Services economy surges in May amid pent-up demand

Total services activity increased at the fastest pace in more than five years in May, while cost pressures on Irish service-sector companies reached their highest point in almost 13 years, according to the latest purchasing managers' index (PMI) survey from AIB.

The survey confirmed a “marked pick-up in growth” across the services economy in May as the loosening of lockdown restrictions led to the release of pent-up demand. The acceleration in activity was the quickest since March 2016, while employment growth also strengthened.

The index rose from a reading of 57.7 in April to 62.1 last month, staying well above the 50 threshold that marks the point at which the sector starts to expand. The jump was in line with the first indicators for services PMIs across the euro zone, UK and United States.

"The May data signalled surging demand in the Irish economy, with new business increasing at its fastest pace since early 2017," said AIB chief economist Oliver Mangan.

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“By contrast, growth in new export business slowed, held back in particular by a contraction in business from overseas in the transport and tourism sector, no doubt due to continuing restrictions on international travel.”

Mr Mangan nevertheless described it as “encouraging” to see growth in overall activity.

“The pick-up in new business resulted in a marked rise in the volume of outstanding work for the third month in a row. Meanwhile, employment also expanded strongly for the third month running,” he said.

However, cost pressures continue to build, with input price inflation hitting its highest level since July 2008. Companies reported contributory factors such as labour, fuel, insurance, energy, freight charges and Brexit-related increases.

There was also some evidence that companies passed on higher costs to customers, with the prices charged by Irish service providers rising for the third consecutive month in May. However, these price increases are being implemented at a more moderate pace, “pointing to a continuing margin squeeze in the sector”.

Companies were optimistic about the next 12 months, with overall sentiment being the brightest recorded by the survey since September 2017.