwhile, investment intentions for the year ahead remain positive for IT, improving a little in this area for business and professional services firms, the report said.

However, spending in other areas is set to be cut back slightly or left unchanged.