Flagging confidence has spread to business services, says CBI

Falling profitability and flagging confidence have spread from the consumer sector to Britain's business and professional services firms, a survey of the services industry shows.

Services such as lawyers, marketing, accountancy and computing reported record falls in business volumes and values in the quarterly Confederation of British Industry services survey.

The drop in both volumes and values was the 10-year-old survey's first twin decline since May 2003. Confidence dropped sharply and numbers employed fell slightly, ending 15 straight quarters of job increases.

There was also record negative sentiment on expected business investment and expansion over the next 12 months.

The survey shows the effects of the slowing economy moving into the once-buoyant business and professional sector as clients rein in spending to prepare for tougher times. The economy ground to a halt in the second quarter of the year, ending 16 years of unbroken growth.

Ian McCafferty, the CBI's chief economic adviser, said: "Profitability in the service sector is clearly under pressure. This pressure, initially confined mainly to consumer services such as hospitality and travel, has spread to the professional and business services sector. This reflects much tougher trading conditions for business and professional firms, after a period when business trends had been holding up in the face of the slowing economy."

Business and professional volumes and values dropped to survey lows, recording balances of minus 31 per cent and minus 27 per cent. A balance shows the difference between the percentage of respondents answering positively and negatively.

Firms reported pressure not just from the slowing economy but from the credit crunch. Businesses were more concerned than in the past about their ability to raise external finance for investment, recording a 22 per cent balance, another record.

The sector's biggest sufferers were marketing firms. After a year of strong growth, volumes and values dropped sharply in the most recent quarter, with further falls expected. Expansion expectations turned negative for the first time in two years.

All business and professional sub-sectors had falls in volumes, apart from telecommunications and computing, though these firms' confidence dipped, and they have cut employment.

Consumer companies' business held up better than expected, but are still below normal. Firms faced a squeeze on profitability, which dropped sharply as costs per employee rose at the fastest rate in more than four years and selling-price inflation was at its slowest for a year.

Travel companies were hit particularly hard as business volumes fell at their fastest for five years and business volumes and profitability continued to drop. Confidence dipped and investment plans turned negative.

Mr McCafferty said: "Across the service sector, business confidence has fallen and companies are negative about their investment and expansion plans for the year ahead."