Service sector has its bright spots

News Analysis: There is no evidence yet of the across-the-board decline that has hit manufacturing

THE OUTLOOK for the UK economy seems to get darker by the day. Last week, the Bank of England cut interest rates for the third time in as many months. This week, a raft of official data releases - inflation, unemployment, retail sales - will prompt another round of economic pessimism.

Amid the gloom, and there is plenty of it, it is easy to forget that companies in the UK service sector are still flourishing. For many, 1998 has been as good a year as 1997. If the economy is to escape recession next year, these companies must keep on growing. What are the chances?

Until recently, the UK service sector looked unassailable. According to the latest official estimates, business services - that is, professional services such as management consultancy - grew by an annualised rate of around 7 per cent in the first six months of the year.

The UK telecoms industry grew by more than 10 per cent. Services prices have continued to increase, reflecting buoyant demand as well as a shortage of skilled labour. The latest inflation data put services inflation at 3.4 per cent, more than three-times the rate of goods inflation.

Lately though, the outlook has started to look a little less rosy. Retailers were the first to feel the pinch of slowing domestic demand. Recent official data, as well as the more timely surveys of retail sales, have been dire.

The country's leading retailers, including the stalwart Marks & Spencer, began warning of a "bloodbath" on the high street. The autumn sales are still on, even though there are only a few weeks until Christmas.

The new price index published last week by the British Retail Consortium showed that prices on the high street last month were 1 per cent lower than at the same time last year.

Retailing aside, there are signs of weakness in other service companies that directly serve UK consumers. Last week, Scottish & Newcastle became the latest in a string of brewers to express caution about the near-term outlook.

"There is still reason to be concerned about consumer confidence," said Sir Alistair Grant, the group's chairman.

Times are getting tougher for hotels and caterers too, where official figures indicate that growth, is, at best, stagnating.

But not all the so-called "consumer service" companies are suffering, suggesting that there may still be life in the UK consumer yet. Demand for certain "big ticket" items, foreign holidays for example, is still holding up. "We're not seeing any evidence of a significant downturn in consumer demand," said Bill Nightingale, head of investor relations at the holiday company Airtours. "If anything, we're slightly ahead of where we thought we'd be."

Forward-looking surveys, though, suggest Airtours' experience is the exception not the rule. A recent Confederation of British Industry/Deloitte & Touche survey found that confidence had fallen sharply among "consumer service" companies such as restaurants and bars.

"Consumer services firms expect the volume of business to be lower and to see a sharp cut in the value of future business," said Martin Scicluna, chairman of Deloitte & Touche.

Financial services are also showing signs of faltering. Investment banks have been laying staff off since the summer's financial crisis. However, the weaknesses seem, to date at least, less pronounced than for "consumer service" companies. Most major retail banks insist loan quality is holding up, and consumer lending continues to grow sharply. The latest CBI survey found that although there had been sharp falls in confidence among financial services companies, most were still reporting healthy business volumes.

There is still one bright spot in the services sector - professional and business services such accountancy, management consultancy and IT. Many of these companies are enjoying record levels of profit. This is in part because issues such as the launch of the euro, the year 2000 and the breakneck pace of change in many industries keeps them busy despite weakening domestic demand.

And it is partly because the bulk of work for accountants and consultants and the like comes from other companies, not individual consumers. It takes time for slowing consumer demand to feed through into lower demand for professional services.

Andrew Given, group finance director of Logica, the IT consultancy, said: "We are not seeing any evidence of a slowdown in the market sectors in which we tend to operate - finance, telecommunications and utilities. Our business is growing and we expect it to continue to grow. We are still recruiting strongly, for example."

Simon Gaysford, chief executive of London Economics, a privately-owned consultancy, paints a similar picture. "We're trading strongly and our pipeline is looking strong," he said. "We're keeping a constant eye on things but there's no sign of any deterioration."

The accountancy firm KPMG is also upbeat, although Alan Reid, head of finance, has noticed a slowing in business in northern England. "We've seen some indications of weakness in our northern business area, that is, from Leeds to Manchester. There are also some indications in the Midlands. But we've seen no sign of a downturn in London," he said.

So although growth in services is undoubtedly slowing, there is as yet no evidence of the across-the-board decline that has hit the manufacturers. A combination of structural factors and cuts in UK interest rates should stop the economic slowdown spreading to all parts of the sector, although it seems inevitable that retailers and other companies directly exposed to UK consumers are in for a shaky start to 1999.

With a bit of luck, the economic slowdown that most forecasters have pencilled in for next year should not turn into anything nastier.

