Business confidence fell across the service sector for the three months to February, as cost pressures hit consumer spending, according to the CBI
The fall was at a slower pace than in the previous quarter as profitability continued to drop and cost pressures remained elevated in both business and professional services – which include accountancy, legal and marketing firms – and consumer services such as hotels, bars and restaurants, showed the latest quarterly CBI service sector survey.
The CBI said that it was imperative for the Chancellor to address the growing tax burden and offer support for business growth in the Budget on 15 March.
Charlotte Dendy, CBI head of economic surveys, said: ‘There’s no doubt the services sector continues to face tougher times, not least those dependent on consumer spending power during a period of high inflation and rising interest rates. Profitability is falling and costs are rising which is denting many businesses’ investment plans and is hitting business confidence across the sector.
‘This underscores the need for serious action to build momentum in the economy at the Spring Budget. To offset the six-point rise in corporation tax in April and restore investor confidence, firms want the government to replace the super-deduction by either introducing full expensing for capital investments or setting out a three-year roadmap to achieve exactly that.’
With costs expected to edge even higher across the service sector in the next quarter, economic uncertainty continues to weigh heavily on those dependent on consumer spending.
Business and professional services reported that cost pressures continued to grow, standing at 58%. Currently, around 63% of businesses expect costs to continue growing in the next three months.
In addition, profitability dropped for the fifth consecutive quarter and at a faster pace than the last three quarters, standing at -27% in February, a steep drop from -11% in November 2022.
Uncertainty about demand continued to weigh on business investment, resulting in cutbacks in spending on land and buildings, as well as vehicles, plant and machinery.
Nevertheless, employment grew in the quarter to February (12%), after it stalled in January (3%). The CBI expects this to continue over the next quarter, albeit at a similar pace.
Businesses across the consumer services sector reported that optimism about the business situation deteriorated in February, but at a slower pace than in November 2022.
Total sales continued to decline for the ninth month running, as cost growth accelerated to 73%, compared to the previous quarter (57%). This is expected to edge even higher next quarter.
Employment across the consumer services sector remained unchanged and is expected to remain flat over the next quarter.
The survey was based on responses from 377 service companies and was carried out between 27 January and 14 February 2023.
