Professional services firms downbeat amid surging costs

Business and professional services firms are the most gloomy for nearly two years as rising costs and uncertainty over Brexit take their toll, according to a survey.

The CBI's latest service sector survey found that optimism about the general business situation among firms such as accountants, legal and marketing firms fell at its fastest pace since November 2016 in the three months to August.

These companies also saw growth in business volumes ease back and this is expected to slow further in the three months to November.

Overall business by volume across the overall service sector - which accounts for around three-quarters of UK economic growth - grew at a steady albeit muted pace over the past quarter as consumer-facing firms enjoyed a better summer.

The report said business volumes bounced back among consumer services firms - including hotels, bars, restaurants, travel and leisure companies - after a sharp decline in the previous three months.

This is expected to pick up further in the next quarter as well, according to the survey.

But profitability across the entire sector remained under pressure as surging costs continued to affect services firms.

The report found that consumer services companies saw their profitability drop for the second quarter in a row, while it remained flat for business and professional services companies.

This came as cost inflation continued to be heightened across the service sector and is set to rise at an accelerated rate in consumer-facing firms over the next quarter.

CBI chief economist Rain Newton-Smith said: "Although consumer services growth inched up last quarter, overall services sector growth was fairly muted.

"And, with cost pressures rising, services firms are not seeing any improvement in their bottom lines."

She added: "The underlying challenges facing the sector are not going away any time soon - demand growth is expected to remain subdued next quarter and firms seem hesitant over the prospects for expanding their businesses in the year ahead."

The CBI called on the Government and Brussels to "get on with" finalising a Brexit agreement.

Ms Newton-Smith said it was vital they put "pen to paper on a jobs-first transition period and finally, agreeing a new relationship between the UK and the EU that puts people's livelihoods above politics".

The CBI's survey covered 131 business and professional service firms and 76 consumer service companies between July 27 and August 13.