Service sector profitability down sharply

LONDON (Reuters) - Profitability and optimism in the dominant services sector deteriorated sharply in the three months to August, a survey showed on Tuesday, in a further sign that a recession could be on the horizon.

The Confederation of British Industry said profitability in business and professional services fell at the quickest pace in 6-1/2 years while consumer services' profitability fell for the third quarter in a row.

The balance measuring companies' confidence in the business and professional services sub-sector plummeted to -42 in August from -18 in May, the third successive quarter of decline. The same balance in consumer services slipped to -61 from -60.

The figures add to a raft of evidence pointing to a sharp economic downturn and are likely to raise expectations that the Bank of England will cut interest rates before the end of the year to avoid a harsh recession.

Economic growth dried up in the second quarter of the year, official data showed on Friday, the worst performance since the slump of the early 1990s, with weakness across the board.

"Profitability in the service sector is clearly under pressure," said Ian McCafferty, economic adviser at the CBI.

"Across the service sector, business confidence has fallen and companies are negative about their investment and expansion plans for the year ahead."

Business and professional services firms said both the value and volume of trade fell in the three months to August at the fastest pace since the series began in 1998.

Companies' costs are also at an elevated level. In the consumer services sector, costs per person employed rose at the swiftest rate since February 2004.

"Combined with renewed cost pressures, the outlook is for faster declines in profitability in both sectors next quarter," the CBI said.