Worries about house prices, falling stock markets, industrial unrest and global instability has led to prolonged uncertainty in the services sector that set to continue, a CBI report reveals.
The latest quarterly service sector survey by the CBI and Grant Thornton survey published on December 2 looks at business and professional services firms such as advertising agencies and management consultants, as well as consumer services firms such as hotels and restaurants.
Business and professional services firms saw a pick-up in the value and volume of business over the past three months. But both remain significantly below normal and confidence about the business situation has failed to improve.
Profits fell further among business and professional services firms, although this decline is expected to come to an end in the next three months. Prices continued to fall but at a slower rate than in the previous quarter and they are expected to stay flat in the coming months.
Employment costs rose over the past quarter with the number of people employed rising as well as costs per employee. Firms expect to continue taking on more staff in the coming months but at a slower rate.
Capital expenditure is also being held back by worries about the future. Figures out last week showed business investment had seen its worst slump since records began nearly 40 years ago.
Business and professional services firms plan to invest more in information technology in the coming year. But spending on fixed capital is being held back by uncertainty about demand, as well as inadequate returns. The level of demand remains by far the most important constraint on the expected level of business.
Consumer services firms reported a more mixed picture. A slight pick up in the volume of business - following six quarters of decline - failed to feed through to confidence, which slumped significantly. The value of business fell a little.
Overall profitability in the consumer services sector rose unexpectedly for the first time since November 2000, driven by hotels, bars and restaurants, but firms expect the rate of profit growth to slow over the coming three months. Prices were broadly unchanged over the past three months but firms expect them to fall a little in the coming months.
Consumer services firms took on more staff over the past three months and expect to continue employing more people in the coming months, although at a slower rate. Costs per employee are still rising but less so than in the previous quarter.
Companies in the consumer services sector said they plan to start investing again in information technology, vehicles, plant and machinery over the coming year. For these firms, uncertainty about demand has fallen as an expected constraint on investment and the level of demand has come down as an expected constraint on the level of business.
Scott Barnes, Grant Thornton Specialist Financial Services Managing Partner, said: "The continuing lack of confidence in the service sector, despite some positive signs, can be imputed to a growing number of destabilising factors which have fuelled a gloomy attitude towards the future.
"Predictions of a drop in house prices, the possibility of war with Iraq, coupled with a continuing flat stock market and some industrial unrest appear to have created a negative sentiment which a small increase in the value and volume of business is not going to redress. This prolonged uncertainty in the economy is here to stay unless some of the issues currently affecting optimism are seen to be resolved."
Ian McCafferty, CBI Chief Economist, said: "Business services have seen a pick up in business in recent months, yet this has failed to feed through to optimism and they remain worried about the future. Consumer services have seen the steady decline in their sector level out, yet they have become much gloomier. These firms were expecting a recovery much earlier in the year and as the turnaround has become more prolonged and uncertain their confidence has been dented."