Services area shrinks at record rate in October

THE SERVICES sector shrank at a record rate last month with businesses expecting further declines over the next year.

The NCB Services Purchasing Managers' Index (PMI) dropped to 36.1 last month from 40.8 in September, the ninth consecutive month the index has been below the 50 mark separating growth from contraction. This is the lowest reading since the series began in May 2000.

For the first time, the data also indicates that businesses expect conditions to be worse in 12 months' time.

Brian Devine, economist at NCB Stockbrokers, said the fall in the services PMI, a broad sector which includes information technology, insurance and transport, reflects a fall in both domestic and international demand.

"Around two-fifths of respondents indicated that activity had declined as businesses reported that the general economic slowdown in Ireland led to a lack of new work in October," said Markit, which compiles the PMI data. "There were some reports that the full effects of the credit crunch are now being felt," it added.

Volumes of new business, backlogs of work and numbers of staff all contracted at a record pace in October, the survey showed.

Many businesses resorted to discounting to win business, sending the prices charged index to a record low at 41.5 versus 46.4 in September.

In turn this squeezed profit margins as companies' costs continued to grow, albeit at the slowest pace for more than four years.

"Despite the rate of inflation easing for the third month in a row to its weakest since February 2004, the index was still well above the neutral 50.0 mark that separates inflation from deflation," Markit said.

Even so, many economists expect slowing inflation to enable the European Central Bank to pursue aggressive interest rate cuts to ease the pain of a world-wide economic downturn.

In the euro zone service sector, activity touched a fresh decade low in October, according to final data released this morning.

The final Markit Eurozone Purchasing Managers' Index for companies ranging from banks to cafes slumped to 45.8 - the lowest in the survey's 10-year history.

That is well below the flash estimate and economists' forecasts of 46.9, and sharply down from September's 48.4. The index is based on a survey of purchasing managers by Markit Economics in London.