Services sector contracts at record rate

Ireland's services sector contracted at the fastest pace in eight years in June, hurt by rising fuel costs and salaries.

The NCB Services Purchasing Managers' Index fell last month to 41.9 from 43.9 the month before, a record low for the 8-year survey. A reading below 50 indicates contraction.

The services economy, which ranges from road haulage to finance, contracted for a fifth straight month in June. Financial service providers registered the sharpest rate of decline with activity falling at a record pace.

Firms in this sector blamed lower activity on the combined forces of the credit crunch and uncertainty in the financial markets. Activity in the financial services sector had a reading of 35.5 in June, down ten points on the previous month.

Despite rising costs, competitive pressures saw prices charged by service providers fall in June, the first decline after three consecutive monthly increases.

"Activity in the services sector is being squeezed by rising costs and a deterioration in the wider economy," said Eunan King, chief economist at NCB Stockbrokers. "The environment remains tough."

Business confidence in the services sector fell to its lowest since the September 11th attacks in the United States in 2001 to reach 58.4 in June, down from 59.3 in May.

The index has fallen from around 65 in the middle of 2006 as the collapsing property market curtailed demand for services.

"Firms that expected activity to be lower in 12 months' time mentioned expectations that economic conditions would deteriorate in the coming year," said Markit, which compiles the survey of approximately 600 Irish companies.

The measure of new exports showed a reading of 43, last month, its lowest level since April 2003 while new business showed a reading of 40.1 in June, down from 44.4 in May, the sharpest month-on-month fall in the survey history.

Businesses in the services sector have reacted by reducing their workforces and the index's employment gauge fell to 46.7 from 47.3. "Many firms reported that departing staff would not be replaced given current economic conditions," the report said.

The survey's measures of employment, new business and work yet to be completed, all fell further below the 50 divide between growth and contraction.

The inflationary pressures that are expected to see The European Central Bank raise interest rates this afternoon eased only slightly last month, with the input prices index at 65.1 in June from May's 66.8.