Business optimism increased across the service sector in the three months to February, according to the latest quarterly CBI Service Sector Survey.
This was driven by a marked improvement in sentiment in both the business & professional and consumer services sectors, which rose at the fastest pace since August 2015 and February 2016 respectively.
Nevertheless, business volumes in both sub-sectors continued to fall. The drop in consumer services volumes quickened, while business & professional services volumes continued to fall, although at a slower pace. Looking to the quarter ahead, the outlook for volumes is mixed with consumer services volumes set to stabilise and business & professional services volumes expected to grow at a robust pace, with expectations for the latter the strongest since May 2018.
While growth in total costs per person eased slightly in the business & professional services sector, cost pressures picked up in-line with the long-run average in consumer services. Profitability continued to decline in both sub-sectors, although the pace of decline eased somewhat in business & professional services. Next quarter, cost growth is expected to accelerate in both sub-sectors in the three months to May with consumer services firms anticipating that profitability will decline at a similar pace. Meanwhile due to expectations of solid volumes growth, business & professional services expect profitability to grow.
There was a mixed picture for services employment, with the business & professional sub-sector returning to growth over the last quarter while consumer services headcount was unchanged. In the three months to May, headcount is expected to grow at a faster pace in business and professional services – the strongest expectations since August 2017 – while consumer services employment is expected to remain broadly unchanged.
Investment intentions improved across the service sector compared with the previous quarter. Business & professional services expect to increase investment on IT, vehicles and plant & machinery however spending on land and buildings is set to be cut back. Overall, business & professional services firms are optimistic about the prospects for business expansion in the coming year, with the balance the most positive since November 2017.
Prospects for investment in the consumer sector have also improved, although firms were negative about the outlook for business expansion over the next twelve months. Consumer services expect to increase spending on land and buildings and IT, but to cut back spending on vehicles and plant & machinery.
Ben Jones, Principal Economist, said:
“After a sustained period of falling volumes and sentiment, the service sector has a renewed sense of optimism with expectations for growth and investment improving. But it’s probably too soon to say whether we’ve turned a corner, particularly as businesses will be increasingly mindful of the risks to the global economy of coronavirus.
“Firms will also be looking ahead to forthcoming EU negotiations and to see what can be done to support and grow our world-class services sector. By focusing on ease of doing business and setting goals for ambitious market access, we can capitalise on renewed optimism and ensure expectations remain strong as we move forward.”
Overall, underlying momentum in the UK economy remains subdued at the start of 2020, but we continue to expect a mild improvement over the course of the year. Household spending is set to remain a key driver of GDP growth, as a low unemployment rate underpins solid growth in real wages.