According to the latest survey conducted by Britain’s big business club, the Confederation of British Industries (CBI) consumer services firms, such as hotels, bars and restaurants, cinemas and gyms endured an even worse quarter than they had feared. Business volumes and values fell at rates not seen since the end of 2001. At the same time, costs accelerated rapidly and profitability sank at a record rate.
Firms selling professional services to businesses, such as lawyers, accountants, architects, IT and recruitment firms saw their volumes and values of business grow in the last three months, but at rates markedly below those of 2007. Average selling prices fell in what is a highly competitive sector and profitability was flat.
Numbers employed by consumer services firms fell for the second quarter running, but this should be short-lived as firms plan modest job increases next quarter. Job numbers rose in business and professional services firms and are expected to continue doing so, albeit at a slower rate.
Looking at the sub-sectors, the only consumer services sector to report growth in business volumes over in the past three months was travel services. However, these firms incurred rapid cost rises and, with limited ability to pass these onto customers, their profitability fell at the fastest rate for five years.
Demand for leisure and personal care services - such as gyms, hairdressers or cinemas - fell markedly in the last quarter, as did spending in hotels, bars and restaurants. Profitability of hospitality firms fell at a record rate and numbers employed have fallen for two quarters in a row.
Firms transporting goods and post saw volumes and values of business fall faster than they have since just after the survey began in 1998, with profitability the weakest for eight years and numbers employed decreasing fast.
In business and professional services, there was a divide in the performance of the sub-sectors. While the profitability of office and personnel services, management and legal and property firms deteriorated, other sectors such as marketing and telecoms and IT saw their ability to make profits improve.
Services firms such as lawyers, accountants and management consultants saw well below normal volumes and values of business for the second quarter in a row. These firms’ staff numbers were unchanged after two and a half years of continuing expansion and training expenditure was cut back at the fastest rate for five years.
Meanwhile, marketing firms saw profitability rise at a record rate, with survey high balances for business volumes and values. Expectations in this sector are not as positive, though, with flat volumes and values and large cost increases thought to be on the way, leading to broadly flat selling prices and profits.
In the telecom and IT sector, aggressive cuts in selling prices were accompanied by fast rises in volumes and values of business. These drove further rapid growth in profitability in a sector where numbers employed continue to grow at a healthy rate.
Ian McCafferty, the CBI’s Chief Economic Adviser said: “Services sector firms are concerned about their business prospects. Consumers are reining in spending on leisure, entertainment and eating out, while professionals offering services such as accountancy, property and law have seen their profits flatten off as costs continue to grow strongly.
”There are some exceptions though. Travel companies reported healthy demand for holidays in the past three months, with people more inclined to take a well-earned break as rising costs put greater demands on household spending. Meanwhile, marketing firms are going from strength to strength and the telecom and IT sector has seen a run of strong profitability growth.”
Meanwhile, according to Vicky Redwood of Capital Economics, a London-based research firm, the household saving rate in the UK is set to rise significantly from its recent record lows, with clear adverse implications for household spending. But the consequences for the savings industry, in particular, hinge crucially on how the rise comes about.
“We think that the saving rate will be driven up primarily by slower borrowing, rather than a sharp rise in the level of saving,’ maintained Redwood.
This is said to have three direct implications for firms. First, a consumer spending slowdown driven by lower borrowing is likely to affect household goods sales, in particular. Second, the rise in the saving rate will not make it easier for banks and other lenders anxious to boost their retail deposits. And third, growth of the financial sector’s balance sheet, and hence the money supply, will slow.
In another development, the EU has made public what is called an international “white list’ of safe financial centres which excludes British-linked tax havens.This has not gone well with the British authorities.The list is supposed to contain only those countries which have top quality anti-money laundering controls. It allows companies operating in EU member states the option of waiving some of the checks (such as asking for copies of passports, utility bills and company financial statements) they would otherwise carry out on financial transactions involving territories that feature on it.
The list includes established financial centres such as the US, Hong Kong and Singapore, as well as emerging markets such as Argentina, Russia and South Africa. It excludes both China and India and leading British overseas territories such as the Cayman Islands, Bermuda and the British Virgin Islands. The Crown dependencies – the Channel Islands and the Isle of Man – have an intermediate status under which member states may consider their standards to be equivalent.