•  Hann-Ju Ho 

    Business Services sector Insight

    Author: Hann-Ju Ho, Senior Economist

    Publication date: 01.08.2010

    Business services
    Stronger private sector corporate spending and investment will lead to continued recovery in business services, but looming fiscal tightening could weigh on activity in parts of the sector, though some companies will benefit from greater outsourcing of activities.

     
    Business services is a wide-ranging sector covering professional services such as accountancy, legal services and marketing, as well as other business services such as security and cleaning. It also encompasses core and non-core business activities that are outsourced by both the private and public sector.

    Business Services confidence chart 


    Spotting opportunities …
    Official statistics show that business services contracted by nearly 5% in 2009, although activity in the sector began to increase again towards the close of 2009 as the economy emerged from recession. We expect recovery in business services to gain traction, expanding by about 2% this year and potentially accelerating in 2011, underpinned by stronger corporate spending growth. This is backed up by the Lloyds Bank Corporate Market’s Business Barometer survey, which demonstrates that companies in the sector are more confident about their prospects. Given likely spending constraints in the next few years, the outsourcing of ‘non-core’ business activities, especially inefficient ‘back office’ functions, could be an important driver of growth, particularly as companies and the government aim to cut costs.

    … And keeping an eye on riskRisks for the sector include the potential for a significant slowdown in the pace of economic recovery, which will weigh on corporate spending and could lead to renewed weakness in the labour market. In addition, more stringent fiscal consolidation means that the volume of public sector work, including the outsourcing of core activities, and margins could come under pressure.
     

    Economic drivers
    Despite renewed growth in the sector, it is important to note that:
    • The pace of recovery is likely to slow in the second half of this year, but a so-called ‘double dip’ recession is not expected
    • Unsurprisingly, profitability in the UK non-financial corporate sector has been hit by the recession, with firms cutting back on spending and investment
    Therefore, although we expect some improvement in both profits and investment, this will be at a moderate pace. Sluggish corporate spending recovery means that maintenance services, for example in IT, may post stronger growth than areas dependent on new investments. In the medium term, we note that the private, non-financial corporate sector has amassed significant financial surpluses in recent years because corporate spending has not kept up with income. If the economic recovery becomes more entrenched, there is potential for a significant uplift in private sector corporate spending.

    Near term, uncertainty about domestic demand prospects remains a key concern.

     

    Source: This article was first published in Lloyds Banking Group - Perspective Magazine, Edition 2.
     

6/21/2018 11:31:26 AM