Services Sector Struggles: Confidence Plummets, Costs Surge, and Jobs Shrink
According to the latest Service Sector Survey from the CBI, Britain’s services industry is facing a double‑whammy: business confidence has taken a nosedive and business volumes have dipped again. Let’s break down the buzz.
Business Confidence Takes a Hard Hit
- Industry sentiment dropped sharply in the quarter to May.
- Only a few firms in both business & professional services and consumer services are holding their breath.
Business Volumes Keep on the Downward Trail
- Both sub‑sectors saw another contraction in activity.
- Clients are dragging their shoes – the demand footfall has slipped.
Costs and Prices Go Way Up
- Cost pressures spiked dramatically, making the business environment tougher.
- Prices are climbing at their fastest pace in two years.
- Business & Professional Services recorded the steepest price inflation rise, the highest level since May 2023.
- Consumer Services saw an uptick that’s more consistent with the tempo of last quarter’s inflation.
Margins: The Big Conundrum
- Profitability keeps bleeding fast as costs accelerate and volumes shrink.
- Margin stress remains a dominant theme across the sector.
Jobs: The Shrinking Workforce
- Headcount shrank again, especially in consumer services.
- The decline in employment is projected to accelerate this quarter.
What the Future Might Hold
- Companies expect further activity drop in the next quarter.
- Cost growth will stay high and will likely outpace price inflation for the foreseeable future.
- Consumer services foresee a steeper decline in employment than business & professional services.
Spending Woes: A Cautionary Tale
- Investments in land & buildings, vehicles, plant & machinery are being put on hold.
- IT spending is slated for cutbacks—its first reduction since November 2022.
CBI’s Key Takeaway
Alpesh Paleja, Deputy Chief Economist, CBI, summarized the mood: “It’s been a rough first half of the year for services. The surge in both costs and price pressures is a cause for concern, especially with the Bank of England wary of persistent domestic inflation.” He cautioned that despite potential positives from new trade deals, domestic conditions remain bleak.
He urged the government “to act swiftly” by using the Spending Review and Industrial Strategy to unlock growth—especially in R&D, skills, and regulatory relief—to lift business confidence and create the right incentives for firms to invest and expand.
Bottom line: If you’re in the services sector, brace for a season of tight budgets, higher costs, and a shortage of job opportunities.
The survey based on the responses of 215 services firms found that:
Business & Professional Services
Business Outlook Deteriorates Further
Business optimism has taken a nosedive for the third straight quarter, slipping from a mild -28% lift in February to a steeper -43% drop as of May.
Volume Slump Continues
Business volumes fell by -18% in the quarter ending May—just a touch less than the -20% plunge in April. Forecasts show momentum is picking up: a sharper -29% dip is expected for June–August.
Cost Surge Explodes
Costs per employee rocketed +60% in the May quarter, up from the +46% seen in February and well above the long‑run average of +30%. Soft‑landing looks unlikely—next quarter could see a +63% surge.
Profitability Tumbles
Overall profitability slid a solid -34% in May, nearly matching the -37% drop seen in February. The next quarter looks set to swipe harder, at a -47% rate.
Price Hikes Take the Lead
Average selling prices have been on a hot streak, leaping +26% by May—a head‑spinning jump from the modest +9% in February. This outpaces the long‑run average of -2%. Market reports predict a similar +24% climb for the June–August period.
Headcount Ebbing
Headcount stayed stubbornly flat in May after a five‑quarter decline—down -2% versus a -23% plunge in April. The upcoming quarter, however, forecasts another slide of -11%.
Investment Is in the Doldrums
- Land & Building outlook turned negative by -15% (vs. -21% in February).
- Vehicles & Plant saw a -14% decline from -21%.
- IT slid a gentle -7% from a previous positive boom of +19%.
Skepticism About Demand tops the list of brakes on investment—two‑thirds (67%) of firms say they’re unsure. That beats the long‑run average of 56%. Other concerns include 29% saying net returns aren’t sizzling, and 29% citing a lack of internal cash.
Bottom Line
We’re looking at a business landscape where optimism is gone belly‑up, margins are melting, and every other metric is on a downward trend. Companies are tightening belts, fighting for cash, and bracing for even steeper falls.
Consumer Services
Consumer Services: A Rough Ride into the Summer
What’s the Deal?
The Numbers That Matter
| Metric | May Quarter | Feb | Long‑Run Avg. |
|---|---|---|---|
| Volumes | −36% | – | – |
| Optimism | −42% | – | – |
| Profitability | −43% | – | – |
| Cost per employee | +70% | +55% | +40% |
| Selling‑price growth | +32% | +36% | +14% |
Why Are Firms Cutting Back?
The top constraints?– 56 % say demand uncertainty is killing the will to invest.- 43 % worry about low net returns.- 20 % cite labour shortages, and 20 % point to a lack of internal financing.
A Look Ahead
By August, we expect:
Bottom Line
Consumer‑service firms are basically in the middle of a financial rain‑storm. If you’re on the payroll or investing in these sectors, brace yourself: the coming months look like a rollercoaster, but the dips are steeper than the peaks. Stay tuned, because the next quarter might bring another round of outages and new chances to re‑invest – if the market behaves like a well‑toned comedian — which rarely does.
