Irish manufacturing fell back into a contraction in March as new orders and factory production fell after briefly showing signs of recovery earlier in the year, according to new data from AIB.

The bank’s monthly manufacturing purchasing managers index (PMI) fell into contraction territory for the first time in three months as firms began to scale back due to weakening demand.

The reversal complicates the economic picture for Ireland, which had brightened considerably in the first quarter with signs of expanding economic activity and several optimistic growth forecasts.

“A primary factor behind the weakening in Irish manufacturing in March was renewed declines in both orders and output, reflecting subdued underlying demand conditions,” said AIB chief economist Oliver Mangan.

“New exports orders remained particularly weak as a result of sluggish global demand. With order books declining, spare capacity is becoming increasingly evident as backlogs of work continued their steep decline in March.

"Meanwhile, stocks of finished goods fell for the first time in eight months, while firms continued to scale back purchases of inputs.”

Nonetheless, some positive signs came through in the data.

Employment in the sector continues to grow while the pace of input-cost inflation fell to its lowest in nearly three years. Supply chain issues are also easing, as seen in shortened delivery times.

Sentiment in the sector remains strong, too, with the confidence gauge for the sector at near-highs for the year as manufacturers look forward to improving fortunes over the next 12 months.

The mixed picture followed a much rosier report in February, when Irish manufacturers had their first rise in new orders in nine months – a sign the economy was entering a growth phase rather than a downturn.

February was the second month of expansion after a dip at the end of last year seemed to herald a possible recession in 2023.

A modest rise in new orders – the first since last May – was behind the improvement but continuing weakness in export orders was already evident. 

The PMI for the much more economically significant services sector will be published on Wednesday, giving clearer direction on the overall health of the economy.