Business confidence plunged this month across the UK’s services sector as mounting cost pressures and weak demand hit profits and undermined the outlook for the rest of the year.
The CBI’s latest service sector poll found that a majority of companies were gloomy about their prospects and discounted the acceleration in activity that usually follows the return to work after the summer break.
Falling sales and rising costs meant most firms were suffering a profit squeeze, the CBI said, leading to lower hiring and cuts to investment.
Consumer services firms reported a negative outlook for the eighth consecutive month while services companies that sell to other businesses reported a decline in activity for the fourth consecutive month.
Optimism about the general business situation deteriorated, though the panic induced in the previous quarter by Donald Trump’s initial tariffs was much reduced. A balance of those firms optimistic about the next quarter fell back from -43% in May to -29% in August.
Alpesh Paleja, deputy chief economist at the business lobby group, said the survey still “painted a grim picture of the services sector”, adding that “pockets of resilience” were unable to reverse a downward trend going back more than a year.
Services account for about three-quarters of economic activity in the UK and the sector acts as a bellwether for the state of the economy.
Paleja said: “Rising employment costs continue to drive cost pressures higher, while subdued demand conditions are holding pricing power in check. The impact is being felt in lower hiring, investment and profits, with companies increasingly shifting focus to short-term firefighting.”
The CBI quarterly survey comes after similar concerns were voiced by respondents to a monthly S&P Global health check of the industry, which registered its biggest drop in new orders in almost three years in July.
A study this week by the Resolution Foundation updating official unemployment figures found that the rate in June of 4.7% had already accelerated to 5% in August as firms delayed replacing staff with new recruits.
The “nowcasting exercise” revealed the pressure on the government ahead of the autumn budget, when the chancellor will say she wants to increase economic growth and employment.
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The Bank of England will be torn in different directions by the data. Rising jobless figures will spur calls for an interest rate cut at the same time concerns about high inflation will encourage demands for the cost of borrowing to remain high.
Official data on Wednesday showed manufacturers suffered a similar squeeze on profits after UK factory gate prices rose at their fastest pace in two years in June.
Prices charged by firms increased 1.9% in the year to June, up from an annual 0.7% rise in April, the Office for National Statistics said.
The biggest increases jumps were in the food products industry, textiles, clothes and leather goods.