Faltering services sector raises fears of double dip

The pace of recovery in Britain's dominant services sector appears to be faltering, business leaders warn today, casting new doubt on the economy's ability to avoid a "double dip" downturn. Sales in the business services half of the sector remained flat in the three months to the end of May, the Confederation of British Industry (CBI) said, while sales of consumer services actually fell.

In the latter – which includes hotels, bars and restaurants – 14 per cent of respondents to a CBI survey said their sales had increased during the quarter, while 35 per cent said sales were down, producing a negative balance of 21 per cent. Among business services such as accountancy, the equivalent figure was a negative balance of 5 per cent.

Profitability across the whole services sector has continued to fall, as have staffing levels, the CBI study also reveals. While price increases have protected businesses to an extent, the employers' group warns that higher costs are continuing to erode margins.

"These figures for the service sector show there is some way to go before the recovery gets up to speed. Firms selling services to the consumer are finding it tougher than those in business and professional services," said Ian McCafferty, the chief economic adviser to the CBI.

"Consumers are still being cautious about spending on discretionary activities such as eating out in restaurants or bars, and leisure and personal services such as haircuts or beauty."

The CBI's warning is particularly worrying since there is little immediate prospect of any sustained pick-up in household spending. The latest consumer confidence data, published on Friday, suggested that people feel more nervous about their financial futures, with tax increases and spending cuts expected in the Chancellor's emergency Budget later this month.

Interest rate rises, which the Organisation for Economic Co-operation and Development (OECD) has warned will have to take place before the end of the year, would also hit confidence. Nor is there expected to be any discernible short-term improvement in business services, with economic growth in 2010 likely to be modest at best.

The performance of the services sector is crucial because it accounts for about 70 per cent of Britain's gross domestic product. If services companies are not growing, the chances of the economy falling back into recession are increased.

Last week, the Office for National Statistics said the economy grew by 0.3 per cent in the first quarter of the year, compared with initial estimates of 0.2 per cent. But the growth was still lower than the 0.4 per cent recorded in the final three months of last year. The revision reflected a better-than-forecast performance from manufacturers rather than improvements in the key services sector.

The Treasury predicts 1 to 1.5 per cent growth for 2010 followed by 3 to 3.5 per cent in 2011. But Alan Budd, head of the new Office of Budgetary Responsibility, is expected to revise those projections downwards before the Budget.