Recovery of crucial service sector 'proving bumpy'

The employers' organisation said the sector, which dominates the UK economy, had a mixed quarter overall with firms operating in business and professional services seeing little change.

Ian McCafferty, chief economic adviser, said: "The recovery of the service sector is proving bumpy in the face of sluggish demand.

"Consumers are cutting back on leisure activities and other discretionary spending, which led to a surprise fall in business volumes and flat profits this quarter.

"Business and professional services firms are finding themselves squeezed by a combination of falling prices, rising costs and flat volumes, which is reducing profitability.

"Uncertainty about demand remains a real concern across the sector, and this is reflected in the fact that firms are feeling less optimistic about the business situation than three months ago."

The latest quarterly CBI service sector survey took place between October 27 and November 10 and covered 169 service sector firms, divided into business and professional services, such as accountancy, legal and marketing firms, and consumer services, such as hotels, bars and restaurants, travel and leisure.

In consumer services, the value and volume of business fell unexpectedly during the quarter. Of those surveyed, 30 per cent said the value rose and 38 per cent said it fell, giving a balance of minus 8 per cent. That was weaker than the modest growth that had been expected. Looking at the volume of business, 23 per cent reported a rise, and 41 per cent a drop, giving a balance of minus 18 per cent. That too was weaker than the expected rise. In the next three months, consumer services firms expect business values and volumes to contract further.

Average selling prices rose at a slower rate than over the previous quarter, while the growth in total costs per person employed strengthened. Profitability stabilised during the quarter, but is expected to dip slightly in the next three months.

In business and professional services, the value and volume of business were both flat during the November quarter. In the next quarter, values and volumes are expected to fall marginally.

Prospects for business expansion in the year ahead remain negative among consumer service firms at minus 29 per cent, the weakest balance since May 2009, with the expected level of demand cited as the most significant factor likely to inhibit business growth. Numbers employed by consumer service firms dipped slightly and sentiment about the general business situation deteriorated compared to three months ago. Business and professional services expect to expand in 2011.