Services sector contracts for sixth month in July

The services sector contracted at a record rate in July and has now declined for 6 consecutive months.

According to the NCB Purchasing Managers' Index, which covers a range of service providers from telecoms to transport, the contraction is the longest in the survey's 8-year history

Business activity, employment, new orders, work backlogs and business confidence all dropped last month at the sharpest pace ever recorded.

The headline business activity index dropped further below the 50 mark separating growth and contraction to reach a seasonally adjusted 41.4 last month, below the previous survey low of 41.9 recorded in June. July was the third month in a row the index has fallen to a new low.

Eunan King, chief economist at NCB Stockbrokers said "rising input costs in conjunction with weak demand is putting significant pressure on firms in the services sector".

Input prices increased at the sharpest pace since May 2001, the report found. The substantial cost inflation was linked to rising oil and fuel costs, with higher food and transportation bills also a cause for concern.

"Business activity in the services sector is at its weakest reading since the survey began," he said, noting that demand from clients in Europe and the US had weakened.

"Unsurprisingly given this background, employment is contracting as firms seek to make cost savings."

The index measuring business expectations tumbled to 52.8 in July, a weaker level even than the 55.5 measured after the September 11th attacks on the United States in 2001.

It was 58.4 in June.

House prices are falling sharply making homeowners more wary about spending and forcing construction companies to cut back, which has had a knock-on effect of these firms' purchasing of other services.

"Firms were fearful that weakness in the construction sector would spread further into the wider economy and affect activity a year ahead," said Markit, which compiles the data.

Service companies and their customers are also under pressure from rising global commodity prices. Input prices increased in July at the sharpest pace since May 2001 due to rising fuel and food costs, with the input price index rising to 68.9 from 65.1 in the previous month, Markit said.

However, the survey showed companies kept their charges stable overall, feeling they had little pricing power.

"In July, rising input prices provided upward pressure on Irish service providers' output charges, but this was almost completely offset by competitive pressures pushing prices lower as demand weakened," Markit said.

Manufacturing activity also fell to an all-time low last month as a strong euro, deteriorating demand and rising costs took their toll on companies, another NCB survey showed on Friday.

Additional reporting Reuters