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Business activity continuing to grow albeit at a slightly slower pace in Q1 2017
Hiring a little more cautious of late but this may also reflect some areas of skill shortages
Companies slightly less worried about Irish economy but still quite cautious
Brexit awareness varies widely across firms—21% of companies have strong sense of likely Brexit impact on their operations but 27% have little sense as to how it will affect them
Sterling weakness now having widely differing impacts across Irish businesses; hurting 31% of firms but helping 13%
40% of companies already taking Brexit related action in many instances because of FX effects
Brexit and weak demand key concerns but some firms prioritise staff and building constraints
Irish business sentiment improved through the spring of 2017 as the Irish economy has thus far defied fears of a marked slowdown while companies report ongoing and healthy growth in their own activity levels.
The details of the KBC Bank/Chartered Accountants Ireland business sentiment survey do hint at some easing in the pace of increase in output and hiring of late as well as ongoing challenges in a number of areas. However, the broad message is that while significant risks to Irish business prospects persist, the reality of early 2017 has not been as difficult as was feared. As a result, companies are now marginally more positive about the coming quarter.
The KBC Bank/Chartered Accountants Ireland business sentiment index climbed to 110.6 in spring 2017 from 104.6 in the previous quarter. This marks the third successive increase in the index following a sharp likely Brexit related weakening last summer. As major uncertainty persists in regard to the global and indeed the domestic economic outlook, producer confidence remains some way below the levels seen in late 2015 (131.1), but the spring survey shows Irish business sentiment is now on an improving trajectory.
The business sentiment survey is intended to provide a snapshot of current conditions across the spectrum of businesses operating in the Irish economy. As diagram 1 indicates, the summary measure of this ‘cross section’ profile provided by the business sentiment index tends to move broadly in line with the underlying trend in Irish economic growth (abstracting from the exceptional movements in Irish GDP prompted by fundamental changes in the operations of a handful of multinational companies). In turn, this suggests the ‘underlying’ pace of Irish GDP growth is starting 2017 at a rate close to 4%.
Companies’ assessments of their activity levels through the past three months show a continuation of broadly based growth in business in the first quarter of 2017 but, as diagram 2 indicates, there are also signs that a small number of companies found conditions a little tougher of late. The number of firms reporting lower activity increased only modestly but still enough to translate into the largest number of negative responses to this question in three years.
The slight downshift in the pace of growth was broadly based but it was particularly obvious in areas such as construction and consumer spending where exceptionally strong gains had been reported in the previous quarter. There was also a clear jump from negligible levels in the previous survey in the number of firms in the food sector reporting weaker conditions of late. However, it should be emphasised that the survey is still pointing to ongoing growth in business activity as in all sectors the number of firms reporting output gains exceeded the number reporting losses by a wide margin.
A broadly similar picture is envisaged for the coming three months. As diagram 3 indicates, the expectations of firms are little changed from three months ago. At the margin, a slight firming reflects notably more widespread activity projections from firms in the construction sector and to a much smaller extent in business services. In other areas firms were marginally more cautious than three months ago particularly in sectors such as food.
Responses to the survey in regard to companies’ payroll trends also give some sense of an environment in which growth is healthy but may be moderating. As diagram 4 indicates, there was a decline in both the number of firms adding to and reducing headcount in the past three months. This would be consistent with conditions in which firms are seeing their activities expand, implying a need to maintain or slightly increase employment while ongoing uncertainty argues against pre-emptive hiring.
Some supplementary questions asked in the spring survey also hint that there is a measure of difficulty in attracting suitable candidates for open positions. Difficulties in this regards would also restrain hiring but as firms remain cautious in their employment plans for the coming quarter, this may not be the most important factor at the aggregate level.
Although all sectors reported strong net job gains in the past three months, there were some variations with food companies notably scaling up employment while business service firms adopted a somewhat more cautious approach than in the previous survey.
Probably the most notable aspect of the spring survey was a marked improvement in companies’ assessments of the broader Irish economy. As diagram 5 indicates, this largely reflects a scaling back of negative views rather than a surge in positive responses.
This suggests that firms are expressing a measure of relief that high profile risks such as those related to Brexit or possible changes to US tax policy have –at least thus far- failed to materialise. Instead, most recent indicators, such as better than expected outturns for GDP and employment, have suggested Irish economic conditions have remained strong of late.
As diagram 5 shows, responses to this question are still altogether more cautious than was the case through 2015 when the Irish economic upturn appeared to be on a sharply accelerating trajectory. So, concerns about a still uncertain environment are still to the fore in corporate thinking. However, the absence to this point of anything approaching the apocalyptic outcomes that were suggested in the wake of new policy directions being taken in the UK and US has caused Irish companies to tone down their own level of concern.
The easing in worries was pronounced in domestic-focussed sectors such as construction and consumer related activities but was even more marked in areas such as business services. These results might suggest an easing in concern that uncertainty would prompt a marked pull-back in spending. In contrast, manufacturing companies were a little less confident than three months ago, a result that might stem from the elevated level of uncertainty about global prospects.
As usual, the business sentiment survey included a number of additional questions intended to shed light on some topical issues.
