Iran war impacts Irish services economy as it contracts for the first time in five years

The tourism and leisure sector saw new orders drop markedly, and employment fall for the third month running. File photo

The services part of the Irish economy contracted for the first time in five years, led by a steep decline in the tourism and leisure sector linked to the war in the Middle East.

New business stalled, price inflation rose again, and the year-ahead outlook for business activity remains subdued, the AIB Purchasing Services Managers’ Index shows.

The index fell to 49.7 in April from 50.7 the previous month. The Irish services PMI was ahead of the Eurozone PMI at 47.4 but behind the UK and US, both of which recorded growth.

Activity levels waned due to contractions in new and outstanding business and rising costs. New business contracted marginally in April for the first time since February 2021, with new export business also lower.

"Economic uncertainty, higher costs and geopolitical tensions were cited as key drivers of the downturn in April. The volume of outstanding work also fell for the first time since January, amid generally weak demand conditions," David McNamara, AIB Chief Economist, said.

The four sub-sectors covered in the survey registered weak growth or outright contraction in April. Business Services and Technology, Media & Telecoms both expanded activity levels. However, Financial Services and Transport, Tourism & Leisure saw a contraction in activity, exacerbated by a surge in input prices related to the Middle East.

The tourism and leisure sector registered the sharpest decrease in business activity for over five years. New orders dropped markedly, and employment fell for the third month running. 

Input price and charge inflation both accelerated further and remained the highest among the monitored sectors. The year-ahead outlook for tourism weakened further.

The fall in outstanding business partly reflected a renewed increase in employment in the sector. The rate of job creation was broadly in line with the modest average over the past 12 months. All sectors except Transport, Tourism & Leisure recorded higher staff levels in April.

The survey results are the latest set of data highlighting growing concern for the economic future as the Middle East conflict drags on.

On Monday, manufacturing surveys across central Europe signalled growing price pressures stemming from the conflict, as companies grappled with surging input costs, longer lead times and braced for shortages of key materials.

The export-reliant, energy-importing region has endured a steep inflation surge after Russia's February 2022 invasion of Ukraine. April manufacturing surveys showed cost rises scaling their fastest rate since the start of that conflict.

The prospect of higher inflation has put central bank rate cuts across the region on ice, although a protracted rise in oil and gas prices or European Central Bank interest rate hikes could also put rate rises back on the table in central Europe.

Despite the concerns, in Ireland, the 12-month outlook for activity remained positive in April, but sentiment remained relatively weak. 

Companies linked optimism to investments in new products and markets, headcount growth and hopes of improved business conditions. Expectations were little-changed since March's 65-month low, however, attributed to geopolitical uncertainty, rising costs and potentially higher interest rates.

Transport, Tourism & Leisure and Business Services recorded the weakest outlooks.

Cost pressures in the services sector continued to escalate in April. Input prices rose at the fastest rate since December 2022, driven by rising fuel, freight and energy costs linked to the war in the Middle East, as well as wage increases and higher costs for other goods and services.