UK Service Sector Faces Prolonged Profitability Crisis
Profitability within the United Kingdom's service sector has declined for the seventeenth consecutive rolling quarter, according to the latest survey from the Confederation of British Industry (CBI). The data, collected from 351 firms, indicates that rising operational costs continue to severely pressure business bottom lines, with few signs of immediate improvement.
Seventeen Quarters of Decline
The CBI's comprehensive survey revealed a weighted balance of -28 percent of business and professional services firms experienced declining profitability during the three months leading to February. This extends a troubling period of financial deterioration that began in February 2022. Consumer-facing service firms faced even more severe challenges, with a balance of -49 percent reporting deteriorating profitability. The weighted balance calculation represents the percentage of companies reporting increases minus those reporting decreases, with greater emphasis placed on larger organizations.
Persistent Cost Pressures Outpace Revenue
Businesses reported growing cost burdens for the twenty-second consecutive quarter, creating significant pressure on profit margins. Meanwhile, selling price inflation remained modest, unable to compensate for escalating expenses. Charlotte Dendy, economic surveys and data manager at the CBI, emphasized the challenging conditions: "Our latest survey indicates that conditions across the service sector remain challenging. Cost pressures continue to outpace selling price inflation, while demand remains subdued. This has squeezed profit margins and prompted firms to scale back headcounts."
Employment Costs Drive Workforce Reductions
Government policy changes have substantially increased employment costs over recent years. In her inaugural budget, Chancellor Rachel Reeves raised employer national insurance contributions (NICs), while the minimum wage has increased over ten percent since the current administration took office. A weighted balance of 43 percent of firms reported rising costs per employee during the survey period, with 54 percent anticipating further increases in the coming quarter.
These escalating costs have forced businesses to reduce staffing levels, with -15 percent of firms cutting headcounts. Employment is expected to decline further in the upcoming period, particularly among consumer service companies. The survey indicates profitability will continue falling across both service subsectors in the coming quarter, though potentially at a slightly slower pace than previous periods.
Calls for Government Intervention
Dendy urged the Chancellor to utilize next week's Spring statement to generate momentum for struggling businesses: "Service sector firms want to see the government continuing to find appropriate landing zones on the Employment Rights Act and accelerating cuts to the regulatory burden – both critical to tackling the high cost of doing business."
The persistent decline in service sector profitability highlights broader economic challenges facing UK businesses as they navigate increasing operational costs, regulatory pressures, and subdued consumer demand in a challenging fiscal environment.