Sport
Club legend Paul Scholes is scared United could disappear into 'the wilderness'
football
News
A model of a Neanderthal man on display at the National Museum of Prehistory in Dordogne, France
science
News
Dawkins: 'There’s a very interesting reason why a prince could not turn into a frog – it's statistically too improbable'
newsThat's Richard Dawkins on babies with Down Syndrome
Sport
Malky Mackay salutes the Cardiff fans after the 3-1 defeat at Liverpool on Sunday
footballFormer Cardiff boss accused of sending homophobic, racist and messages
PROMOTED VIDEO
Sport
Rodgers showered praise on Balotelli last week, which led to speculation he could sign the AC Milan front man
transfers
Life and Style
life – it's not, says Rachel McKinnon
Arts and Entertainment
Eye of the beholder? 'Concrete lasagne' Preston bus station
architectureWhich monstrosities should be nominated for the Dead Prize?
Arts and Entertainment
Arctic Monkeys headline this year's Reading and Leeds festivals, but there's a whole host of other bands to check out too
music(who aren't Arctic Monkeys)
News
Lizards, such as Iguanas (pictured), have a unique pattern of tissue growth
science
Extras
indybest
News
Anna Nicole Smith died of an accidental overdose in 2007
people
Life and Style
food + drink
Arts and Entertainment
'The Great British Bake Off' showcases food at its most sumptuous
tvReview: Bread-making skills of the Bake Off hopefuls put to the test
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

Test Lead (C#, Java, HTML, SQL) Kingston Finance

£40000 - £55000 per annum: Harrington Starr: A Global Financial Service Organi...

Access/Teradata Developer, Banking, Bristol £400pd

£375 - £400 per day: Orgtel: Access / Teradata Developer - Banking - Bristol -...

Quantitative Analyst (Financial Services, Graduate, SQL, VBA)

£45000 per annum: Harrington Starr: Quantitative Analyst (Financial Services, ...

Day In a Page

Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

We know all too much about the cruelty of Isis – but all too little about who they are

Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
Neanderthals lived alongside humans for centuries, latest study shows

Final resting place of our Neanderthal neighbours revealed

Bones dated to 40,000 years ago show species may have died out in Belgium species co-existed
Scottish independence: The new Scots who hold fate of the UK in their hands

The new Scots who hold fate of the UK in their hands

Scotland’s immigrants are as passionate about the future of their adopted nation as anyone else
Britain's ugliest buildings: Which monstrosities should be nominated for the Dead Prize?

Blight club: Britain's ugliest buildings

Following the architect Cameron Sinclair's introduction of the Dead Prize, an award for ugly buildings, John Rentoul reflects on some of the biggest blots on the UK landscape
eBay's enduring appeal: Online auction site is still the UK's most popular e-commerce retailer

eBay's enduring appeal

The online auction site is still the UK's most popular e-commerce site
Culture Minister Ed Vaizey: ‘lack of ethnic minority and black faces on TV is weird’

'Lack of ethnic minority and black faces on TV is weird'

Culture Minister Ed Vaizey calls for immediate action to address the problem
Artist Olafur Eliasson's latest large-scale works are inspired by the paintings of JMW Turner

Magic circles: Artist Olafur Eliasson

Eliasson's works will go alongside a new exhibition of JMW Turner at Tate Britain. He tells Jay Merrick why the paintings of his hero are ripe for reinvention
Josephine Dickinson: 'A cochlear implant helped me to discover a new world of sound'

Josephine Dickinson: 'How I discovered a new world of sound'

After going deaf as a child, musician and poet Josephine Dickinson made do with a hearing aid for five decades. Then she had a cochlear implant - and everything changed
Greggs Google fail: Was the bakery's response to its logo mishap a stroke of marketing genius?

Greggs gives lesson in crisis management

After a mishap with their logo, high street staple Greggs went viral this week. But, as Simon Usborne discovers, their social media response was anything but half baked
Matthew McConaughey has been singing the praises of bumbags (shame he doesn't know how to wear one)

Matthew McConaughey sings the praises of bumbags

Shame he doesn't know how to wear one. Harriet Walker explains the dos and don'ts of fanny packs
7 best quadcopters and drones

Flying fun: 7 best quadcopters and drones

From state of the art devices with stabilised cameras to mini gadgets that can soar around the home, we take some flying objects for a spin
Joey Barton: ‘I’ve been guilty of getting a bit irate’

Joey Barton: ‘I’ve been guilty of getting a bit irate’

The midfielder returned to the Premier League after two years last weekend. The controversial character had much to discuss after his first game back
Andy Murray: I quit while I’m ahead too often

Andy Murray: I quit while I’m ahead too often

British No 1 knows his consistency as well as his fitness needs working on as he prepares for the US Open after a ‘very, very up and down’ year
Ferguson: In the heartlands of America, a descent into madness

A descent into madness in America's heartlands

David Usborne arrived in Ferguson, Missouri to be greeted by a scene more redolent of Gaza and Afghanistan
BBC’s filming of raid at Sir Cliff’s home ‘may be result of corruption’

BBC faces corruption allegation over its Sir Cliff police raid coverage

Reporter’s relationship with police under scrutiny as DG is summoned by MPs to explain extensive live broadcast of swoop on singer’s home