Rising wage and fuel costs put squeeze on Irish SMEs

Fuel an issue as service sector sees sharp rise in activity. Rising staff and fuel costs and a hike in prices charged by suppliers have helped drive a sharp increase in overheard costs for businesses in the services sector.

Input prices continued to rise sharply, despite the rate of inflation easing for the second month running.

But overall, Irish services companies saw further sharp rises in activity and new business and recording an improvement in business confidence.

Philip O’Sullivan, chief economist at Investec Ireland, which produced the data, said firms’ profitability was being squeezed by the higher costs.

“On the margin side, input prices again rose at a sharp pace in February, with higher staff and fuel costs blamed for this latest increase,” Mr O’Sullivan said.

“Firms have been passing on at least some of these cost pressures through hiking output prices,” he said.

In any event, and despite the benefit of higher volumes, the profitability index moderated to the weakest in the current four-survey sequence of growth.”

The seasonally-adjusted business activity index posted 60.6 in February, down only slightly from 61 in January.

Higher new orders and increased marketing reportedly contributed to growth of activity, but the main factor behind the expansion was improving economic conditions.

Rising workloads and business expansion plans contributed to a further increase in employment during February.

The rate of job creation was faster than that seen in the previous month.

Meanwhile, slowing consumer spending started to hurt services companies in February.

The services PMI fell to a five-month low of 53.3 from 54.5 in January and suggested the economy is now expanding at a quarterly pace of around 0.4pc – much slower than the 0.7pc expansion during the fourth quarter of 2016.

“Weaker consumer spending was a key cause of slower service sector growth, suggesting that household budgets are starting to crack under the strain of higher prices and weak wage growth,” Chris Williamson, chief business economist at IHS Markit, said.