Service sector outlook weakens and costs rise in March, linked to outbreak of war in Middle East
The Irish service sector expanded only slightly in March, while inflationary pressures escalated, according to the latest AIB Ireland Services PMI survey.
The AIB Ireland Composite PMI Output Index fell from 52.5 in February to 52.1 in March, signalling the slowest expansion in six months and remaining below the long-run average of 53.8
Overall activity increased, but at one of the weakest rates over the past five years as new business growth moderated.
Input price inflation accelerated sharply to a three-year high, while the year-ahead outlook for business activity softened.
This was linked to uncertainty regarding the economic impact of the war in the Middle East. Faced with rising costs, overall employment declined slightly in March.
The seasonally adjusted AIB Ireland Services Business Activity Index fell for the fourth consecutive month to 50.7 in March, down from 51.8 in February.
This marked the weakest rate of growth in seven months and one of the slowest expansions in the current upturn, which began in March 2021.
Growth remained below the long-run survey average of 55.0 for the fourth successive month.
Sector performance was mixed. Business Services (51.5), Financial Services (51.0) and Technology, Media & Telecoms (51.4) recorded modest growth.
However, Transport, Tourism & Leisure (47.6) saw activity decline, marking its ninth contraction in the past 12 months.
New business continued to rise, but growth slowed for the fourth month in a row and was the weakest since last August.
Financial Services and Transport, Tourism & Leisure both recorded declines in new business, while Business Services posted only modest gains.
Technology, Media & Telecoms was the exception, recording strong growth. Meanwhile, new export business was broadly unchanged.
Outstanding work increased for the fifth time in six months, albeit only marginally. Business Services was the only sector to record a decline in backlogs.
Cost pressures intensified during the month, with respondents citing higher fuel, energy, wages, pension contributions, raw materials and professional services costs.
Supply chain disruption linked to the Middle East conflict also contributed to rising input prices.
In response, service providers increased their own prices at a stronger pace despite softer demand.
Transport, Tourism & Leisure recorded the fastest increases in both input costs and charges, while Financial Services saw the weakest.
Business sentiment weakened in March, with expectations for the year ahead falling to their lowest level since October 2020.
Firms pointed to economic uncertainty, high costs and geopolitical risks as key concerns.
With cost pressures rising, new business growth slowing and confidence weakening, service providers reduced staffing levels.
Employment fell for only the third time in the past five years, although the decline was marginal overall.
At a broader level, private sector output continued to grow, but at a slower pace.
The AIB Ireland Composite PMI Output Index fell from 52.5 in February to 52.1 in March, signalling the slowest expansion in six months and remaining below the long-run average of 53.8.
While manufacturing output strengthened, growth in the services sector remained subdued.
New business levels were unchanged from February’s six-month low, while employment growth slowed to a seven-month low as service providers cut staff.
Input price inflation across the private sector rose to a 39-month high, with charge inflation also among the strongest seen in the past three years.
Commenting on the findings, AIB chief economist David McNamara said the data pointed to “very modest growth” in the services sector, with activity impacted by slowing demand, weaker hiring and rising costs linked to geopolitical tensions.
He noted that new business growth was at its slowest in seven months, while export demand remained near stagnant.
Sector performance was uneven, with Transport, Tourism & Leisure particularly affected by rising input costs.
McNamara added that while firms are attempting to pass on higher costs to protect margins, the outlook remains uncertain.
Business sentiment, although still positive, has weakened significantly and is now at its lowest level since the early stages of the pandemic, reflecting ongoing concerns around inflation, global instability and future demand.
