Service Sector New Order Growth Sees Five-Month High
Rates of expansion in the Irish service sector saw a boost at the end of 2016, with new orders, activity, and employment all rising at faster rates and new business from abroad returning to growth, according to the Investec Services Purchasing Managers Index, released on Thursday. The report also showed a marked pick-up in sentiment regarding the 12-month outlook for activity.
Commenting on the Investec Republic of Ireland Services PMI survey data, Chief Economist at Investec Ireland Philip O’Sullivan said: “Similar to Tuesday’s Manufacturing PMI release, today’s Investec Services PMI Ireland report shows that activity in the sector strengthened into the year end. The headline PMI, which slumped to a 41 month low of 54.6 in October, accelerated for a second successive month to 59.1 in December.
“The report shows increased customer demand from both at home and overseas. The New Business index rose at a sharp pace, with roughly four times as many panellists reporting an increase in new orders as opposed to the proportion who experienced a decline. The New Export Business index recorded a decline for the first time in 64 months in November, but last month it snapped back into positive territory, with some respondents indicating that higher new business from the UK was responsible for this transition – a welcome change given that Ireland’s closest neighbour had been viewed as an area of weakness by panellists in previous months.
The seasonally adjusted Business Activity Index reached 59.1 in December, up from 56.0 in November. According to the repoirt, activity has now increased for the past 53 months. Panellists in the survey reported an improvement in economic conditions and a rise in new business. Optimism around the outlook for business activity over the coming year was also reported to have increased. At the end of 2016, sentiment strengthened markedly and was the highest in 11 months.
The pace of expansion in new orders continued to increase in December after hitting a 41-month low in October. The latest rise in new business was sharp and the fastest since July. This was supported by a return to growth of new export orders, following a reduction in the previous month.
Stronger growth of new business led to a further rise in backlogs of work in the sector, with the rate of accumulation picking up to a nine-month high. In response, service providers took on extra staff at an accelerated pace. Job creation reached its fastest rate since February.
Input prices rose at a sharper pace in December, with panellists mentioning increases in staff costs as well as higher fuel prices. The rate of inflation was stronger than the series average.
Higher input costs were passed on to clients in some cases, resulting in an overall increase in output prices in December. Moreover, the rate of charge inflation quickened for the second month running to the fastest since April.
“Given the firming of client demand noted above, it is no surprise to see Backlogs of Work, which have been building for 43 successive months, record a faster rate of accumulation (to the quickest since March 2016) in December,” Philip O’Sullivan said. “A number of panellists said that staffing levels were insufficient to deal with the inflow of new work, which in turn contributed to the third successive month where the rate of job creation has accelerated.
“On the margin side, services firms had to endure a sharp rise in Input Costs last month, which is attributed to rising staffing and fuel costs, allied to a strengthening US dollar. Firms were, however, able to pass on at least a portion of this through hiking Output Prices once again (and at the fastest pace in eight months). In any event, the rate of growth in the Profitability index improved to its fastest since January of last year.
“The forward-looking Expectations index accelerated to an 11 month high in December, with 29 times as many panellists anticipating growth in activity over the coming year against those anticipating a decline.
“In all, as mentioned in the introduction, an examination of the Investec PMI data suggest that the rate of growth in activity across much of Ireland’s private sector picked up in late 2016 after the ‘soft patch’ endured in the wake of the UK’s vote for Brexit. While noting that political developments have the potential to put a dent in the pace of growth once again this year, we draw comfort from the fact that the Irish manufacturing and services sectors proved sufficiently resilient to continue expanding in spite of all the challenges that the past year produced.”
The full report can be read here.