Small businesses in the services sector have seen profitability fall unexpectedly, according to the latest research by the Confederation of British Industry (CBI).
The CBI survey revealed that although businesses in the service sector increased prices, overall profitability fell in the past three months, with a balance of -14% making less money.
Almost a third of companies asked said the value of business fell compared to only 21% who said it rose, resulting in a balance of -8%, well below what is regarded as normal.
Furthermore, companies expect profitability to drop further, with a balance of -26% predicting margins will decline in the next three months.
According to the research, business activity across the economy is varied, with some sectors struggling more than others.
CBI Chief Economic Adviser, Ian McCafferty, said: “Although our recent retail surveys have shown increased sales of high street goods, this survey shows that households are still reluctant to spend on services. Conditions remain difficult for consumer-facing firms, as volumes of business have edged lower over the past quarter.”
He added: “Firms selling to business and professional firms have seen their volumes move sideways over the past three quarters, and no growth is expected over the next three months. Unsurprisingly, business confidence in this sector has fallen for the first time in over a year. “
Prospects for business expansion in the next 12 months are shown to be negative for the first time in a year, as decreased levels of demand significantly limited business expansion plans.
McCafferty concluded: “We will not know the precise impact of public sector spending cuts, and how they will affect employment, until the Comprehensive Spending Review late in October. In the meantime, there is uncertainty about the strength of demand in the coming year, and services firms are not optimistic about prospects for business expansion.”