We began by asking about the extent to which firms were affected by a distinct lack of visibility in terms of Irish and broader global economic prospects. The responses shown in diagram 5 below highlight clear differences between companies’ areas of concern and areas of control.
For most businesses, some degree of uncertainty is an inevitable and almost natural part of the planning process. However, as panel A in diagram 6 indicates, a significant number- some 31% of respondents did indicate that current circumstances were unusually difficult in this regard.
This was a particular issue for firms in the food sector while consumer focussed companies also signalled above average concerns of this nature. Arguably, Brexit related issues such as the weakness of Sterling may be posing specific concerns for many firms at present.
If the majority of companies felt that uncertainty in relation to their immediate operating environment was no greater than usual, the predominant view in relation to the broader Irish economic outlook, set out in diagram 6B was that current conditions are more uncertain than usual. In broad terms, this chimes with the general note of caution evident in many aspects of the survey.
Probably of equal note is the extent to which views (and circumstances) differ across firms even in the same sector. In this context, responses from food firms showed relatively high proportions of both ‘more uncertain’ and ‘less uncertain’ verdicts.
In the same vein, in response to another question, some 31% of firms noted that Sterling weakness was having an adverse effect on their business while 13% indicated it was having a positive effect. Although there was a relatively high proportion of negative responses from manufacturing firms, that sector also showed the largest number of positive responses. Similarly, while all other sectors emphasised negative effects, they each reported a significant number of positive responses. These results highlight the complex nature of our economic links with the UK and underscore the major risks in a ‘one approach fits all’ policy in relation to Brexit even at the sectoral level. As we note below, this finding applies to many areas of the survey.
The spring survey also asked respondents to rank a range of issues by importance to their businesses. As diagram 7A indicates, Brexit and inadequate demand were most frequently ranked as a key concern for Irish companies at present. More generally, diagram 7A suggests that there is no single issue now dominating the business landscape. Instead concerns vary widely, ranging from sustainability issues posed by weak demand and intense competition at one end of the spectrum to growing pains related to difficulties adding to staff or physical space.
Diagram 7b shows a slightly different analysis of the same responses. When we assess response to this question by weight of the average level of concern (measured on the weighted average score between 1 and 5), we find Brexit is seen as the issue of broadest concern. A difficulty hiring additional staff comes in a narrow second. Again, these responses testify to the diversity of the challenges Irish business currently faces in their efforts to ‘rightsize’ their activities as the downside threats posed by Brexit stand in stark contrast to the ‘upside’ problems related to skill shortages in certain areas.
We followed up this line of questioning by asking firms whether these various concerns had eased or increased through the past six months. As diagram 8 indicates, concerns have increased rather than decreased of late in each instance. The most notable increase has been in relation to Brexit but there have also been significant increases in concerns regarding US policy and hiring difficulties. These responses suggest the improvement in Irish economic conditions through the past couple of years may have altered the challenges facing businesses somewhat but this ‘new normal’ is anything but normal in terms of the diversity of concerns now facing Irish firms.
In each of the surveys since the UK decision to leave the EU we have focussed on various measures of the likely impact of Brexit on Irish business. In the spring survey we sought to determine how much progress companies felt they had made in preparing themselves for Brexit. The responses shown in diagram 9 below can be examined in a number of ways.
First of all, there are significant differences in companies’ understanding of the implications of Brexit for their businesses. Just 21% of companies believe they have a strong sense of the consequences of Brexit for their activities with manufacturing companies particularly prominent within this grouping. While a further 53% of companies report they have some sense of what Brexit might mean for their operations, a substantial 26% say they have little sense of what it will mean for them. Among the latter group, firms in the business services and consumer areas tended to figure prominently, presumably reflecting little or no direct business links to the UK. However, the pervasive nature of Ireland’s economic and business ties with the UK means indirect or spill-over effects may well be wide-ranging.
An encouraging 41% of companies indicate that they have already taken some action in relation to Brexit but as these responses tend to feature more heavily from companies in sectors reporting a significant effect from Sterling weakness, it may primarily reflect a response to developments already underway in the form of currency movements rather than notably pre-emptive action (the anonymised nature of the survey means we can’t link individual responses to different questions).
Not surprisingly, the majority of those companies with little sense of the likely impact of Brexit on them have not taken action but significant numbers of those who identified some effect from Brexit on their business have yet to act. This could be because the impact they envisage will not occur until the UK leaves the EU but it likely owes more to a greater prioritisation of various other concerns discussed above. This may also be true of the 22% of firms who have some sense of the implications of Brexit but haven’t acted as yet. As many of these responses contrast with significant reports of action from firms in the same sector, these results suggest notable and potentially worrying differences in preparedness between firms likely to be affected in a similar manner by Brexit.
The KBC Bank Ireland / Chartered Accountants Ireland Business Sentiment Survey reflects the view of Chartered Accountants working in senior positions (CEOs, MDs and FDs) in Ireland’s leading companies. The Spring 2017 survey was conducted from 28th March to 3rdh April 2017 and the results presented are based on 352 completed responses.
This non-exhaustive information is based on short-term forecasts for expected developments in the economy and financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalised investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a judgment as of the date of the report and are subject to change without notice.