Cash-strapped consumers are spending less on leisure, entertainment and eating-out, but are still happy to splash out on holidays, a survey has revealed.
The CBI's latest quarterly spotlight on services firms showed that business activity among consumer-facing ones fell at its fastest rate since the end of 2001.
Businesses such as hotels, bars and restaurants, cinemas and gyms are enduring a difficult combination of lower consumer spending and higher costs, which saw profitability in the sector hit its lowest level in at least 10 years, according to the CBI.
Travel firms were the only consumer services companies to report growth in business over the last quarter, although they too were hit by soaring cost rises and suffered the fastest fall in profitability for five years.
The CBI said holiday operators felt unable to pass many of their higher costs on to consumers, however the survey revealed that consumers services firms across the wider sector hiked prices at their fastest rate in a year.
The price rises were offset by employment costs, which held profits back, showed the survey.
Ian McCafferty, the CBI’s chief economic adviser, said: "Services sector firms are concerned about their business prospects. Consumers are reining in spending on leisure, entertainment and eating out, while professionals offering services such as accountancy, property and law have seen their profits flatten off as costs continue to grow strongly.
"There are some exceptions though. Travel companies reported healthy demand for holidays in the past three months, with people more inclined to take a well-earned break as rising costs put greater demands on household spending."
A balance of consumer services firms reporting a fall in business volumes stood at negative 44 per cent, the lowest since November 2001, as was the balance for a fall in the value of business, at negative 59 per cent.
Profitability was the weakest since the survey began in 1998 – at negative 39 per cent – despite firms being able to pass through some of the rising costs.
Average selling prices rose, with a balance of positive 40 per rcent, but a higher balance of positive 50 per cent said costs went up.
Business services companies, such as lawyers, accountants and IT and recruitment firms, were less affected by the economic slowdown, with business activity growth seen over the past three months, although profits remained flat as competition saw prices fall.
The Services Sector Survey also found that employment in the consumer services industry fell for the second quarter, although firms questioned said they were planning to recruit on a modest scale in the next quarter.
The CBI added that firms were also becoming increasingly concerned about their ability to raise finance amid the credit crunch.
The survey findings tally with the results of the Bank of England’s most recent monthly report from its regional agents, which showed that services firms were among those most affected by a consumer spending downturn.
Service sector output fell to its lowest level in more than four years in April, as those in areas such as business catering and logistics joined the finance sector in feeling the heat from the crisis in wholesale credit markets, the Bank reported.