Optimism high after year of growth

In the three months to May, firms were increasingly confident about the business situation, with optimism rising at the fastest rate since the start of the survey in 1998, while business volumes rose again, marking a full year of growth. The survey of 151 firms also revealed that companies have continued to take on more staff and increased expenditure on training.

Katja Hall, CBI Deputy Director-General, said: “With a full year of growth under their belts, service sector firms are more upbeat than they have been for a long time.

“The recovery continues to strengthen with both consumer and business-facing firms taking on more staff and investing in training and IT.

“But a rising number of firms, particularly in business and professional services are having problems finding the right staff. This survey identifies a skills gap as a growing constraint on business expansion in the sector over the year ahead.”

Consumer services – hotels, bars, restaurants, travel and leisure firms and others in consumer-facing sectors – regarded levels of business to be comfortably above normal. Business volumes rose strongly once more and growth is expected to pick up further in the coming quarter. Despite a sharp rise in total costs, the profitability of these firms improved at the liveliest rate since late 2006. Numbers employed grew strongly for the third consecutive quarter and firms plan to boost spending on training/retraining staff over the next three months at the fastest rate since November 2007.

The business and professional services sector – which includes accountancy, legal and marketing firms – saw growth in business volumes edge up, to its fastest pace since 2006. Firms reported their level of business to be above normal for the first time since November 2007. Average selling prices rose following a prolonged period of falling or stable prices, while the rise in profitability gathered pace from the previous quarter. Headcount has now risen steadily for a full year, while growth in expenditure on training/retraining expanded at the fastest pace since February 2006. In the coming quarter, firms expect to raise headcount further and continue to invest heavily in staff training.

Looking ahead, consumer-facing firms appear more bullish about their prospects than business & professional services firms, which expect the pace of growth in business volumes and values to moderate. Firms in both sub-sectors expect their businesses to expand over the next year, though to a lesser degree than the last quarter. Consumer services firms plan a strong increase in IT capital spending over the next 12 months, driven mostly by a desire to replace existing capital. Inadequate net returns were seen as the single biggest factor likely to limit capital expenditure over the next year, while the proportion of respondents citing demand uncertainty dropped to its lowest level since May 2006.

Business and professional service firms will also focus capital expenditure on IT. Replacement and efficiency improvements remain the most important investment motives, but capacity expansion has gained notably in importance (with citations rising well above their long run average). As with consumer services firms, they are less worried by demand uncertainty than at any time since the financial crisis.