The UK service sector is facing a prolonged period of economic difficulty, with profitability declining for the seventeenth consecutive quarter, according to novel data released by the Confederation of British Industry (CBI). Businesses are reporting sustained pressure from rising costs, offering few signs of immediate improvement. The ongoing downturn in service sector profits underscores broader economic challenges facing the UK, impacting businesses of all sizes and potentially foreshadowing further economic slowdown.
The latest CBI survey, based on responses from 351 firms, reveals a weighted balance of -28% of business and professional services companies experienced declining profitability in the three months leading up to February. The situation is even more acute for consumer-facing businesses, with a significantly larger -49% reporting deteriorating profitability. This prolonged period of decline, stretching back to February 2022, highlights the persistent challenges businesses face in maintaining financial health amidst a complex economic landscape.
Businesses are bracing for continued challenges, with expectations that profitability will continue to fall in the coming quarter, albeit at a slightly slower rate. A key driver of this decline is the relentless increase in costs, which businesses have now been grappling with for 22 consecutive quarters. Even as selling price inflation remains modest, it hasn’t kept pace with the escalating cost burden, squeezing profit margins and forcing tricky decisions about staffing levels.
“Our latest survey indicates that conditions across the service sector remain challenging,” stated Charlotte Dendy, economic surveys & data manager at the CBI. “Cost pressures continue to outpace selling price inflation, while demand remains subdued. This has squeezed profit margins and prompted firms to scale back headcounts.”
Rising Employment Costs and Staff Reductions
The pressure on service sector profitability is being exacerbated by significantly higher employment costs, a consequence of recent government policies. Chancellor Rachel Reeves’s first budget included increases to employer National Insurance contributions (NICs), and the national minimum wage has risen by over 10% since the current government took office. A weighted balance of 43% of firms reported rising costs per person during the period, with 54% anticipating further increases in the next quarter.
These escalating costs are directly impacting employment levels. -15% of firms reported reducing headcount, and further employment declines are expected, particularly within consumer-facing service businesses. This trend suggests a potential slowdown in job creation and a possible increase in unemployment within the sector.
Call for Government Action
The CBI is urging Chancellor Reeves to address these challenges in the upcoming Spring Statement. Dendy emphasized the need for government action to stimulate business momentum, specifically calling for “appropriate landing zones on the Employment Rights Act and accelerating cuts to the regulatory burden.” These measures, she argues, are “critical to tackling the high cost of doing business.”
The ongoing struggles within the service sector are a significant concern for the UK economy, given its substantial contribution to overall economic output. The sector’s difficulties reflect broader economic headwinds, including persistent inflation, subdued demand, and increasing regulatory burdens. Addressing these challenges will be crucial for fostering sustainable economic growth and ensuring the long-term health of the UK economy.
Looking ahead, the Chancellor’s Spring Statement will be a key moment for the service sector. The measures announced will likely shape the sector’s trajectory for the coming months, and businesses will be closely watching for policies that address the pressing issues of cost pressures and regulatory burdens. The next set of CBI data, expected in May, will provide further insight into whether the sector is beginning to stabilize or if the downward trend is set to continue.
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