Optimism continued to improve in the UK service sector in the three months to November, despite costs growing at the fastest pace since records began.
According to the latest service sector survey from the Confederation of British Industry (CBI), sentiment for business and professional, and consumer services companies got better in the quarter, however this was a slower pace than the preceding three months.
Business volumes continued to grow at a strong pace across the service sector in the three months to November, the data showed, however, there were signs of slowing growth, as firms expected volume growth to ease next quarter.
Cost pressures also continued to build during the period, with both consumer services and business and professional services seeing costs grow (to 56% compared to 39%) at the fastest pace in survey history, which began in 1998.
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Firms in both sectors now anticipate the pace to pick up even further to 70% next quarter, also the strongest expectations on record.
As a result, selling price growth accelerated too, with expectations for significantly faster growth in the coming quarter for both sub-sectors.
Despite soaring costs, profitability saw the strongest growth since February 2018 in consumer services. With strong price and cost growth expected to persist into the next quarter, expectations in both consumer services and business and professional services are for profits growth to stall in the three months to February.
Employment growth within business and professional services picked up in the three months to November, recording the fastest growth in more than six years. This pace of growth is expected to continue into next quarter.
Consumer services also saw employment return to growth in the quarter, and is forecast to continue at a similar rate next quarter, the CBI said.
The research also showed that firms’ investment prospects have strengthened, as services firms expect to boost spending plans over the next year, particularly on IT. Respondents from the business and professional services sector reported the strongest investment intentions for vehicles, plant and machinery investment since 2016, and for IT in more than 20 years.
Meanwhile, consumer services firms expect to increase spending on land and buildings, as well as vehicles, plant and machinery – both the strongest expectations since 2017. Capital expenditure on IT is also tipped to remain strong for consumer services.
“Record growth in costs is threatening to put a winter freeze on the service sector recovery next quarter,” said Charlotte Dendy, CBI head of economic surveys and data.
“With firms’ cost growth expectations the strongest in survey history in both sub-sectors, businesses expect services profits growth to stall in the coming quarter.
“With COVID still a concern, with impacts for consumer confidence, together with cost and supply chain issues continuing to bite, a difficult winter lies ahead. It is therefore vital that the government works with business to help address these challenges, ease cost and supply pressures, giving businesses the platform to ensure the recovery does not fizzle out before Christmas.”
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