Business-related Service Providers: Signs of an Economic Slowdown?

For the second time in a row the economic situation has failed to improve for business-related service providers. Already since the third quarter of 1998, the business situation has remained at stalemate in the consecutive quarters. On the basis of a seasonally adjusted comparison with the previous quarter, the revenues as well as the turnover have once again remained virtually unchanged in the fourth quarter of 1998. For the first time since the third quarter of 1996 this survey has shown a decline.

According to Prof. Wolfgang Franz, president of the Centre for European Economic Research (ZEW) in Mannheim and member of the German Council of Economic Experts, the current situation of the business-related service providers reflects the cloud of uncertainty that is hanging over this sector in terms of future macroeconomic developments. A real economic turnaround in the business-related services sector would rather be unlikely in the medium-term since revenues, demand, turnover and employment situation continue to be assessed very positively. Seasonally adjusted, the labour market situation sticks out in particular inthe fourth quarter of 1997 as companies once again hired more staff than they released. The improvement becomes all the more visible when compared to the previous year. Except for the fourth quarter of 1997, new staff was continuously hired as of mid-1996. Since last year a growing number of companies were also able to succeed in pushing through smaller price increases on the market.

Economic and seasonal demand fluctuations in the business-related service sector are particularly met with adjustments of working hours, however, not with an adjustment of staff numbers. Further training programmes have become increasingly important as a measure to match fluctuations in demand. In particular programmes allowing for higher staff flexibility in their companies find particularly much appeal by business-related service providers. Only sectors experiencing a sustained growth tend to hire new staff as a reaction to positive demand fluctuations

These are the findings of a business survey conducted by the Centre for European Economic Research (ZEW), Mannheim, in cooperation with the credit reference agency "Verband der Vereine Creditreform", Neuss, in December 1998. 1100 companies participated in this survey. The business-related services sector encompasses tax advisors and certified public accountants, business consultants, architects, technical consultants and planners, vehicle renting, machine renting, forwarding companies and logistics firms, software providers, advertising agencies and waste management firms.

Detailed background information

Admittedly, the positive assessment of the labour market and the generally favourable business parameters would speak against an end of this ongoing upward trend in the business-related services sector. However, the business expectations for the first quarter of 1999 have clouded visibly. Up until now the expectations for the coming quarters have constantly been much more positive compared to the respective current quarter. The sudden uncertainty concerning the further macroeconomic development clearly makes its presence felt. Only in terms of revenue and prices improvements are expected compared to the fourth quarter of 1998.

The medium-term outlook for business-related service providers will highly depend on the overall economic development in Germany. The situation is heterogeneous: the high level of investment activity stands in contrast with a decline in exports and a decreasing order backlog. In addition, the demand for consumer goods still lacks momentum.

Impulse for technical planners and architects

According to many economic researchers, new impulses can be expected to emanate from the so far faltering building industry from mid-1999 onwards. An upswing is expected particularly for private housing. The return to positive growth in building activity will provide new momentum for architects and technical planners, who up until now have been considered problem children in the business-related services sector. However, the positive development of building activity is largely limited to West Germany. East German businesses, which are still highly dependent on the building sector, are not expected to experience a major improvement of their economic situation in the medium-term. With that said East German business-related service providers once again fail to recover thoroughly in 1999. The divergent outlooks concerning the economic situation of East and West German business-related service providers are therefore likely to remain in existence. For more than three years now East German businesses have been continually assessing their economic situation more unfavourably than West German businesses.

Waste management sector continues its downward trend, software providers and business consultants enjoy boom period

In terms of economic outlook, waste management firms are going along similar lines to East German business-related service providers. Since the beginning of 1995 the sector’s assessment of its own situation continues to deteriorate for it is faced with significant overcapacities. Just like architects and technical planners, businesses in the waste industry are additionally affected by competition from “pseudo-privatised” public enterprises.

Software providers and business consultants continue to be the booming industries among business-related service providers. The demand for standard software programmes and their installation as well as for information and communication technologies remains unbroken. The changeover to the year 2000 and the switch to the euro provided additional impulse. Vehicle rental businesses as well as forwarding companies and logistic firms likewise enjoy an upbeat economic situation. Although the economic situation for machine rental businesses is on a slight standstill, the positive development of building activity will provide new momentum. Tax advisors and certified public accountants enjoy a steady and constant development. Advertising agencies remain unimpressed by the EU ban on tobacco advertising and continue their positive development.

Due to the generally favourable economic climate prevailing in the business-related services sector and the positive staff situation, a slowdown of this upward trend, though no economic turnaround, is expected to take place by mid-1999. Nevertheless, the uncertainty about the further development has increased. In the medium-term, the development will be shaped to a large extent by the return to positive growth in building activity and a stabilisation of domestic demand in all sectors.

