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The latest examination of the service sector by the CBI shows that business and
professional firms such as marketing, management and legal services saw the
value and volume of business grow at the fastest rate since the quarterly survey
began in November 1998.
Increased profitability
As a result the profitability of these firms increased at its most rapid rate in
the seven year history of the survey and optimism improved for the first time
since February. But conditions for consumer services firms such as hotels, bars,
restaurants and leisure and personal care were tough with no growth in volumes
or profitability seen in the past three months.
Business and professional services firms.
An unexpectedly high balance of 39% saw the value of business rise over the past
three months, up from 6% in the previous quarter, and vastly exceeding the
predicted figure of 10%. It is the strongest gain since the survey began and
more growth is predicted next quarter (a balance of 24%).
Business volumes also
grew very briskly during the last quarter, with a balance of 41% of firms
reporting an increase, much stronger than forecast of 12%, and a healthy
increase of 32% is expected next quarter.
Increased optimism
Optimism about the general business situation increased for the first time since
February, when growth in the value and volume of business was nearly as strong,
with a balance of 14% more optimistic this quarter than three months ago, a
turnaround from the previous survey, when th figure was -13%.
The unexpected strength in business volumes, allied to a moderate rise in costs
and a halt to recent sales price deflation, drove profitability growth to its
fastest rate (a net balance of 20%) since the survey began. A further gain of
10% is anticipated next quarter.
CBI report reveals two-speed service sector
Employment increased for the fifth successive quarter and is expected to rise at
the same rate next quarter. Businesses also plan to expand more in the coming
year than they did in the last by a large margin (a balance of 34%), extending a
positive sequence of expansion plans to two years.
Consumer services firms.
A balance of 12% saw the value of business rise over the past quarter but volume
of business was flat at 0%. Next quarter though, companies are predicting
increases, with the survey recording a balance of 19% for both, hinting that
conditions may be set to improve.
Business levels lower than normal
However the current figures are strongly below seasonal norms. The balance of
companies saying volume of business was below normal was -49%, the lowest level
since November 2001 when it was -59%.
Profitability levels, which have marked time since a strong increase in
February, remain flat (a balance of -2%) after cost rises slowed in the past
quarter but were offset by stagnant prices (a balance of -2%). This ended a
year-long sequence of price inflation.
Consumer services less optimistic
Against this backdrop and for the third consecutive quarter, consumer services
firms are less optimistic than three months ago about the business situation
(-13%).
The number of people employed in the consumer service sector fell in the three
months to November (a balance of -14 %) after two quarters of growth. Jobs are
expected to fall again next quarter with a balance of minus 16 per cent
predicted.
The only increase in investment over the next year is expected to be in IT (a
balance of 11%) with cuts expected in spending on land and buildings (-4%) and
on vehicles, plant and machinery (-21%).
Asked about the reasons behind investment plans, expansion of capacity recorded
its lowest rating since May 2003 while reaching new customers and provision of
new services rated very highly.
On a positive note, while consumer services firms do not expect to expand in the
coming year more than in the past 12 months, the balance of minus two per cent
is far less negative than in the past three quarters, hinting at a possible
improvement in circumstances.
Steve Edmonds, Head of Entrepreneurial Business Services at Accountants Grant
Thornton, commented: "We are currently witnessing the contrasting fortunes of a
two-speed service sector. Consumer services firms continue to experience
sluggish performance as a result of the frugal behaviour of consumers,
meanwhile, business and professional services are delivering far stronger
results.
"Despite several negative predictions concerning UK finances recently,
particularly relating to the housing market, important parts of the economy
remain resilient and attractive to foreign capital."
Ian McCafferty, the CBI's Chief Economic Adviser, added: "The split in company
fortunes identified in this survey is representative of the economy as a whole.
Business and professional service providers are, for the most part, enjoying an
improving financial position, as are some other sectors, like financial services
and oil.
"However the increasing parsimony of shoppers is laid bare in the figures from
consumer service companies. The depressed conditions these firms face, taken
together with the tough conditions on the High Street and the subdued
manufacturing markets, point to the need for policy-makers to take a very
cautious approach.
"Anyone tempted to believe the economy can weather further policy-related cost
increases should think again."
Source:
Credit Control Journal
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