Consumer services firms have defied expectations to report their best quarterly figures for more than a year, a new survey by the CBI and Grant Thornton reveals today.
Professional services companies' performance, however, fell disappointingly short.
Firms such as hotels, bars and restaurants that supply services to consumers experienced the fastest growth in the volume and value of their business for more than a year. Prices rose at the same rate as costs, allowing higher volume to increase profitability for the first time in over a year - and firms expect a similar outcome next quarter.
But the more positive news was tempered by professional services firms, such as management and legal services, seeing their recent strong performances fall back. Although the volume and value of their business grew last quarter, it was at a much slower pace than over the previous six months.
And despite a second consecutive quarter of price rises for professional services firms, overall profitability grew at a slower rate than in the previous six months and is forecast to fall next quarter.
Optimism among consumer services firms improved over the last three months - a balance of plus 14, reversing the deterioration in sentiment in February. The more upbeat mood was driven by companies reporting increases in business volume and value - a balance of +27 and +38 respectively - for the first time since February 2005. Firms expect similar growth next quarter.
Profitability increased over the past three months and employers expect this to continue.
However this performance came partly at the expense of more job losses, albeit at a slower rate than over the previous two quarters.
Firms remain wary of expansion. More firms plan to spend to expand capacity over the next year than three months ago but the balance (+36) is still below the longterm average.
Uncertainty about demand has been replaced by financial factors as a constraint to investment.
The highest figure since May 2003 (34 per cent) cited a shortage of internal finance as a problem, and the highest percentage in the survey's history reported an inability to raise external finance (18 per cent). Thirteen per cent also raised concerns about the cost of finance.
For business and professional services firms both the value and volume of their business increased last quarter - balances of +15 and +nine respectively.
But, for the first time since November 2002, firms expect activity to decline in the coming quarter.
The balance of firms saying total costs per person increased last quarter (+40) is the highest since August 2001, and an even bigger balance (+47) expected costs to rise next quarter.
Rising levels of employment will also add to cost pressures as business and professional services firms continue to hire. Capital expenditure on IT is also expected to increase over the next twelve months.
David White, partner at Grant Thornton in Birmingham, said: "Buoyed by a miniresurgence in house prices and continued economic stability, consumers appear to have relaxed the belt-tightening tendencies seen over the past year. Consumer services firms are now reporting good performances for the past three months and a healthy outlook for the summer.
"While shop spending on big-ticket goods remains hesitant, perhaps with the exception of HD TVs - arguably the must-have item for the World Cup season - other sectors offering less expensive services such as hotels, bars and restaurants appear to be the early beneficiaries of this renewed optimism."
Commenting on the performance of business and professional services firms, Mr White said: "The rampant growth in this sector has tailed off with the emergence of some negative sentiment for the months ahead.
"Whether this pause is in order to consolidate previous growth or whether it's due to more deeply rooted problems remains to be seen."
Ian McCafferty, CBI chief economic adviser, said: "This is welcome sign of returning consumer confidence but it is very early days.
"Profitability remains difficult even as uncertainty about future demand recedes.
"Better news from the consumer services has also been offset by the weakerthanexpected showing from business and professional services firms."
