Irish services sector sees further expansion but cost pressures remain

Activity in the State’s dominant services sector continued to expand as 2023 came to a close, but at a more moderate pace with slower increases in activity and new business, according to AIB.

The bank’s latest purchasing managers index (PMI) for services fell from 54.2 in November to 53.2 in December, signalling slower growth. Any figure above 50 indicates expansion.

The pace of expansion has moderated seven times in the past eight months in the face of a global slowdown and higher borrowing costs and the latest figure was the second-lowest in 2023. AIB said, however, that activity has risen every month since March 2021.

AIB chief economist Oliver Mangan also noted that despite the weaker reading the Irish index remained above those in other countries, with the flash services PMIs coming in at 52.7, 48.1 and 51.3 for the UK, euro zone and the US respectively in December.

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“Irish firms continued to report rising levels of new business, but the pace of growth slowed in December to the second weakest in 2023,” Mr Mangan said.

“Similarly, while the volume of outstanding work continued to rise, it was at one of the slowest rates in the past three years. One bright spot was new exports orders which hit their highest level since August, with the UK mentioned as a source of growth,” he said.

The services sector, which includes everything from hotels and hairdressers to IT firms and telecoms, had rebounded strongly from the pandemic in 2022 but last year brought a pronounced cost-of-living squeeze and higher interest rates which weakened demand, dragging down spending on services.

Wages remained a key source of pressure on operating costs for service providers in December, AIB’s report noted.

“Utilities, transport and insurance were also reported as becoming more expensive at the end of the year,” it said.

The overall rate of input price inflation accelerated for the first time in six months, rising to a four-month high.

Nonetheless, all four sub-sectors of AIB’s barometer registered higher activity in December. For the first time since July, financial services (54.7) posted the fastest growth, just ahead of technology, media and telecoms (54.2), which had been the top-ranked sector for the previous four months. Modest expansions were registered in business services (52.2) and transport, tourism and leisure (51.5).

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