An increase in new business helped drive the strongest growth in services in almost 18 months, according to the details of a key index published yesterday.

The measure of activity in the services in the NCB Stockbrokers' Purchasing Managers' Index (PMI) for the services sector was 56.9 in September.

At almost seven points above the benchmark number of 50, which indicates no change on the previous month, this was the biggest increase the index recorded since April 2002.

It was the fourth consecutive month of growth in the index, which slumped to 47.5 in May after a period of sustained contraction. A result below 50 indicates a fall on the previous month. The return was also twice the level of growth shown in August, when the index hit 53.5.

The expansion was driven by growth in incoming new business, which hit 55.3, the highest level that category reached since May 2002. The increase in new business left the companies monitored by the index with a backlog for the first time this year. The work outstanding category came in at 50.4, after recording a fall in the last nine months.

Business expectations were buoyant, hitting 75.3. Many firms taking part said their client bases were generating a roll-over of business, with repeat contracts on the increase.

However, the index indicated that margins in the services sector remained under pressure during September. Costs continued to show an increase, while prices charged by the businesses involved fell.

The costs index rose to 57.7 slightly ahead of the August rating of 57.1, but almost six points below the 2003 high of 63.1 recorded in February. The increases were attributed to non-labour costs like fuel, insurance, telecommunications and postal charges. Employment rose slightly to 50.4, after falling steadily throughout the year, but this had only a minor impact on costs. The index of prices charged fell for the sixth month running, hitting 47.2. This was the second biggest fall recorded so far in 2003, August and June both hit 47.1.

NCB economist Mr Dermot O'Brien said the combination of cost increases and falling prices indicated that margins were being squeezed. But he argued that the most significant aspects of the index were the increases in activity, new business and employment.

The index covers all services except retail and wholesale. The data come from a representative panel of 600 Irish private sector service companies.