Activity in services sector falls sharply

The Republic's services sector saw a sharp fall in the level of overall activity, according to the latest NCB purchasing managers services index.

September's index dropped to 46.2, the weakest in its 17-month history. In broad terms, a reading of above 50 on the index translates as growth, while readings below 50 indicate contraction.

Firms generally reported that the contraction was in line with worsening conditions throughout global markets.

A number of firms also mentioned that the events in the United States had hit activity levels. The latest data are in stark contrast to the strong growth seen as recently as the beginning of the year.

"The services purchasing managers's services index recorded its second sub-50 reading on overall activity in September, with financial services and the tourism sector accounting for the deterioration. Not surprisingly after the events of September 11th, there was a sharp loss of confidence in the transport and tourism sector, though other service industries remained hopeful about the future," said Mr Dermot O'Brien, chief economist at NCB Stockbrokers.

A sharp contraction of incoming new business was recorded in September as a number of firms reported that demand for services had fallen in line with slowing worldwide economic growth. Shrinking new business was seen across each of the four broad service sectors monitored by the survey in September - transport and tourism; financial services; technology, media and telecoms; and general business services.

Work backlogs fell for the fifth time in the past six months in September.

The financial services sector recorded the sharpest decline, registering 42.6. The transport, travel, tourism and leisure sector also saw a further sharp decline over the month. Although continuing to signal a contraction of business activity in September, the technology, media and telecoms sector saw a strong easing in the overall rate of decline. While overall activity levels in the business services sector fell for the third month running in September, the pace eased over the period.

Despite the sharp fall in new business during September, firms remained reluctant to shed staff. Overall employment was up marginally from the previous month, although the trend to date has been one of slower employment growth over time.

Service sector firms again reported the growth of average charges in September as input prices continued to rise sharply. But the rate of output price inflation fell to its lowest level recorded to date as firms reported having to sacrifice margins in order to retain contracts at a time of strong competition and falling demand for a number of services.

September also saw sustained growth of average input prices, although the rate of price inflation eased for the fourth month running. Nevertheless, growth of costs continued to exceed that of charges as firms continued to report the high cost of labour.

The latest data on confidence within the Irish services economy signalled a dramatic fall in the degree to which panel firms believed in the near-term growth prospects for their businesses. But Mr O'Brien said the latest figures did not indicate the services sector was in recession. "Retail figures are not included in this survey and the retail sector is still very buoyant. I don't think we should jump to the conclusion that we're talking recession here," he said.