Source: Markit Economics

The Irish service sector edged closer to recovery in December as both activity and new orders fell at slower rates. The seasonally adjusted 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 - - rose to 48.3 in December, from 46.8 in November. Although service economic activity continued to decrease in December, the rate of contraction eased to its weakest since February 2008. Falling new business was again a key factor behind lower activity, which has now declined in each of the past twenty-three months.

Companies remained optimistic that activity will be higher this time next year, with positive sentiment recorded for the eighth successive month. Panellists expect the wider economy to improve during 2010, with new product launches leaving firms well placed to benefit from any economic upturn.

Consistent with the trend for activity in December, new orders fell at a slower pace during the month. However, the survey showed that clients remained cautious, and were therefore reluctant to commit to new expenditure, leading to a twenty-third successive contraction in new business.

The contraction in new orders was registered despite a fourth consecutive increase in new business from abroad. Moreover, the rate of expansion of new export orders in December accelerated to its strongest since October 2007.

As overall new orders fell again in December, they were insufficient to compensate for completed work. Panellists subsequently continued to deplete backlogs during the month, and at a marked pace.

Staffing levels also decreased in December, and at a substantial pace. The reduction largely reflected adjustments to declining demand, and attempts to reduce costs. However, the rate of job cuts slowed to the weakest in seventeen months. Close to 26% of respondents highlighted lower employment during the month.

Lower salary payments in December were a key reason behind the latest drop in input costs at Irish services companies. The twelfth successive monthly decline remained sharp, despite easing to its slowest since January. Output charges also decreased, extending the current period of reduction to seventeen months. Furthermore, the rate of decline was considerable, with respondents noting increased competition for new business, as well as pressure from clients to offer discounts.

Commenting on the NCB Republic of Ireland Services PMI (Purchasing Managers' Index) survey data, Brian Devine, economist at NCB Stockbrokers said: “The services sector contracted once again in December but the pace of decline continues to moderate. The drag continues to come from the domestic part of the economy as international new orders actually expanded for the fourth month in a row. While global recovery is leading Ireland out of recession we would expect that by the end of Q1 both GDP and GNP will have expanded.”

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.