Ireland’s services sector shrank in April for the first time since early 2021 amid what AIB described as a “surge” in input cost inflation to its highest level in almost 3½ years, related to the US-Israeli war in Iran.
Based on a survey of some 40 services sector businesses, the bank’s latest purchasing managers’ index (PMI) for the wide-ranging sector of the economy indicates that soaring fuel, freight and energy costs contributed to an overall dip in activity levels last month.
Among the four big subsectors, two reported a decline in activity last month.
Transport, tourism and leisure businesses saw the sharpest monthly contraction in overall activity levels, according to the report. AIB said this subsector also continued to report the sharpest inflation in input costs and prices charged.
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Output from the subsector has now fallen in 11 of the past 14 months, said AIB. Tourism and travel-adjacent businesses were badly affected by a fall in tourist visits from Europe and the United Kingdom last year.
New business levels within the sector fell sharply again last month, said AIB, amid heightened economic uncertainty and higher costs linked to the Gulf conflict.
Airlines, including Aer Lingus, last month cut flights from their summer schedules, some due to concerns about jet fuel shortages arising from the blockade of the Strait of Hormuz.
Financial services businesses also reported a decline in general activity, said AIB, for the first time in 10 months.
The technology, media and telecoms subsector bucked the overall trend with growth rebounding, while the business services subsector recorded modest expansion.
Overall, the headline PMI dipped to 49.7 – just below the neutral 50 threshold that separates expansion from contraction – from 50.7 in March.
“Activity levels waned due to contractions in new and outstanding business and rising costs linked to the war in the Middle East,” said AIB chief economist David McNamara.
“Economic uncertainty, higher costs and geopolitical tensions were cited as key drivers of the downturn in April. The volume of outstanding work also fell for the first time since January, amid generally weak demand conditions. The war in the Middle East and resulting supply chain disruptions contributed to cost pressures,” he said.
“However, the rate of increase in prices charged also accelerated to a two-year high, implying some margin protection for firms seeking to pass on these higher costs.”
Looking ahead, business sentiment remains positive, albeit at a “relatively weak level”, said McNamara.
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On both sides of the Border, the Irish economy is expected to grow this year, but uncertainty created by the US-Israel-Iran conflict has heightened risks, said EY Ireland in a separate report on Tuesday.
EY believes that the Republic’s economy will grow 1.8 per cent this year, while the North will expand by about 0.7 per cent. The firm cautions that activity will drag if prolonged conflict in the Middle East keeps oil and gas prices high.
The firm predicts that euro zone inflation could reach 2.8 per cent this year. It also says that a protracted conflict that keeps oil above $100 a barrel increases the likelihood of recession in the region. EY said the odds of this occurring are about 35 per cent.
