Source: Markit Economics

Irish services sector PMI (Purchasing Managers' Index) fell sharply in January and the Business Activity Index - - which is based on a single question asking respondents to report on the actual change in business activity at their companies compared to one month ago - - dipped to 44.4 in the first month of 2010, from 48.3 in December. The no-change level of activity is 50.

January's reduction was the strongest since last July and extended the current sequence of contraction to two years. Panellists indicated that lower activity largely reflected weak economic conditions, with new business insufficient to compensate for the completion of existing projects.

However, despite the steeper fall in activity, confidence regarding the twelve month outlook improved. According to respondents, stronger optimism was mainly due to an expectation that economic conditions will improve over the coming year. New orders at Irish services companies fell markedly, and at the fastest pace in four months as clients remained reluctant to commit to new projects. The reduction in overall new business was recorded despite a rise in new export orders. New business from abroad has increased in each of the past five months, although the rate of expansion in January was the slowest in that sequence. Outstanding business decreased sharply as a lack of new orders led Irish service providers to transfer resources to complete work-in-hand.

As workloads continued to decline in January, services companies adjusted their workforces accordingly. Consequently, employment decreased for the twenty-third successive month, albeit at the slowest pace since July 2008.

Panellists were able to negotiate cost reductions with suppliers during January. As a result, input prices decreased for the thirteenth month running and at a sharp pace. However, the latest fall was the second slowest in the current sequence of decline.

Output prices fell substantially, largely reflecting intense competition in the sector. Panellists also indicated that charges had been lowered in an attempt to boost new business. Output prices have now declined throughout the past year-and-a-half.

Commenting on the NCB Republic of Ireland Services PMI survey data, Brian Devine, economist at NCB Stockbrokers said: “The January services PMI revealed that the contraction in activity was widespread with the index falling to its lowest level in six months. More worryingly the level of new orders fell back sharply, highlighting that this was more than just weather related problems. The latest data highlight how fragile domestic demand is in the Irish economy. In 2010 we expect domestic demand to contract by 3.5% but for GNP to only decline 0.5% thanks to the contribution from net exports. New export orders increased for the fifth month in a row highlighting the dichotomy between the domestic Irish economy and the global economic recovery.”

The NCB Republic of Ireland Services PMI (Purchasing Managers’ Index) is produced by Markit Economics. The report features original survey data collected from a representative panel of around 300 companies based in the Republic of Ireland services sector.