UK tourism profits hit by soaring costs and fierce competition

The unexpected warm summer boosted trading at Britain’s hotels, pubs and restaurants as holiday makers took advantage of the soaring temperatures, a new report shows.

But profits were hit due to the double whammy of rising raw materials costs and fierce competition that kept prices low, says the CBI’s quarterly service sector survey.

Business activity in the service sector overall grew to its highest level since 2007 and confidence rose strongly.

But it was in the consumer services sector, which also includes the travel and leisure industries, that profitability dropped unexpectedly as price growth stalled and jobs also fell, the business lobby group showed.

However volumes did manage to rise over the three months to August – at their fastest rate since the beginning of the downturn.

Stephen Gifford, director of economics at the CBI said: ‘Consumer services firms are a bit more worried about the longer-term and have scaled back their investment and expansion plans.

‘Conditions remain tricky as households grapple with the prolonged squeeze on real incomes and business confidence remains vulnerable to any adverse developments in the global economy. But all being well, business should continue to pick up through this year and into the next.’

The figures for the business and professional services – including accountancy, law and marketing – painted a healthier picture, with both volumes and profitability up.

But these form a much smaller portion of services.

The data is the latest indicator of the health of the British economy after revised official figures last week showed it grew by 0.6per cent in the second quarter, better than previously thought.

Services which are the powerhouse of the economy, represent three-quarters of output and have been central to leading the UK out of the downturn, so a continued acceleration in volume growth will be a welcome boost.

But the fall in profit across the consumer-focused firms will fuel fears that the recovery may not be sustainable.

The survey found that a balance of 15per cent of companies in consumer services saw business volumes grow, a level that has not been reached since August 2007. Optimism was also high, with a positive reading of 28per cent.

However, fewer firms saw profitability increase than saw it decrease – giving a negative 15per cent reading, the worst since February last year, with a further fall expected over the next three months.

Numbers employed also slid and are expected to fall further, while businesses are more likely not to expand over the following year.

The business and professional services sector saw a positive volume growth reading of 20per cent, the best since November 2007, with optimism also up, as well as profitability and jobs, and a growing likelihood of expansions.

The CBI findings came from a survey of 97 business and professional services firms and 64 consumer services firms.