Confidence at EU service sector firms evaporated in the autumn in the midst of the worst global financial crisis in 80 years, with a contraction of activity expected heading into 2009, according to a survey of almost 3,000 service sector firms.

Meanwhile, the latest KPMG Business Outlook Survey saw growth in the key emerging markets of the BRIC region (Brazil, Russia, India and China) set to slow as service sector companies there expect weaker demand spreading from the developed Western economies.

Data showed that both areas are feeling the effects of the wider global slowdown. In the EU, the headline net balance for the expected volume of services activity over the next 12 months dipped into negative territory for the first time, to -2.9, from +30.2 in April. This contrasts with a reading of +33.8 for the BRIC, down from +58.0 in April. Almost one-third of EU service providers expect activity to fall, compared with 14 per cent of their BRIC counterparts. That said, the latter figure represents a near six-fold increase compared with six months ago.

There was notable variance within the BRIC region regarding the outlook for business activity. Russia was closer to the European trend, recording +3.4, a huge drop from April’s +55.0. In stark contrast, Chinese and Brazilian service providers are much more bullish, posting net balances of +44.9 and +42.2 respectively (from +59.3 and +54.9).

For the EU, both new business volumes and the value of total activity are expected to fall over the next 12 months, the first negative outlook in both cases in more than two years of the survey’s operation. Meanwhile, growth of revenues and new business is anticipated in the BRIC, but to the weakest extent in that survey’s history.

EU service providers will take a hit on their profits in the next12 months as the sector contracts. The net balance fell to -21.1 from the previously reported +7.6. Meanwhile, profits in the BRIC service sector will continue to rise, but to a much weaker extent than in the two previously reported periods (+26.4, down from +50.5 in April and +57.9 one year ago).

The latest outlook surveys add weight to the view that inflation expectations are diminishing, giving more room for manoeuvre on monetary stimuli. In the EU, the net balance for total input costs for service providers more than halved. In both cases, staff costs continue to provide the main thrust to overall inflation, while the weakest pressure came from outsourcing costs.

The broad BRIC category masked a notably weak net balance for total input costs for India, which saw a weaker outcome than all EU countries covered, except Ireland. Conversely, the highest EU net balance was recorded in Germany, although this was still below the three remaining BRIC economies.

The EU faces the likely burden of rising unemployment over the next 12 months, as employment in the key service sector is expected to decline. Service sector jobs in the BRIC region are expected to increase, but at a slower pace in tandem with the overall picture for demand.

Jeremy Butler, associate partner within KPMG’s High Growth Markets practice in Birmingham, said: “The latest survey findings indicate that the advanced Western European economies are bearing the brunt of the global slowdown, but also that the big emerging markets are not immune to the headwinds. Overall, a contraction is anticipated for the EU while services growth in the BRIC will be moderate. That said, the overall slowdown in the BRIC will be at differing tempos, propped up by robust Chinese and Brazilian growth, while Russia and India exert a drag.

“The main difference between the two regions is negative balances in the EU and weaker positive balances in the BRIC for all non-price measures.

“Input prices for service sector companies in both the EU and BRIC will rise more slowly as the wider global downturn progresses and the effects of reduced oil and commodity prices feed through. This will lead to slower increases in firms’ tariffs as competition intensifies to secure market shares.”