Services sector continues expansion

Services companies continued expanding last month despite the double-edged sword of quantitative easing pushing input prices higher and eroding profitability.

Investec’s latest monthly services purchasing managers’ index (PMI) shows further expansion in the services sector in March and while the headline PMI has fallen slightly over the past three months, the reading of 60.9 demonstrates consistent strong growth.

The positivity is tempered by a sharp rise in input prices driven by a fall in the value of the euro against sterling as the effect of the ECB’s €60bn-a-month quantitative easing programme.

“Input prices continued to ratchet higher, with the rate of increase in costs accelerating to its fastest pace since September 2008.

“Firms attributed this to euro weakness and rising staff costs. Almost 14 times more firms reported rising input prices versus those who recorded a fall,” said Investec Ireland chief economist, Philip O’Sullivan.

Companies were able to offset some of this pressure by increasing output prices at the strongest rate since March 2007, however.

Given the trends across input and output pricing last month, the fall of firms’ profitability to a 10-month low is unsurprising, Mr O’Sullivan added.

Expansion have occurred in 32 consecutive months with any above-50 reading denoting increased activity.

The new orders’ index, despite expanding at a slower pace of growth in March remains comfortably above the series average.

The new export orders index tipped up marginally in March helped by supportive currency moves — the opposite side of the quantitative easing coin that benefitted companies.

Service firms also reported work backlogs to be on the rise highlighting the increase in demand last year. Mr O’Sullivan said that given the strong growth, a rise in the numbers employed was unsurprising.

“Given the above dynamics, it is no surprise to see that services companies continue to add to headcounts, albeit the rate at which they are doing so slowed to a five-month low.

“Data for the four segments of the services industry — technology, media and telecoms; business services; financial services; and travel and leisure — show that employment expansion continues to be broad-based with all four reporting simultaneous growth in headcounts for a 16th successive month,” he said.

Confidence among respondents to the survey remains markedly strong with the majority expecting economic conditions to improve further over the coming 12 months, leading to subsequent growth in activity.