Decline in service sector at slowest rate in 14 months

SERVICE SECTOR activity declined again in June, but the pace of contraction eased to its slowest pace in 14 months, according to data published yesterday.

The NCB purchasing managers' index (PMI) for the Irish services sector - an early snapshot of business activity, prices, employment and sentiment - found that new orders at services companies fell for the 17th month in a row.

Demand for services remained low, while cuts in public sector projects also dragged down activity.

Weakness in the global economy was largely responsible for a fall in new export orders.

Meanwhile, signs of a recovery in the euro zone services economy took a backwards step in June, after reaching a seven-month high in May, according to the euro zone PMI.

However, business optimism in the euro zone services sector has hit a two-year high on hopes that the worst of the recession is over.

The euro zone composite index, which includes both services and manufacturing sector data, rose to a nine-month high, slightly beating economists' forecasts.

In Ireland, the easing in service sector conditions is lagging the improvement recorded in the manufacturing sector PMI.

NCB economist Brian Devine said this indicated that domestic demand remained weaker than the export market.

A 16th successive monthly round of redundancies in the services sector largely reflected declining workloads, while, in some cases, employment had also been reduced in an attempt to cut costs.

But the rate of job shedding in June was the slowest since October 2008.

Overall, the seasonally adjusted Business Activity Index rose to 42.3 last month, up from 39.5 in May.

This level remains far below the 50 threshold that divides growth from contraction.

NCB said the Irish PMI, which is a survey of a panel of services sector companies, recorded "modest optimism" for the second month running as companies hoped that the global economy would recover to some extent over the next 12 months. But many firms still forecast a reduction in activity.

There was strong evidence of deflation in the business environment as input prices fell at a record pace in June, extending the current period of deflation to six months.

According to the companies questioned for the index, salary reductions as well as successful negotiations with vendors for discounts were the main reasons for the fall in input prices.

Increased competitiveness in the sector meant prices charged by services companies also fell by a considerable pace in June.

Mr Devine said the severe pace of contraction in activity in the final quarter of 2008 and the first quarter of 2009 had been fuelled by uncertainty and pessimism as well as fundamental economic problems.

"In this regard, it is encouraging to note that optimism among service sector firms is gradually improving," Mr Devine said.

"The pace of decline is likely to be less severe going forward as pessimism fades."

He said the Government needed to be transparent rather than opaque about its forthcoming decisions on taxes and spending, otherwise unconfirmed rumours regarding future tax hikes and expenditure cuts could further destabilise confidence and cause consumers and businesses to postpone spending.