A worse-than-expected result from the CBI's latest quarterly survey shows business in decline across the service sector over the past three months.
The business and professional service sector fell far short of predictions of strong volume growth, reporting its biggest fall in profitability since November 2011, as businesses cut prices and employment costs rose.
Consumer services, such as hotels, bars, restaurants and the travel and leisure industries, slowed sharper than expected, as rising prices were outpaced by growth in employee costs.
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The survey of 147 firms foresees a slightly brighter picture in the next three months, with volumes in both sectors expected to rise and employment increase. Profits in business and professional services are expected to be under pressure. Consumer services firms expect to see profitability rise on the back of a price upturn, and the proportion of firms expecting to expand in the next 12 months at its highest level in three years, with more firms saying they will invest in new equipment, reaching new customers and providing new services.
The CBI's Anna Leach said: "Despite the disappointing quarter, optimism remained stable and the outlook is brighter for the months ahead."