Activity in Ireland’s services sector increased again in March but at one of the weakest rates over the past five years, as new business growth moderated and price inflation accelerated sharply to a three-year high.
AIB’s latest purchasing managers’ index (PMI) report, which is a pulse check of the sector, shows the year-ahead outlook for business activity softened, linked to uncertainty regarding the economic impact of the war in the Middle East.
Faced with high costs, employment fell slightly across the sector in March. Overall, the index fell for the fourth month running to 50.7 in March from 51.8 in February. Any reading higher than 50 indicated growth.
The latest figure signalled the weakest rate of growth for seven months, and the third-slowest in the current upturn, which began in March 2021. Activity in the sector expanded at a rate below the long-run survey average of 55 for the fourth successive month.
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“That put the Irish services sector ahead of the flash euro zone PMI of 50.1 but behind the UK and US PMIs at 51.2 and 51.1, respectively,” said AIB chief economist, David McNamara.
Three of the four subsectors measured by the index – business services (51.5), financial services (51) and technology, media and telecoms (51.4) – registered only modest increases in activity in March, although the expansion in the last of those three represented a relative improvement following stagnation in February.
The transport, tourism and leisure sector, at a reading of 47.6, registered its ninth contraction in activity over the past 12 months.
New business at Irish service providers continued to increase in March, but the rate of growth lost momentum for the fourth month running. The latest expansion was the weakest since last August and among the softest in the current five-year period of growth.
New business fell in two sectors – financial services and transport as well as in tourism and leisure – and rose only modestly in business services. Technology, media and telecoms bucked the overall trend.
Meanwhile, new export business across the service sector as a whole was broadly flat. The level of outstanding work rose again despite the slower increase in new business.
Business outstanding increased for the fifth time in six months, but the rate of growth in the latest period was only marginal. The business services sector posted a contraction in outstanding work.
March data indicated a sharp acceleration in input price inflation to a three-year high. Faced with surging input costs, service providers increased their own prices at a stronger rate in March despite slowing demand growth.
Anecdotal evidence from survey respondents linked higher costs to fuel, energy, wages, pension contributions, raw materials and professional services, with the war in the Middle East and related supply chain disruption mentioned as a contributing factor.
“The war in the Middle East and resulting supply chain disruptions contributed to cost pressures,” McNamara said. “However, the rate of increase in prices charged also accelerated, implying some margin protection for firms seeking to pass on these higher costs.”
Sector data showed that transport, tourism and leisure registered the fastest increases in input costs and charges in March, and financial services the weakest.
Uncertainty linked to the impact of the war in the Middle East on the global economy and domestic consumer confidence weighed on the business outlook in March. Expectations moderated since February in all four subsectors.
“In terms of the outlook, business sentiment remained in positive territory. However, expectations were the weakest since October 2020,” McNamara said. “High costs, economic uncertainty and the impact of the war in the Middle East were mentioned as weighing on future activity levels.”
With input costs rising sharply, new business growth slowing and an uncertain outlook, service providers shed staff in March. Employment fell for only the third time in the past five years, albeit at a marginal rate. Jobs fell slightly in three sectors, with financial services posting a slight increase.
