Rapid growth in services sector but wage pressure begins to bite

The services sector of the economy is continuing to grow strongly, according to a new index.

The NCB Services Sector Purchasing Managers' Index, released for the first time yesterday, also found that staffing levels continued to rise in January although wage pressures were beginning to bite.

The index, compiled with the Irish Institute of Purchasing Managers, is the first set of data to give information on activity in the service sector. The sector covered by the survey accounts for around 35 per cent of Gross Domestic Product.

Areas covered include financial services, business services, technology, media and communications as well as travel, transport, leisure and tourism.

For the moment, distribution, retailing and wholesaling and public services, which account for 10 per cent of GDP, do not form part of the index. However, Mr Dermot O'Brien, chief economist at NCB Stockbrokers, said he hoped these areas as well as construction would be included in the future.

The data are taken from a panel of almost 350 firms with a combined turnover of more than £5 billion (€6.35 billion) in both the domestic and multinational sectors.

In January the level of overall business confidence remained high at 60.7 but was off the highs recorded last summer. A reading of more than 50 reflects confidence. All sectors apart from travel and tourism also reported an increase in activity. Lower tourist numbers at the start of the year translated into a downturn in activity in travel and tourism. But well in excess of a third of firms increased their activity levels in response to sustained growth in demand. Levels of incoming new business also rose for the ninth month.

Business expectations which had fallen slightly at the end of the year picked up a little in January, despite the gloomier picture from the US. Staffing levels continued to rise in January as they have every month since the data were first collected last May. Firms reported the need to increase capacity to deal with backlogs.

The rate of growth of employment, however, continued to fall back slightly. According to Mr O'Brien, this was mostly the result of skills shortages although the rate of increase in wages was causing some problems for a few companies.

Business confidence also remained high with strong optimism about activity levels within 12 months.

There was also good news for inflation with input prices lower in January, primarily on the back of lower global energy prices.

Overall activity has followed a similar pattern to the euro zone but at a higher level. There has been some divergence in prices with pressures rising more rapidly in Ireland than elsewhere in the euro zone, however.