Confidence in services sector hits five-year low

Business confidence in the Irish services sector fell to its lowest level in five years in November, despite the otherwise strong economy, as fears of a no-deal Brexit escalated.

Around 43pc of surveyed panellists reported optimism about business growth over the next 12 months, but worries over a slowdown linked to the UK’s exit from the European Union dragged on sentiment, according to the latest Services Purchasing Managers Index (PMI) from IHS Markit.

Investec Ireland chief economist Philip O’Sullivan said November’s survey took place against a backdrop of very concerning reports about the UK/EU Brexit talks.

“Hopefully, the outcome of Brexit will be benign,” Mr O’Sullivan told the Irish Independent.

The services sector ranges across industries from hotels to banks, and professional services. It is the biggest element in the economy.

“While the headline PMI is at an eight-month low, it is still a very good reading. It has come on the back of an extraordinarily high boom for the services industry, in particular in the tech and tourism sector. However, the current backdrop is a little more uncertain,” Mr O’Sullivan said.

PMI data is seen as a good indication of where the economy will go, because it is based on company-level activities. Brexit complicates that because businesses themselves are operating in something of an information vacuum.

Mr O’Sullivan added that if Brexit plays out in a more orderly way “we are likely to see normal services resume”.

Overall services activity continued to expand robustly during the month. The headline PMI posted a reading of 57.1 in November, down fractionally from 57.2 in October. Any reading over 50 is deemed growth. New orders data – generally a good guide to future growth – was positive. Similarly, new export business expanded at the weakest rate in two years and input cost inflation moderated to a six-month low.

In the UK, output in the services sector slumped to its lowest level since the Brexit vote in November as the country’s EU divorce continues to drag on the economy. The services PMI showed a reading of 50.4 last month – lower than the 52.2 in October and below the 52.2 reading economists were expecting.

Chris Williamson, chief business economist at IHS Markit, warned that unless demand in the UK revives, a “slide into economic decline at the turn of the year is a distinct possibility”.

While businesses may be displaying concerns around Brexit, the KBC Bank Ireland/ESRI Consumer Sentiment Index for November shows Irish consumers’ mood revived last month following three successive monthly falls.

The index rose to 96.5 in November, reversing October’s monthly drop to 93.5, however sentiment remains well below recent peaks in July and January of this year. In the euro area, consumer confidence remained on a downward trend but the monthly loss was influenced by a notably poorer French reading that reflects increasing political and social tensions.

Meanwhile, consumer confidence in the UK registered the largest monthly decline in 17 months in November – reflecting a pullback in spending plans as Brexit-related uncertainty hit home.