Outlook for businesses at weakest point in five months

The services sector showed some signs of stabilisation in October, but underlying conditions remained weak, and outlook for businesses was the weakest in five months, a new survey has found.

The AIB Services Purchasing Managers' Index showed a further decline in both activity and new work last month, with the seasonally adjusted composite output index at 49.0, just below the 50 mark that separates contraction from expansion.

That was higher than the 46.9 recorded in September, indicating a small recovery in the month. It was also above that for the euro zone, where the October PMI fell to 46.2, but behind the UK index, which declined but stayed in expansion mode at 52.3.

The Services Business Activity Index for the month declined for the second month in a row at 48.3, as new pandemic restrictions dampened the growth seen in July and August following the loosening of lockdown measures designed to slow the spread of coronavirus.

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Eight months of decline

Outstanding business and employment continued to fall in October, with the latter falling for the eighth consecutive month, but the pace slowed to the slowest in eight months of decline. The volume of new business also fell as ongoing coronavirus restrictions and uncertainty over rising virus cases hit demand. However, the rate of decline slowed from September.

But the services sector is also facing uncertainty over a second wave of Covid-19 infections plus the impact of the upcoming exit of the UK from the European Union, which weighed on expectations.

The transport and tourism sectors were among the hardest hit in terms of falling business activity, registering strong declines. Business services, however, saw a third expansion in four months, with the technology, media and telecoms (TMT) sector also showing an increase.

Difficult conditions

Spending on personal protective equipment (PPE), higher freight charges due to Covid-19 restrictions, and costs related to remote working adjustments and compliance saw costs for businesses increase, with companies passing higher input prices on to customers.

"The detailed PMI data point to ongoing difficult business conditions for many services firms. Weak demand was evident in a continued decline in new business from both at home and abroad. Firms linked the weakness of demand to Covid-19 restrictions," said Oliver Mangan, AIB chief economist.

“The recent marked rise in new cases of Covid-19 and resulting reimposition of restrictions on activity is being most clearly felt in services sectors that depend on discretionary consumer spending. In particular, the transport, tourism and leisure sector posted another very weak reading for October, well below that for other sectors.”

Although companies were more upbeat about the 12-month outlook, with firms expecting the impact from Covid-19 to fade over the year, sentiment was the weakest since May, with transport, tourism and leisure recording the weakest confidence.

“Overall, the PMI data shows that business conditions are challenging for many services firms,” said Mr Mangan. “This will be even more so in November, with much of the sector now back in lockdown.”