UK services sector sentiment hits 2-1/2-year low, CBI says

A CBI survey revealed that UK service sector business confidence has plummeted to a two-and-a-half-year low of -43% in May, driven by rising cost pressures partially attributed to increased employment taxes and minimum wage hikes. Expectations for price increases are accelerating, particularly in business and professional services, raising concerns for the Bank of England regarding persistent domestic inflationary pressures. Profitability expectations have also weakened significantly, signaling a broad cooling in investment, business volumes, and hiring within the sector.

Analysis

Business confidence within the UK services sector has deteriorated significantly, with the Confederation of British Industry's (CBI) gauge for business and professional services plummeting to -43% in the quarter to May, its lowest point since November 2022, down from -28% in February. This decline is mirrored in consumer-facing services. A primary driver is escalating cost pressures, notably from a 25 billion pound increase in employer social security contributions and a near 7% rise in the minimum wage, both implemented in April. Consequently, expectations for price increases in business and professional services have reached a two-year high, fueling concerns at the Bank of England about persistent domestic inflationary pressures, particularly relevant as the BoE assesses the appropriate pace for further rate reductions following a recent cut. Profitability expectations for the upcoming quarter have also worsened dramatically to -47%, the weakest reading since February 2020 and, excluding the pandemic, the lowest since November 2008. This negative outlook is accompanied by cooling investment intentions, contracting business volumes, and reduced hiring activity, as indicated by the survey of 215 firms conducted between April 28 and May 14.

Key Decisions for Investors

• Investors should exercise heightened caution towards UK-domiciled assets, particularly within the services sector, given the significant decline in business confidence to -43% and severely weakened profitability outlook of -47%.
• Monitor upcoming Bank of England communications and UK inflation metrics closely, as the reported surge in service sector cost pressures and price expectations may temper the pace of anticipated interest rate cuts.
• Consider reviewing exposure to UK companies sensitive to domestic demand and labour cost inflation, as the CBI survey highlights deteriorating business volumes, investment, and hiring intentions.