Costs putting brake on services sector

THE Irish services economy recorded its strongest growth in five months but increasing wage and insurance costs are hampering further progress, it emerged yesterday.

The July NCB Stockbrokers/NTC Research services purchasing managers' index (PMI) for Ireland saw the Business Activity Index rise for the second month in a row, from 50.2 to 51.9 a reading above 50 indicates expansion and below 50, contraction. The greater the divergence from 50, the greater the rate of change.

NCB senior economist Eunan King said the acceleration in activity is at its highest since December.

"Confidence is higher and new business accelerated modestly. Competition is restraining prices charged while input costs, mainly wages and insurance, continue to rise," he said.

While actual growth has been modest, the Irish services sector community's business confidence continues to rise, going from 69.7 to 70.3. In the PMI scale this is interpreted as a "strong degree of optimism".

The sector is also being hit by modest deflation in the prices it charges for services according to the PMI, with the core figure falling from 47.1 to 46.2, reflecting a continuing weakness in pricing power.

"Average charges levied by services firms in July were reported to have fallen for the fourth successive month. Although the rate of deflation eased, panel firms continued to suggest that lower charges were needed in order to successfully attract new business," the PMI report said.

Despite the optimism about the future and an increase in new business firms, many among the 600 companies surveyed continued to shed staff, reporting capacity cuts were required to achieve operational efficiency.

However, the financial services sector and the technology media and telecoms (TMT) sectors recorded growth in employment while business services, transport, tourism and leisure firms continued to cut jobs, despite some seasonal hirings in the tourism sector.

Employment in the TMT sector grew despite failing to attract significant new business, reflecting this sector's bullish outlook for over six months, hitting 76.4 in July up from 74.7 in June.

Despite shedding jobs the volume of business outstanding in all sectors fell for the seventh consecutive month.

"The fall in backlogs was recorded despite an increase in new business and the sustained period of staff reduction," the report said.

Panel firms also indicated that capacity at their units was greater than demand but some of this extra capacity was secured through more efficient work practices reducing lead times for the provision of services.