Irish services sector bucks euro trend with strong performance

Activity in the Irish services sector expanded again in December, with the rate of job creation hitting the highest level on record, suggesting momentum in the economy was continuing apace.

The picture contrasts sharply with the euro zone economy which turned in its worst quarter for over a year as further price cutting failed to generate business activity.

Also of concern to policymakers, the latest round of business activity surveys highlighted an ongoing downturn in France and Italy and only a stuttering performance in Germany, Europe’s largest economy.

Investec’s latest Purchasing Managers’ Index (PMI) for the Irish services sector, which covers businesses from banks to hotels, rose to 62.6 from 61.6 in November to match the June’s level which was the highest since February 2007.

The index has stayed above 60 for almost a year and has not fallen below the 50-point line denoting growth since July 2012.

The main highlight in the report was the sub-index measuring employment, which rose to 61.8 from 60.7, the highest level since the series began in May 2000 and a day after Taoiseach Enda Kenny targeted reducing the State's jobless rate below 10 per cent this year.

Staffing levels in the sector have now increased in each of the past 28 months with panellists having taken on extra staff in response to higher new business and positive expectations for the future.

Four times more firms reported an increase in new business last month than those who saw a decline, with panellists reporting new business wins from the UK, US and Middle East.

On the margin side, input prices continued to rise, reflecting higher wage costs. This was despite reports from some panellists of lower fuel prices.

"Panellists mainly attributed the latest rise in service sector output to increased new business, driven by better economic conditions and improved confidence," Investec Ireland chief economist Philip O'Sullivan said.

“All four components of the services sector - business services, financial services, technology, media and telecoms and transport and Leisure - simultaneously recorded growth in employment for a 13th successive month in December.”

Ireland’s performance contrasted with that of the euro zone as a whole, with Markit’s final December Composite PMI, based on surveys of thousands of companies across the region, coming in at 51.4.

While beating November’s 16-month low of 51.1 and marking the 18th month the index has been above the 50 level that separates growth from contraction, Chris Williamson, chief economist at survey compiler Markit said the indicator pointed to fourth quarter GDP growth of just 0.1 per cent.

“The euro zone will look upon 2014 as a year in which recession was avoided by the narrowest of margins, but the weakness of the survey data suggests there’s no guarantee that a renewed downturn will not be seen in 2015,” Mr Williamson said.

Last week, ECB president Mario Draghi fanned expectations he would take bolder steps when the Governing Council meets on January 22nd, saying the central bank stood ready to respond to the risk of deflation.

Risks of a deflationary spiral - consumer price data for the euro zone due on Wednesday is widely expected to show a fall in annual terms - will push the ECB to buy sovereign debt early in 2015, a December Reuters poll showed.

A composite PMI sub-index showed firms have been cutting prices for nearly three years. It came in at 48.1, up from November’s 47.6.

That ongoing discounting had only a marginal effect on a PMI covering the region’s dominant service industry as it nudged up to 51.6 from November’s 51.1, missing a flash 51.9.

And some of that activity was again driven by firms running down old orders. A PMI covering backlogs of work was below 50 for a seventh month at just 47.8, well shy of the 48.6 flash reading.

While a measure of German manufacturing and services activity unexpectedly rose for the first time in three months, the rate of expansion remained “lacklustre” compared with momentum recorded earlier last year, Markit said.

Output in France fell for an eighth month in December as a slight recovery in services failed to offset a deepening downturn at the country’s factories. A gauge for Italy showed a return to contraction.

Meanwhile, growth in UK service sector slowed more than economists forecast in December, adding to signs the economy lost momentum at the end of 2014.

Markit Economics said its PMI fell to 55.8 from 58.6 in November - the lowest since May 2013 and compared with the median estimate of economists for 58.5.

Additional reporting by Bloomberg