Steep wage rises weigh on services sector

PROFITS have been hit in the all-important services sector on the back of a steep rise in costs, even as demand remains robust.

The services sector makes up roughly 80pc of the UK economy and covers the two main areas: business and professional services, such as accountancy and marketing; and consumer services, including hotels, bars and restaurants.

Data from the CBI’S latest quarterly survey for the three months to August showed that while both sub-sectors were upbeat about the number of people looking to use their services, they were much more pessimistic about profits because of a large rise in costs.

While business and professional services firms saw volumes grow at the fastest rate since May 2016 and expected them to keep rising in the next three months, only 21pc of firms said overall profitability was up on the previous quarter, compared to 25pc who said it was down. This marks the fifth consecutive quarter in which profits in this segment have fallen.

The tone was worse in consumer services, where the mood regarding the outlook for trading was downbeat. Some 23pc of firms said they were less optimistic than three months ago, compared to only 11pc that were more optimistic. The cost of hiring someone in

‘With no growth in spending in the second quarter, it’s no surprise services firms are downbeat’

the restaurant, bar and hotel trade grew at the fastest pace since February 2004. Profitability declined in August at the fastest rate since November 2011.

The survey follows consumer spending being squeezed thanks to inflation outpacing wage growth for much of 2017, and fears about an over-reliance on credit cards to fund spending.

Anna Leach, CBI head of economic intelligence, said the services sector had been a “mixed bag” this summer. “With the latest GDP data showing no growth in consumer spending in the second quarter, it’s no surprise that consumer services firms are particularly downbeat,” she said.

She added the availability of skills was another risk the sector was dealing with, and highlighted the “degree of care which will need to go into crafting the UK’S future migration system”.