Confidence in services sector slides, CBI survey reveals

Confidence in Britain's dominant services sector has fallen in the past three months as cash-strapped consumers and businesses have reined in spending on leisure pursuits and professional advice, a Confederation of Business Industry survey shows.

Levels of business volumes and values were weak for the whole sector, and neither consumer nor business services firms are positive about the prospects for expansion in the next year.

Profitability fell at a record rate for consumer-facing companies and was flat for business services firms, the CBI, whose director general is Richard Lambert, said.

Service businesses have become more worried about their ability to raise external finance and the cost of doing so. Consumer services, such as hotels, restaurants, cinemas and gyms, had a worse quarter than they had feared as costs jumped and profitability sank at a record pace.

The number of people employed in the sector also fell for the second quarter in a row as business volumes and values fell at their fastest rate since the end of 2001 when consumer confidence was rocked by the terrorist attacks on the US.

Consumer businesses were also negative about business expansion, blaming an inability to raise external finance as a factor likely to restrict future investment as banks cut lending to conserve funds and limit risk.

Ian McCafferty, the CBI's chief economic adviser, said: "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."

Consumers are facing soaring bills for food, energy and borrowing after years of cheap credit and falling prices. The return of inflation means the Bank of England has limited scope for cutting interest rates to ease pressure on household finances.

The travel industry was the only consumer services sector to report growth in business volumes. But though sales have held up, travel companies' profitability fell at the fastest for five years as expenses jumped with little scope to pass on increases to customers.

The CBI survey adds to the gloomy news for the services sector, which accounts for 70 per cent of the economy. The Office for National Statistics reported on Friday that total services output rose 0.5 per cent in the first quarter of 2008, but fell 0.1 per cent between February and March.

Firms selling professional services to businesses – such as lawyers, accountants, architects, IT and recruitment firms – saw volumes and values of business grow but at rates below those of 2007, the CBI found. Average customer fees fell amid fierce competition and profitability was flat. Professional services firms have resorted to cutting prices, denting their profitability. With staff numbers unchanged after two and a half years of expansion, firms are slashing training budgets.

For the second quarter in a row, professional services firms do not plan to expand more in the coming year than in the last. Firms are more concerned the cost of finance will constrain their investment over the coming year.