Service sector profits continue long decline
Profitability in the UK’s service sector declined for the seventeenth consecutive rolling quarter, according to new data, with businesses reporting few signs of improvement on the horizon.
The Confederation of British Industry’s (CBI) latest survey on the service sector showed that rising costs put businesses’ bottom line under pressure.
A weighted balance of -28 per cent of business and professional services firms saw declining profitability in the three months to February, extending a period of declining profitability that began in February 2022.
Things were even worse for consumer-facing firms, with a balance of -49 per cent reporting deteriorating profitability.
A balance is the percentage of companies reporting an increase minus those reporting a decrease, with greater weight assigned to larger firms. The survey was based on the responses of 351 firms.
‘Conditions remain challenging’
The survey showed that profitability is expected to continue falling across both subsectors in the coming quarter, although at a slightly slower pace than the previous period.
The pressure on profit came from rising costs, with businesses reporting growing cost burden for the 22nd consecutive quarter. Selling price inflation, meanwhile, remained modest.
“Our latest survey indicates that conditions across the service sector remain challenging,” Charlotte Dendy, economic surveys & data manager at the CBI said.
“Cost pressures continue to outpace selling price inflation, while demand remains subdued. This has squeezed profit margins and prompted firms to scale back headcounts.”
Businesses have faced significantly higher employment costs over the past couple of years as a result of government policy.
In her first budget, Chancellor Rachel Reeves increased employer national insurance contributions (NICs), while the minimum wage has also increased over ten per cent since the government took office.
A weighted balance of 43 per cent saw costs per person rising in the period, with 54 per cent anticipating further increases in the coming quarter.
Higher costs pushed firms to cut staff, with -15 per cent of firms reducing headcount. Employment is expected to fall further in the coming period, especially amongst consumer service firms.
Dendy said the Chancellor needed to use next week’s Spring statement to build momentum for businesses.
“Service sector firms want to see the government continuing to find appropriate landing zones on the Employment Rights Act and accelerating cuts to the regulatory burden – both critical to tacking the high cost of doing business,” she said.