Services sector shrinks but consumers happier

THE SERVICES sector shrank for the second month in a row as new business showed only a marginal rise in June. The NCB Services Purchasing Managers’ Index, which measures the health of the industry, declined slightly, falling to 49.7, just below the 50 mark that separates expansion from contraction.

The survey showed new business, which registered 50.3 on the index, was driven by a strong increase in new export orders to 54.2. Employment also continued its downward trend, falling to 49.2 as both financial services and transport and leisure showed declines in staffing.

Although confidence fell over the month, companies said they were confident that activity would be higher than current levels in 12 months’ time. Input costs continued to rise, putting pressure on firms as they once again cut output prices due to competition and in an attempt to stimulate demand. Output prices have now decreased in each of the past 47 months.

Consumer confidence, however, showed a small increase according to the KBC Bank Ireland/ESRI consumer sentiment index, which increased to 62.3 in June from 61.0 in May, bringing it very close to the six-month high of 62.5 recorded in April.

“The latest consumer sentiment index reveals a slight increase in June, with most of the previous month’s decline having been reversed. Despite some recent hesitation, the broader trend reveals a gradual recovery in sentiment since the end of last year,” according to Eddie Casey of the ESRI.

Austin Hughes of KBC Bank Ireland put the improvement down to “a divergence between the greater concern expressed about the broad economic outlook and a little less pessimism in relation to households’ own financial situations. This may reflect a ‘silver lining’ in terms of lower oil prices and a possible drop in borrowing costs that accompanied darker euro zone clouds.”

He cautioned that “the improvement in sentiment in June largely reflects a drop in negative responses rather than any marked increase in positive replies. So, there is no sense Irish consumers expect any dramatic improvement in their circumstances that would prompt much stronger spending”.

The picture across Europe remains even gloomier with the Markit’s Eurozone Composite Purchasing Managers’ Index (PMI), which surveys thousands of companies, revised up in June to 46.4 from a preliminary reading of 46.0 that matched the May figure.

The index has been below the 50 mark that separates growth from contraction for nine of the last 10 months, suggesting the economic rot has spread to the core of the euro zone.

The PMIs suggest the euro zone economy contracted 0.6 per cent in the second quarter, which would be the largest quarterly decline in three years.

“Even Germany looks to have fallen into a renewed decline, though only a very modest drop in output is signalled. The pace of downturns in other major euro member states is far more worrying,” said Chris Williamson, chief economist at Markit.

He said output in Italy probably declined 1 per cent in the second quarter, with steep downturns also on the cards in Spain and France.