The manufacturing sector has contracted for the first time in more than three-and-a-half years as export orders slowed significantly. It is tangible proof that the slowdown in both the US and Europe is beginning to hit Irish jobs and output.
The NCB Purchasing Managers Index has fallen below critical levels indicating that the sector is contracting while input prices have fallen for the first time in over two years.
The index, conducted in association with the Irish Institute of Purchasing Managers had a reading of only 48.9 in August. Readings above 50 signal growth while those below signal contraction.
The negative reading is in line with declining export and manufacturing output figures which signal that the economy is quickly slowing in line with larger economies in Continental Europe.
According to Mr Dermot O'Brien, chief economist at NCB Stockbrokers, the decline was largely driven by a sharp fall in export orders in August.
More than 75 per cent of total manufacturing is multinational based and that sector was hit hard, he added. However, he insisted that so far there is no sign that the slowdown is affecting the services side of the economy and that the figures are in line with overall growth in the economy this year of around 6 per cent.
The slowdown is in line with similar indicies across Europe, nearly all of which have been reading below 50 in recent months. However, a few countries such as Germany and Italy recorded a slight rise in August, prompting some analysts to predict that an upturn may be on the way although any recovery is likely to be slow and weak.
The Reuters euro zone Purchasing Managers Index for August, published on Friday, rose for the first time since April 2000 and recorded a significant rise in its forward-looking new orders component.
However, it remained below the 50 level, signalling continued contraction in manufacturing.
But economists saw increasing evidence that the trough was in sight for the US-induced downturn in Europe.
"I think it's very unlikely that this is just a statistical mistake," said Mr Heinrich Engelke at Bankgesellschaft Berlin said of the Reuters euro zone data.
"We've had several small indications that there's something of a turning point in business sentiment in Europe."
Even so, economists caution the index might take months to return to levels indicating growth.
"I'm not sure we're going to be seeing (levels of 50 and above) in the next couple of months, if at all by the end of the year," said Mr Nick Matthews at Barclays Capital in London.
The direction of the European economy will be key for Ireland and further contraction on the Continent is likely to be repeated in Ireland, according to Mr O'Brien.
The contraction is likely to have an ongoing impact on employment, which has fallen for the second month in August when 11 per cent of firms said their workforces had been cut back in response to falling orders.
