Ireland's services sector contracts at record rate

Ireland's services sector shrank at a record rate last month with businesses expecting further declines over the next year.

The NCB Services Purchasing Managers' Index dropped to 36.1 last month from 40.8 in September, the ninth consecutive month the index has been below the 50 mark separating growth from contraction. This is the lowest reading since the series began in May 2000.

For the first time the data also indicates that businesses expect conditions to be worse in 12 months' time.

Brian Devine, economist at NCB Stockbrokers said the fall in the services PMI, a broad sector which includes IT, insurance and transport, reflects a fall in both domestic and international demand.

After a more than a decade of economic growth the combination of a domestic construction downturn and the global financial crisis made Ireland the first euro zone country to enter recession this year.

"Around two-fifths of respondents indicated that activity had declined as businesses reported that the general economic slowdown in Ireland led to a lack of new work in October," said Markit, which compiles the PMI data.

"There were some reports that the full effects of the credit crunch are now being felt," it added.

Volumes of new business, backlogs of work and numbers of staff all contracted at a record pace in October, the survey showed.

Many businesses resorted to discounting to win business, sending the prices charged index to a record low at 41.5 versus 46.4 in September.

In turn this squeezed profit margins as companies' costs continued to grow, albeit at the slowest pace for more than four years.

"Despite the rate of (input cost) inflation easing for the third month in a row to its weakest since February 2004, the index was still well above the neutral 50.0 mark that separates inflation from deflation," Markit said.

Even so, many economists expect slowing inflation to enable the European Central Bank to pursue aggressive interest rate cuts to ease the pain of a world-wide economic downturn.

In the euro zone service sector activity touched a fresh decade low in October, according to final data released this morning.

The final Markit Eurozone Purchasing Managers' Index for companies ranging from banks to cafes slumped to 45.8 - the lowest in the survey's 10-year history. That is well below the flash estimate and economists' forecasts of 46.9, and sharply down from September's 48.4.

Financial markets were little moved by the data.

The release marks the fifth consecutive month the PMI index has been below the 50 mark that divides growth from contraction and the dramatic fall from the flash estimate published just a week ago suggests the slide into recession is gathering pace.

Component surveys showed activity declining across the euro zone. The index for Germany, the 15-nation bloc's largest economy, fell below the 50 mark for the first time in nine months while France's slumped to match July's 10-year low.

With new business levels tumbling, companies have stepped up job cuts and the employment index fell to a level not seen since February 2004.

"A lot of the components, in particular the new business component, are significantly weak," said Mark Miller, economist at Bank of Scotland Treasury.

Additional reporting Reuters