Cyclical demand fluctuations more frequent than seasonal ones

Due to the strong dependence of business-related services sector on the overall economic situation, businesses in this sector are increasingly affected by demand fluctuations. Thereby, cyclical fluctuations are more pronounced than seasonal ones. 45 per cent of the businesses are subject to cyclical fluctuations. According to the ZEW/CREDITREFORM economic survey, about 32 per cent of business-related service providers are subject to seasonal fluctuations. East German business-related service providers suffer more heavily from cyclical as well as seasonal demand fluctuations than their West German competitors.

There are several differences between the individual industries in the business-related services sector concerning the level of dependence on demand fluctuations. In particular technical planners and architects are frequently subject to demand fluctuations due to their dependence on the building industry. Vehicle and machine rental businesses are also more frequently exposed to demand fluctuations than other business-related service providers. By contrast, software providers, tax advisors, certified public accountants as well as waste management firms are less exposed to demand fluctuations.

Overtime and short-time working used to compensate for demand fluctuations

The use of overtime and short-time working remains the most popular measure to compensate for demand fluctuations. However, the popularity of these "established" measures has diminished compared to 1996 and 1997. Further training programmes geared towards a more flexible employment of staff have gained greater significance among business-related service providers. This measures ranks second. In particular tax advisors and certified public accountants as well as software providers and business consultants try to train their staff in various tasks by means of these programmes in order to employ them more flexibly. The usage of spare capacity for the further training of staff equally plays an important role. Frequently applied measures also include fixed-term employment contracts as well as a stronger automation of work processes.

Much less common are hire and fire strategies as a reaction to unfavourable cyclical conditions, as well as the use of marginal employment. The latter has notably gained greater significance indeed compared to 1997, however, it still remains a fairly uncommon measure.

Business-related service providers have yet widely refrained from measures such as using freelancers, part-time working or introducing working life models (e.g. so-called "savings accounts" for working hours) in order to make labour relations more flexible. Even though it is exactly these measures which are considered good ways of compensating for demand fluctuations, they have been rarely put into practice so far. The discrepancy between the generally positive assessments of these modern forms of labour relations and their actual implementation indicates a clear development potential. Member of the German Council of Economic Experts Wolfgang Franz points out that it is now up to the companies to implement those measures; however, the economic policy is called upon to create appropriate framework conditions.  

New hires only in case of a continuing upwards trend

The discrepancy of the economic situation between the individual industries is also reflected in the type of countermeasures taken to compensate for demand fluctuations. For instance, fixed-term employment contracts are a common measure particularly among architects, technical planners and waste management firms. Apparently, there is a surplus supply of qualified staff prepared to accept a fixed-term contract. The dismissal of staff is also more commonly used among architects and technical planner as a countermeasure to a decline in demand compared to other industries in the business-related services sector. At the same time, however, marginal employment is a fairly uncommon measure particularly among architects and technical planners as well as software providers. Thus, lower labour costs cannot make up for the lack of professional qualifications. 

New hires as a reaction to a rise in demand are particularly common among software providers. During boom phases, architects and technical planners, as well as forwarding companies and advertising agencies are more likely to award subcontracts to competitors than other business-related service providers. 

The overall results show that business-related service providers are reluctant to change their number of staff as a reaction to demand fluctuations. Instead, they endeavour to adjust working hours and increase labour flexibility. Risk aversions apparently make businesses shy away from dismissing staff that had been newly hired during boom phases as soon as the situation starts to deteriorate again. For that reason, the hiring of new staff is only a comparably common reaction to an increase in demand among industries that have been experiencing a sustained upturn in the past few years.

Contact

Prof. Dr. Ulrich Kaiser, Phone: +49(0)621/1235-194, E-mail: kaiser@zew.de

The economic survey of the ZEW and Creditreform has been carried out quarterly since the second quarter of 1994. A selected, representative cross-section of 3800 companies is surveyed quarterly by the ZEW and Creditreform since the second quarter of 1994. The random sample is frequently refreshed by startup companies.

Ulrich Kaiser is employed as a senior researcher at the Mannheim-based Centre for European Economic Research (ZEW) in the Research Department "Industrial Economics and International Management". ZEW was founded in 1990 on the basis of an initiative of the Federal State of Baden-Württemberg in co-operation with the Landeskreditbank Baden-Wuerttemberg and the University of Mannheim. In terms of research, the institute has a clear focus on microeconomic and industry analyses, as well as Econometrics. ZEW currently employs 70 researchers in the following Research Departments: International Finance, Labour Markets, Industrial Economics, Environmental Economics, and Corporate Taxation. The Research Department “Industrial Economics and International Management“ comprises 22 researchers, whose focus is on the innovative behavior of German economy, the development of markets and regions, as well as on the service sector.