Services Sector Confidence Takes a Downward Dive in May
The latest Service Sector Survey from the CBI shows that business confidence in the services arm of the economy has slipped sharply once more in the quarter ending May. It’s a crest that’s been cresting again, and the ride isn’t turning out to be very pleasant.
Key Takeaways
- Business confidence has fallen, pulling the whole sector downhill.
- Business volumes are smaller in both business & professional services and consumer services.
- Cost pressures are climbing fast, while prices are rising at the fastest rate in two years.
- Profit margins are shrinking, and headcount is shrinking even more—especially in consumer services.
- Expectations for the next quarter are grim: volumes, cost growth and employment all look set to fall.
- Investment plans are being trimmed, with cuts in land & buildings, vehicles, plant & machinery, and, first time since November 2022, IT spending.
Inflation and Cost Pressures Tighten the Grip
Business & professional services have seen a very steep uptick in price inflation, hitting its highest rise since May 2023. Consumer services are also feeling the squeeze, but at a pace that mirrors the previous quarter’s inflation pattern.
Profitability Hits a Low Note
With volume losses continuing, costs escalating, and margins already battered, profitability has slipped further across the services landscape. Companies are shedding employees, especially within consumer services where job cuts have been most pronounced.
A Stormy Outlook for the Quarter Ahead
Firms across the sector are bracing for another sharp dip in activity next quarter. Cost growth will stay above historic norms and will outpace selling price inflation, which is still expected to remain high. Employment is predicted to decline faster, with consumer services facing a heavier hit than business & professional services.
Demand is thin, so services businesses are cautious about their investment plans over the next year. If they have to choose between projects, they’ll likely cut back on land & buildings, vehicles, plant & machinery, and even IT—an unusual pivot not seen since late 2022.
Words from the CBI’s Deputy Chief Economist
Alpesh Paleja, Deputy Chief Economist at the CBI, summed it up: “It’s been a tough first half of the year for the services sector. The double whammy of rising costs and price pressures is worrying, especially with the Bank of England concerned about persistent domestic inflation. Businesses keep citing the hit from higher employer NICs and the National Living Wage, which depresses demand from clients. Global volatility adds fuel to an already wary outlook. While recent UK/EU reset talks and trade deals with the US and India may lift spirits for some, more must be done to counteract the tough domestic trading conditions. The survey shows a gloomy picture that will likely linger into the summer. In just a fortnight, the government needs to use the long-awaited Spending Review and Industrial Strategy to unlock growth—setting ambitious R&D goals, easing investment in skills, and trimming regulatory burdens—to boost business confidence and give firms the right incentives to invest and grow.”
The survey based on the responses of 215 services firms found that:
Business & Professional Services
Business Snapshot: The Recent Ripple in the Corporate Ocean
Business Sentiment Drops Like a Lead Balloon
Three straight quarters of declining optimism has pushed the General Business Outlook down to -43%, up from a -28% blip in February.
Volume Trends – a Sluggish Drift
- Quarter to May saw a volume dip of -18%, barely off the -20% trend from the previous month.
- Predictions for the next quarter (June‑August) suggest a steeper slide to -29%.
Costs per Employee – the Price Hike Continues
The burn‑rate per employee skyrocketed a further +60% in the May quarter, loftier than the +46% surge in February and the long‑term norm of a modest +30%.
Forecasts show costs will keep climbing, with next quarter growth projected at a steep +63%.
Profitability – the Tumble Won’t Stop
- Overall profitability fell to -34% in May, mirroring a -37% slide in February.
- Next quarter is expected to scorch even faster, dropping to a rough -47%.
Prices – The Sunlit Silver Lining
A bright spot emerged as Average Selling Prices accelerated to an impressive +26% in the May quarter, the fastest uptick in two years (up from only +9% in February). This tumble of the long‑term average of -2% is a welcome toast.
Companies are predicting similar growth next quarter, around +24%.
Headcount – A Tread‑Mile Plateau
Staff numbers stayed largely stationary in the May period, slipping only westward a modest -2% after a five‑quarters slide that had reached a steep -23% in April.
But the balance sheet’s newest drama calls for a drop in August, projected at a sizable -11%.
Investment Intentions – Lock‑Down Confines
- Land & Buildings investments slated to shrink by -15% (down from -21% in February).
- Vehicles, Plant & Machinery see a cut of -14% (down from -21%).
- Unexpectedly, IT budgets are being trimmed by -7% after a surprising warm +19% in the previous cycle – the first negative outlook since November 2022.
What’s Holding the Ball – The Big Three Hurdles
- Uncertainty about demand tops the list, flagged by 67% of respondents—a spike above the long‑term average of 56%.
- Inadequate net returns loom next, noted by 29%.
- Shortage of internal finance, also at 29%.
Consumer Services
Consumer Services Firms: A Rollercoaster Ride of Business
Things have been feeling a bit gloomy in the world of consumer services. The mood hasn’t lifted for eight straight quarters, dropping to a negative 42% in the latest May metrics (down from a sad 55% in February).
Business Volumes – The Usual Slump
- May quarter: volumes fell 36% – the trend of flat or shrinking numbers that kicked off in March 2022 continues.
- Next 3 months (to August): expected to drop another 43%.
Costs per Person – Watching the Numbers Rise
- May: cost growth hit a whopping +70% (after +55% back in February).
- Long‑run average stands at 40%, so the numbers are way above the norm.
- Projected to stay high in the coming quarter (+66%).
Profitability – Not the Cheerful Lane
Overall profits are on a downward slope, down 43% this quarter (versus a dip of -35% in February). In the next three months, a further decline of 47% is anticipated.
Selling Prices – Slow‑Moving, Still Above Average
- May: growth slowed to +32% from +36% earlier.
- Still hot over the average (+14%).
- Next quarter: expected to ease to +21%.
Headcount – Firing Up the Numbers
- May: headcount fell 28% (down from a stark 47% in April).
- Projected further reduction in August at a faster rate (+36%).
Investment Intentions – A Cautious Approach
- Land & buildings: cut by 42% (from 35% in February).
- Vehicles, plant & machinery: down 40% (from 34%).
- IT: slashed by 36% (from 32%).
Why the Hesitation?
- Uncertainty about demand: 56% of firms cite this as the biggest hurdle (compared to a long‑run average of 48%).
- Low net returns: 43% are worried.
- Labour shortages: 20% concern.
- Shortage of internal finance: another 20% flag this.
Stay tuned for updates – whether you’re a business owner, investor, or simply curious about the trend, keeping an eye on these numbers can help you navigate the bumps ahead.
