THE SERVICES sector, one of the economy's few remaining bright spots, has started to contract with increasing speed, writes John McManus.

Business activity in the sector shrank for the second month in a row in March. In addition, employment in the sector - which includes all private sector service activities other than retail and wholesale - fell in March for the first time in over four years.

The pace of contraction in the sector was stronger in March than February. The decline was attributed to lower levels of new business and, in some cases, falling staff numbers at the firms surveyed.

Services have to date been one of the more robust sectors of the economy, and export services had been expected to offset the impact of falling domestic demand and the slowing construction sector.

Two out of every three people employed in Ireland work in services and the Economic and Social Research Institute is forecasting that non-tourism service exports would need to grow by 10 per cent this year in order for the economy, as a whole, to grow by 1.6 per cent.

The NCB Purchasing Managers Index published yesterday shows that new work originating from abroad declined for the third month in a row, with the data pointing to a "moderate fall in new export business".

"While the overall index fell marginally compared to February, new orders fell at the fastest pace since 2001. Export orders were weak but, of more concern, was the weakness of employment. The employment index was down to 2003 levels, weighed upon by embargoes on recruitment in the financial services sector.

"This is no doubt related to the current problems in the housing and mortgage markets," according to Eunan King, senior economist at NCB.

However, the survey found that confidence remains high among service firms, though still "well below the average for the survey as the global credit crisis and weakness in the construction sector dented confidence".

New business fell at the sharpest rate recorded in the 77-month history of the survey.

"A number of firms commented that a deterioration in domestic demand had led to lower new order levels. Worsening conditions in the construction sector and greater competition also contributed to the marked fall," according to the survey.

Service firms' costs increased at a sharp pace in March, while prices charged rose marginally in March, following February's slight decline.

Firms that registered an increase in charges linked this to higher input prices, while competition led to lower output prices at some firms, said NCB.