Business optimism and activity across the service sector declined sharply in the quarter to May, according to the CBI’s latest Service Sector Survey.

Business volumes declined further in May, marking the nineteenth and twenty-first consecutive monthly fall for business & professional and consumer services respectively.

Meanwhile, services cost growth continued to significantly outweigh selling price inflation, putting profits under pressure. Notably in consumer services, costs grew at the fastest pace in three years and despite an acceleration in selling price growth to the strongest in a year, profitability fell at the fastest rate since August 2020.

As a result, employment continued to contract across the service sector, with consumer services witnessing the fastest contraction since July 2025.

Looking ahead to next quarter, business volumes are expected to fall further, albeit at a slightly more modest pace across both sub-sectors.

Selling price growth is set to remain unchanged in business & professional services, while consumer services expect an uptick in growth in the quarter ahead. However, with cost growth set to remain elevated across the sector, profitability and employment are expected to decline further.

With conditions across the service sector remaining challenging, firms continue to cut back on investment plans for the year ahead. Capital expenditure is set to be reduced across all investment categories in both sub-sectors, except for IT investment amongst business & professional services firms, which is expected to be broadly unchanged. Uncertainty about demand continues to be the key factor limiting capital spending across the service sector, while inadequate net return also remains a significant concern.

Our latest survey highlights the extremely challenging conditions facing the service sector, particularly consumer services. Cost growth is continuing to outpace selling price inflation, profits are falling sharply and firms are being forced to scale back investment and reduce headcount.

With inflation set to rise in the coming months, consumer caution is likely to intensify, adding further strain to an already subdued demand backdrop. The Chancellor’s temporary VAT cut on family summer activities is a welcome step that should help support confidence over the summer, but it cannot be a substitute for tackling the underlying cost pressures facing firms.

Business, professional and consumer services firms need an easier and cheaper environment in which to operate. That means meaningful business rates reform, further measures to cut business energy costs and a serious push to reduce the regulatory burden that is weighing on investment, employment and growth.

The survey based on the responses of 292 services firms found that:

Business & professional services

General business sentiment worsened sharply in the quarter to May, and at a much faster pace than in February (-46% from -3% in February).
Business volumes declined in May for the nineteenth consecutive month, and at a faster pace than in April (-34% from -16%). In the quarter ahead, volumes are expected to fall further, albeit at a slightly slower pace (-27%).
Costs per person employed grew further in the three months to May, and at a faster pace than the three months to February (+55% from +43%). Cost growth remained above the long-run average (+31%) and is set to stay elevated in the quarter ahead (+56%).
Profitability deteriorated in the quarter to May at a faster pace than in February (-43% from -28%). Profitability is expected to continue declining at a broadly unchanged pace in the quarter to come (-42%), the gloomiest expectations in a year.
Average selling prices grew gradually in the three months to May, and at an unchanged pace from February (+6% from +6%). Selling price inflation is anticipated to remain broadly unchanged in the three months ahead (+8%).
Employment contracted further in May, but at a slower pace than in April (-11% from -33%), marking the slowest rate of decline since May 2025 (-2%). Headcount is expected to decline at broadly the same pace next quarter (-13%).
Uncertainty about demand remained the most cited factor limiting capital expenditure (cited by 64% of respondents). This was followed by inadequate net returns (37%) and a shortage of internal finance (28%).
Firms expect to cutback investment into both land & buildings (-9% from -9% in February) and vehicles, plant & machinery (-22% from -17% in February), while IT investment is set to remain broadly unchanged (+2% from +17% in February).

Consumer services

Optimism about the general business situation deteriorated sharply in the three months to May (-49% from -45% in February), marking the seventeenth consecutive quarter of unchanged or worsening sentiment.
Business volumes fell in May, and at a faster pace than in April (-37% from -28% in April). This is the twenty-first consecutive month of falling volumes. Business volumes are set to continue declining in the quarter to come, albeit at a slightly more modest pace (-30%).
Total costs per person employed continued to grow in the quarter to May at a faster pace than the quarter to February (+71% from +46%), and at the fastest pace since May 2023 (+81%). Cost growth stayed well above the long-run average (+41%) and is expected to remain elevated in the next three months (+62%).
Overall profitability deteriorated sharply in the three months to May, at a faster pace than in February (-65% from -49% in February), and at the fastest pace since August 2020 (-81%). Profitability is anticipated to continue falling, but at a slightly slower pace in the three months to come (-57%).
Selling price inflation accelerated in the quarter to May (+32% from +9% in February). This is the fastest selling prices have grown in a year (+32% in May 2025), and in the quarter ahead, selling price growth is set to accelerate further (+45%). If realised, this will be the strongest growth in selling prices since August 2022.
Employment fell at a faster pace than in April (-47% from -42%), and at the fastest pace since July 2025 (-48%). In the next three months, headcount is set to continue contracting at a broadly unchanged pace (-46%), the weakest expectations so far this year.
Uncertainty about demand was the most cited factor limiting capital expenditure (cited by 62% of respondents). This was followed by inadequate net returns (35%) and the cost of finance (20%).
Firms are anticipating cutbacks in capital expenditure across all investment categories: land & buildings (-28% from -16% in February), vehicles, plant & machinery (-38% from -31% in February) and IT (-18% from -7% in February), marking a deterioration in all investment categories since last quarter.