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Growth in services sector slowing as costs rise and outlook darkens

The war in Ukraine and elevated inflationary pressures continue to weigh on expectations for activity


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The pace of Ireland’s services sector expansion slowed in June and business confidence dipped as higher costs and the war in Ukraine weighed on firms.

Fuel, energy, wages and freight got more expensive in June, with 63pc of firms reporting higher costs in AIB’s latest purchasing managers’ index (PMI).

Activity in the services sector fell to 55.6 in June, from 60.2 in May, the weakest increase since December. Any reading over 50 indicates growth.

New business grew at its slowest rate since January, with some firms saying high inflation is dampening demand.

Irish consumer prices rose 9.6pc in June, according to the EU’s harmonised index, well above the eurozone average.

As a result, managers are now less upbeat about their growth prospects for the next 12 months. It is the most pessimistic they have been since October 2020, when Ireland went back into full lockdown.

While the services sector grew, manufacturing fell for the first time in 16 months, the AIB index showed.

The combined services and manufacturing index – known as the Ireland Composite Output Index – came in at 52.8 in June, down from 57.5 in May.

It is the slowest rate of expansion in a 16-month run of growth, and the third month in a row it has slowed. The index is now below its long-run average.

While manufacturing cost inflation eased slightly in June, it is still the fourth-highest on record.

Transport, tourism and leisure firms saw the highest cost increases out of any sector.

However, firms are passing on those costs to consumers, with transport and tourism recording the highest prices rises of any of service sector in June.

But growth in transport and tourism is slowing down after it recorded the strongest expansion of any service sector in March, April and May.

Transport and tourism firms were still hiring in June, though at a slower rate than the business, financial and technology services sectors.

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Overall, Irish service firms saw positive jobs growth for the 16th month running, although the momentum is starting to wane.

Hiring was highest in business services, although it was the slowest growing sector overall in June, for the third month running.

Financial services took the lead as the fastest-growing sector, for the first time since February.

AIB chief economist OIiver Mangan said the figures show a “marked deceleration in the pace of growth” in the services sector in June.

However, he said the index remains above its long-run average and “well above” eurozone, UK and US surveys.

“The war in Ukraine and elevated inflationary pressures continue to weigh on the outlook for activity,” Mr Mangan said.

“Businesses continued to experience severe upward pressure on input prices, in particular, fuel, energy, freight and wage costs.

“This in turn saw prices charged to customers rise very sharply for the fourth consecutive month.”

The data comes as insolvency experts predict an uptick in business failures in the second half of the year and in 2023.

The number of firms going bust is already up 50pc in the last six months, compared to the same period in 2021, according to consultants Deloitte.

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