Profitability in the UK’s service sector has been on a downward trend for seventeen consecutive rolling quarters, and businesses currently report limited signs of improvement. The Confederation of British Industry’s (CBI) latest survey reveals a challenging landscape for service providers.

The Persistent Decline in Service Sector Profits

A weighted balance of -28 per cent of business and professional services firms reported declining profitability in the three months leading up to February. This extends a period of consistent decline that began in February 2022. The situation is even more pronounced for consumer-facing firms, where a balance of -49 per cent reported deteriorating profitability.

The survey, based on responses from 351 firms, indicates a widespread issue impacting various segments within the service sector.

Cost Pressures and Their Impact

The primary driver behind this decline is rising costs. Businesses have experienced increasing cost burdens for 22 consecutive quarters. Even as selling price inflation remains modest, it hasn’t kept pace with the escalating costs, squeezing profit margins. Firms are also facing significantly higher employment costs due to recent government policy changes.

Specifically, the Chancellor’s increase to employer National Insurance contributions (NICs) and the rise in the minimum wage – exceeding ten per cent since the current government took office – are contributing factors.

Headcount Reductions and Future Outlook

In response to these pressures, firms are taking action to reduce costs, including reducing staff. A weighted balance of -15 per cent of firms reported reducing headcount. Further employment declines are anticipated, particularly within consumer service firms.

The CBI expects profitability to continue falling in the next quarter, although potentially at a slightly slower rate.

What Can Be Done?

Charlotte Dendy, economic surveys &amp. data manager at the CBI, emphasizes the need for government intervention. She suggests that the Chancellor should focus on creating a more favorable environment for businesses in the upcoming Spring statement.

“Service sector firms want to notice the government continuing to uncover appropriate landing zones on the Employment Rights Act and accelerating cuts to the regulatory burden – both critical to tacking the high cost of doing business,” Dendy stated.

Looking Ahead: Key Considerations for Businesses

The prolonged downturn in the service sector highlights the importance of proactive cost management, strategic pricing, and efficient operations. Businesses need to carefully assess their cost structures, explore opportunities to improve productivity, and adapt to the changing economic landscape.