Further evidence of two-tier nature of Irish economy

Fri, Feb 4, 2011, 00:00

IRELAND’S SERVICES sector returned to growth in January, lifted by continuing demand for exports, but underlying trends remained weak.

The NCB Purchasing Managers’ Index, which measures activity in the services sector, rose back above the 50 mark that separates contraction and growth, reaching 53.9 in January after December’s 47.4 reading.

“Some bounce was expected given the adverse weather conditions and the fact that the NCB PMI is a seasonally-adjusted month-on-month comparison,” said Brian Devine, economist at NCB Stockbrokers.

Overall business confidence rose for the second month in a row, reaching its highest level since September last year.

However, despite a rise in new export business to 55.1, overall new business continued to contract, recording 47.7 for January and making it the fifth consecutive month that it has fallen.

“Once again this provides evidence of the two-tiered nature of the Irish economy – buoyant exports, depressed domestic demand,” Mr Devine said.

Employment also continued to decline, but at 49.5 the rate of contraction was marginal.

NCB said it expects this to begin to level off in 2011.

Services sector activity surged in the United States and Europe, but the growth brought with it signs of inflationary pressure.

The business surveys mirrored similar reports about global manufacturing that showed increased growth was accompanied by steeply rising prices, potentially presenting a headache for economic policy-makers.

In the United States the Institute for Supply Management said its survey showed the services sector grew at its fastest pace in more than five years.

It said the index jumping to 59.4 in January from 57.1 the prior month.

The Markit Euro Zone Services PMI rose to 55.9 in January from 54.2 in December.

This is higher than an earlier flash estimate of 55.2, and its 17th month above the 50 mark that divides growth from expansion.

“There’s no doubt that what the PMIs are showing you is that the increase in global input prices is significant, and it’s showing up at both the input and output price level in these surveys,” said Malcolm Barr, economist at JP Morgan.

However, a US Department of Labor report showed that while businesses were facing rising input costs, they were keeping labour costs down by squeezing more output from workers, helping to keep inflation muted.

Unit labour costs, a gauge of potential inflation pressures closely watched by the Federal Reserve, fell at a 0.6 per cent rate after dipping at a 0.1 per cent pace in the third quarter.