Confidence in services sector drops on inflation and Ukraine concerns

Business confidence in the Irish services sector dropped further last month weighed down by inflation concerns and geopolitical instability linked to the war in Ukraine, according to AIB’s latest PMI survey data.

The data shows activity increased at the slowest rate of the year so far, while new business grew by the least since January.

Input prices and charges both rose at the fourth-fastest rates on record. More positively, employment growth remained strong despite easing to a five-month low.

The headline figure fell to 55.6 in June from 60.2 in May. A reading above 50 indicates an overall increase in growth compared to the previous month, while a figure below 50 indicates a decrease.

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Last month’s figure signalled the weakest increase in activity since December and completed a full quarter of slowing growth.

The Index trended at 59.2 in the second quarter, down from 60.5 in the first quarter and the weakest performance since the first quarter of 2021 (44). That said, the index remained above its long-run trend level (since 2000) of 55.1 in June.

Data broken down by the four monitored sub-sectors showed broad-based growth for the sixth month running in June. That said, three sectors registered slower rates of expansion in business activity.

The weakest growth was seen in business services (52.3), followed closely by transport, tourism and leisure (52.8) which suffered a notable loss of momentum since May.

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Growth in the technology, media and telecoms sector eased to a three-month low, but was strong overall (59.2).

The financial services sector (59.5) was the only segment not to record slower growth in June, although the rate of expansion remained down on those seen in February, March and April.

New business rose for the 16th successive month in June, albeit at the weakest rate since January.

Firms reported that demand continued to be driven by a post-pandemic recovery, although there were reports that concerns over inflation and geopolitical instability had weighed on sales.

The moderation in the pace of expansion was not as marked as that seen for total business activity, which was reflected in the strongest growth in outstanding business at service providers in three months.

The transport, tourism and leisure sector posted the fastest rise in new business, followed by financial services.

Latest data signalled further elevated inflationary pressures in the service sector. Both input prices and charges rose at the fourth-fastest rates on record, little changed from the all-time highs seen in March and April, respectively.

Anecdotal evidence widely mentioned higher prices for fuel, wages, energy and freight. The transport, tourism and leisure sector registered the fastest rates of inflation for both input prices and charges, and financial services the weakest.

With inflationary pressures remaining strong, and ongoing global political uncertainty linked to the war in Ukraine, Irish service providers were less optimistic regarding the 12-month outlook for business activity.

Expectations were the weakest since October 2020, and below the long-run survey trend. By sector, confidence was lowest in business services and strongest in technology, media and telecoms.

More positively, employment growth continued at a strong pace in June despite easing to a five-month low. Recruitment was sharpest in business services, and weakest in transport, tourism and leisure.