Service sector outlook deteriorates 'sharply' despite solid October

'Concerns over inflation, with a jump in cost pressures in October mainly due to fuel and energy' account for the drop in sentiment

Chief economist at AIB David McNamara said new business activity 'continued to grow solidly in October albeit activity was mixed across the sub-sectors'. File picture

The Irish services sector experienced further solid increases during October but the 12-month outlook among firms deteriorated “sharply” with weaker expectations partly linked to concerns over inflation, the latest AIB Purchasing Managers Index (PMI) shows.

In October, the PMI recorded a reading of 54.3, up from the 54.1 in September with activity levels boosted by rising new business alongside gains in employment. Any figure above 50 means there was growth in the sector during the month.

The rate of growth in the Irish services sector was ahead of the flash Eurozone and UK PMIs at 51.7 and 53.1, respectively, but below the US PMI at 57.9.

While the PMI reading showed solid growth during the month, indicators from the survey of firms were “less positive” with outstanding business falling and “the 12-month outlook deteriorating sharply”.

“Weaker expectations were partly linked to concerns over inflation, with a jump in cost pressures in October mainly due to fuel and energy,” the PMI said.

Chief economist at AIB David McNamara said new business activity “continued to grow solidly in October albeit activity was mixed across the sub-sectors”.

“New export business growth eased on the month, with little change in volumes due to a softening in international demand. Amid this demand backdrop, employment expanded at a similar pace to that observed in September,” he said.

The services sector is divided up into four sub-sectors. The technology, media and telecoms (TMT) sector continued to outpace all the other sub-sectors with a PMI reading of 55.9 while transport, tourism and leisure recorded a reading of 54.5 and business services had a reading of 54.2.

The sub-sector with the lowest PMI reading was financial services at 52.6.

New work recorded in the sector saw a solid increase with demand growth driven by TMT, followed by transport, tourism and leisure. Relatively modest increases were seen in business services and financial services.

“Irish service providers reduced the level of outstanding business for the first time in five months in October. That said, the rate of depletion was only marginal,” the PMI said.

Irish service sector output rose for the sixth successive month in October.

Services employment continued to grow in October, despite the fall in outstanding business. The rate of job creation remained “subdued”, however, due to a slight decline in staffing in financial services and only a marginal rise in TMT.

On inflation, Mr McNamara said input price inflation “accelerated again” in October with cost hikes driven by wage pressures, as well as energy and supply shortages.

The rate of input price inflation jumped to a five-month high and was the third-strongest since February 2023, below the peaks in April and May this year following the outbreak of war in the Middle East.

“The rate of increase in prices charged also picked up to the highest level in over three-and-a-half years, as services firms managed to pass on costs and protect margins,” Mr McNamara said.

In terms of outlook for the next 12 months, business sentiment “dipped notably” last month reaching a six-month low, Mr McNamara said.

“A number of survey respondents mentioned that high inflation and uncertainty were undermining the outlook,” he said.

The PMI said expectations moderated in all four sub-sectors, with the softest overall outlook in transport, tourism and leisure and the strongest in TMT.