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The UK’s service sector showed strong growth in the three months to May, though concerns are increasing about the availability of skills and labour, according to the latest quarterly CBI Service Sector Survey.

Business volumes leapt in the business and professional services sector (which includes accountancy, legal and marketing firms) at the fastest rate in almost a decade, resulting in profits growing at their quickest pace since late 2007.

Growth in consumer services' (which includes hotels, bars, restaurants, travel and leisure firms) business volumes was more moderate, but stronger price growth helped support margins. Expectations for the next three months are robust across the entire service sector.

The survey of 174 firms showed a strong performance overall across the services sector, with optimism improving, recruitment up and investment intentions for the year ahead remaining solid.

However, an above-average number of firms reported labour availability as a constraint on investment, while skills shortages are increasingly affecting business expansion plans in business and professional services.

Rain Newton-Smith, CBI Director for Economics, said:             

“Strong confidence and activity in the services sector reinforces our view that weaker growth over the first quarter of 2015 will prove temporary.

“Prospects for consumer services remain buoyant, as real incomes rise supported by low inflation and strong employment, fuelling spending in bars, hotels and restaurants. But concerns about skills shortages are increasing in both sectors, particularly among business and professional services firms looking to expand.

“Nevertheless, capital spending plans are firm across the sectors, especially in consumer services, where companies are focussing on developing market share by reaching new customers and providing more services.”

 Key findings:

Consumer services

• 48% of firms said that numbers employed had risen, with 6% saying they were down, leaving a rounded balance of +43%, the highest since November 2007 (+46%). Expectations for growth in the coming quarter are at a record high
• Optimism regarding the business situation improved somewhat on the last quarter. In the latest survey, 35% of firms were more optimistic against 6% who were less optimistic, leaving a balance of +29%
• 39% of firms reported a rise in business volumes, compared with 16% saying they were down in the last quarter, leaving a balance of +23%. Growth in business volumes is expected to pick up in the next quarter (+35%)
• 26% of firms said they had increased selling prices, while 9% said they were down, leaving a balance of +17%. Price inflation is expected to be similar (+15%) over the next quarter
• Costs per person employed continued to rise robustly (+42%), at a similar pace to the previous three months (+41%) and with a similar increase expected next quarter (+41%)
• Profitability increased at broadly the same pace as the previous quarter: 40% said it was up while 18% said it was down, leaving a balance of +22%, with expectations the same for the quarter ahead

Business and professional services

• Growth in optimism regarding the business situation nearly doubled compared to the previous quarter, with 38% of firms saying they were more optimistic than three months ago compared with 9% saying they were less optimistic, giving a rounded balance of +30%
• 49% of firms said business volumes were up compared with three months ago, and 7% said they were down, giving a balance of +42%, the highest since February 2006 (+44%), and volumes are expected to grow strongly (+29%)
• 13% said they had increased their selling prices but 12% said they had cut them, leaving a rounded balance of +2%
• Growth in costs per person employed dipped slightly, with a balance of +28% this quarter comparing with +36% in the three months to February. Costs are set to increase at a slightly faster pace over the next three months (+32%)
• Profitability increased strongly, with 39% saying it was up and 16% saying down, leaving a balance of +23%, the highest since November 2007 (+34%). But a much slower rise is expected in the next three months (+8%)
• 31% of firms said the number of employees had increased in the last three months, with 7% saying they were down, giving a rounded balance of +24%. A similarly solid rise in headcount is expected in the next quarter (+21%)

Notes to Editors:

The Service Sector Survey was conducted between 29th April and 15th May 2015. 109 Business & Professional Services firms and 65 Consumer Services firms replied.