Weak service sector puts recovery in doubt

Banks are still reluctant to lend to service sector

In an ominous sign of an approaching "double dip" recession, and a bitter blow to hopes that the British economy might be about to stage a vigorous recovery, the CBI's latest survey of service-sector confidence suggests firms saw an unexpected fall in sales over the last three months.

As the service sector comprises around 70 per cent of the UK's GDP, any renewed weakness there sets back expectations of anything but the feeblest of recoveries. The CBI said that the fall in sales reported by its member firms pushed profitability lower and kept business levels well below normal.

Ian McCafferty, the CBI's chief economic adviser, said that the latest data was "disappointing, particularly as business and professional firms had hoped conditions would strengthen this quarter. This confirms the weakness reflected in third-quarter GDP data, and underlines the fragility of the economic recovery."

Businesses are reporting further downward pressure on prices and lower volumes, according to the CBI.

In the business and professional services sub-sector, which covers such areas as the law, health and accountancy, the volume and value of business had been expected to strengthen further up to November, after the previous quarter's modest growth. Instead both measures fell. This has put pressure on profitability: some 21 per cent of firms said profits increased, while 48 per cent reported a fall, giving a net balance of minus 27 per cent. In consumer services, there was a net balance of minus 13 per cent.

Tough trading conditions have been exacerbated by a shortage of lending by the banks, Mr McCafferty said. "It is worrying that so many firms cite the ability to raise funds as a constraint on future investment and business expansion," he said. "Consumers and businesses are continuing to cut back on spending on goods and services, and firms operating in the sector are responding by cutting prices to stay competitive."

Service-sector profits have now fallen for the sixth successive quarter. In consumer services, such as hotels, bars and restaurants, business volumes declined more sharply than last quarter and by more than expected, while business values dipped slightly. However, looking ahead to the next three months, firms in consumer services are more optimistic than those in business and professional services.

They expect to increase sales, profits and employment in the next quarter, and for the first time since May 2007 they expect to expand their business in the coming year. As a result, optimism about the business situation among consumer services companies has risen at the fastest rate, a balance of plus 16 per cent, since February 2007.

In manufacturing, there are suggestions from the Engineering Employers Federation (EEF) that access to credit may be easing. It says that the combined efforts of the Bank of England, through its £200bn plan to inject money directly into the economy, and pressure from the government, has helped to unblock bank lending.

Commenting, Lee Hopley, EEF Head of Economic Policy, said: "It now appears there is light at the end of the tunnel and conditions are now starting to improve." However: "The government and the Bank of England will need to move carefully. Even as we start to see clearer signs of an upturn, companies, especially small and medium enterprises, will remain vulnerable to higher costs or reductions in the availability of credit."

Meanwhile, house prices increased 0.2 per cent in November, according to the latest national survey by Hometrack. This is the fourth consecutive rise in house prices, although the pattern is uneven and the upward trend clearest in London and the South-east.