Sentiment fell sharply across the services sector in May amid rapid increases in costs and prices, and a worsening growth outlook according to the latest CBI Service Sector Survey, based on responses from 174 services firms and conducted during the first two weeks of May.
Growth in consumer services came to a standstill, with business volumes flat in the three months to May and expected to contract in the quarter ahead. By contrast, business and professional services firms reported that growth in business volumes accelerated last quarter, though volumes are predicted to be flat in the quarter ahead.
Costs and average selling prices in the services sector grew rapidly once again over the three months to May. Business and professional services firms expect selling price inflation to accelerate a little further in the three months to August, but the pace of price inflation in consumer services is expected to slow somewhat as demand also cools. Services firms are sharing the burden of higher costs with their customers/clients, with profitability falling in both sub-sectors for the second quarter in a row and a further fall expected next quarter.
Ben Jones, CBI Lead Economist, said: “Services firms are feeling pretty despondent about their immediate prospects in the face of cost pressures and high inflation. The squeeze on household incomes is already having an impact on activity in consumer services, with fears of worse to come over the summer.
“Businesses across the services sector are continuing to hire new staff and although concerns over shortages of labour are still widespread, they have eased a bit. But falling profitability is beginning to take its toll on investment plans, which have softened.
“The Government should act now in support of those on lower incomes but also help restore business confidence and get firms investing. An extension to the successful Recovery Loan Scheme would be an astute move as the cash flow crunch continues for firms.”