The Irish services sector reversed two months of modest growth through September, falling markedly into contraction territory, according to AIB.

The bank’s Services PMI for September recorded a business activity index of 45.8, down from 52.4 in August. Any index figure below 50 indicates a sector in contraction.

AIB’s services sector analysis for September showed that new business declined at the fastest rate since June. A combination of weakening demand and higher labour costs linked to the end of the temporary Covid-19 wage subsidy scheme led the rate of job shedding to level off, following a four-month period of slowing cuts.

Business activity declined across all four sub-sectors monitored in September. The fastest decline was in transport, tourism and leisure, which had seen strong growth in July and only a slight fall in August.

Financial intermediation registered a drop in activity for the sixth time in seven months, while only marginal declines were seen in business services and the technology, media and telecoms sectors. Over the third quarter as a whole, business services registered the strongest performance.

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Total activity was weighed down by a renewed fall in incoming new business in September, following only a marginal increase in August. Companies linked weak demand to Covid-19 restrictions, economic uncertainty and difficulty in completing new sales due to longer decision-making by clients. Export demand also weakened, linked to Covid-19-related uncertainty and, to a lesser extent, Brexit. The rate of decline in new export sales was the fastest in three months.

The latest data signalled a seventh consecutive drop in the volume of outstanding business at Irish service sector companies. Businesses mainly linked lower backlogs to a lack of incoming new work.

With new and outstanding business both falling, service sector employment in Ireland declined further in September. Companies mentioned redundancies, reduced working hours and the non-replacement of leavers.

By sector, AIB found that the decline was most marked in transport, tourism and leisure, followed by financial intermediation and technology, media and telecoms sectors.

Service providers' expectations for activity over the next 12 months remained positive in September, though the strength of confidence slipped for the third successive month following June's rebound. Excluding the March to May period, sentiment in September was the weakest since November 2010.

Commenting on the figures, AIB chief economist Oliver Mangan (pictured) noted that the recent marked rise in new cases of Covid-19 in Europe and resulting re-imposition of restrictions on activity is being most clearly felt in services sectors that depend on discretionary consumer spending.

“Overall, the PMI data show that business conditions are very challenging for many firms operating in the services sector of the economy owing to the continuing Covid-19 pandemic,” Mangan added.