Services sector nosedives in January amid Level 5 restrictions

Activity in the Irish services economy fell at the sharpest rate since May last month as Level 5 lockdown measures to stem the spread of the Covid-19 pandemic took their toll.

Overall, January's Purchasing Managers' Index (PMI) survey data from AIB signalled a difficult start to 2021 for Irish service providers with restrictions tightened as a second wave of Covid-19 swept through Europe.

More positively, employment was only fractionally lower than in December and companies’ expectations remained upbeat as companies looked beyond the winter crisis to a rebound once vaccination campaigns are established.

The services business activity index, which is the headline figure, dived to 36.2 in January, from December’s 50.1, indicating the fastest rate of decline in Irish services output for eight months. The 50 mark separates growth from contraction.

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The month-on-month decline in the headline figure was the third largest on record, behind those seen in March and April last year. All four monitored sub-sectors suffered sharp falls in business activity in January, the first broad-based decline in four months.

Worst downturns

By far the worst performance was in transport, tourism and leisure (where a reading of 19.8 showed the most dramatic contraction), followed by technology, media and telecoms (37.9) and business services (38) respectively.

These three sectors all posted the worst downturns since May. The fourth sector, financial services, fared comparatively better but still posted a significant decline (44.2) to a three-month low.

New business fell rapidly in January as lockdown restrictions suppressed demand. The latest decline was the fastest in eight months and the strongest since April 2009 when the March-May 2020 period is excluded.

New UK trading arrangements following the end of the Brexit transition period were also mentioned by survey respondents as a source of lower inflows of new business at the start of the year.

A lack of incoming new work was reflected in a steep drop in outstanding business in January, following slight increases in the final two months of 2020.

The rate of backlog depletion was the strongest since June 2020, with the transport, tourism and leisure sector posting the worst reduction. In contrast, outstanding work rose in financial services.

Sentiment

Although pipeline business fell in January, service providers retained an optimistic outlook for the next 12 months.

Sentiment was little changed from the levels seen in November and December, with firms expecting the development of vaccination programs to reduce the need for future lockdowns and allow business levels to rebound in the second half of 2021. Firms were also hopeful of successfully adjusting to the new UK trading environment.

The positive outlook for 2021 was reflected in the latest data on employment at service providers. Although a reduction was signalled in January, it was only fractional and much weaker than those seen during the second and third quarters of 2020.

Employment rose strongly in the technology, media and telecoms sector, largely offsetting a sharp fall in transport, tourism and leisure.

Average input prices rose in January, reflecting higher fuel, insurance, salaries and import costs. That said, the rate of inflation eased to a six-month low. Charges levied by service providers fell as firms attempted to boost sales, albeit only marginally.