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Irish Business Sentiment Index steady in late 2014.
• Irish Business Sentiment Index steady in late 2014.
• Activity up strongly but firms slightly less upbeat about broader economic climate.
• Rising output boosts employment at end 2014.
• Two thirds of firms to raise pay in 2015 but increases set to be modest.
• Four out of five firms see themselves in recovery mode in 2015.
• Roughly half of firms to boost capacity in 2015 with one in ten planning cutbacks.
• Almost half of businesses expect a modest boost from lower oil prices.
• Sluggish global economy and domestic uncertainty may be restraining upturn at present.
Section 1: Output And Employment Rising But Companies A Little More Cautious
Irish business sentiment held broadly steady in the final months of 2014. However, this doesn’t signal unchanged conditions. Instead, this outturn reflects two contrasting influences that largely offset each other in the past three months. Companies report increased activity and employment levels but this was countered by increasing caution about the general economic climate. As a result, the KBC Bank Ireland/Chartered Accountants Ireland Business Sentiment Index edged down to 124.3 from 124.8 in the third quarter.
A movement of this limited magnitude effectively signals no material change in the business sentiment index as a whole. However, the details suggest some interesting and contrasting developments of late that again emphasise the unusual and uneven contours of the emerging upturn even if domestic spending is now showing clearer signs of recovery.
Business Activity Levels Continue To Strengthen
The final three months of 2014 saw a very strong increase in business volumes across the Irish economy. As diagram 1 indicates, 61% of firms reported increased output while just 7% indicated lower levels of activity. In both respects, these represent the healthiest readings in the eight year history of the survey. As such, they point towards strong positive momentum in business activity. That said, a comparison with the earlier quarters of 2014 suggests this has been a gradual build-up rather than a sudden sharp change in business conditions.
The fact that all business sectors signalled solid increases in activity emphasises that the upturn in Irish economic conditions is becoming more broadly based. The most notable improvement compared to the previous quarter was reported by companies focussed on the Irish consumer. The survey specifically asks respondents to exclude seasonal influences but it may be that it is so long since many companies had a ‘normal’ Christmas related pick-up in business that separating what is seasonal from the underlying trend proved problematic.
Other firms with a significant domestic facing element, including both business services and construction, also reported slightly above average gains in activity of late. In contrast, there appears to have been some easing in the extent of the upswing in more externally influenced sectors such as food and manufacturing. However, the main feature is one of broadly based increases in business activity as 2014 drew to a close.
Firms Expect Further Modest Gains In Early 2015
Business activity is expected to strengthen further in early 2015. Once again, the tone of responses of companies focussed on domestic activity tended to be somewhat more positive than the average. This may owe something to increasing momentum in what are still the early stages of an emerging upturn in domestic spending relative to exports. However, all sectors reported positive responses in terms of expected activity levels that were significant multiples of the negative responses. So, the broad message is one of continuing solid growth.
As diagram 2 suggests, expectations for activity levels in the coming quarter show relatively modest gains compared to the previous quarter. Our sense is that this result reflects a range of influences including some firm specific factors. However, a couple of possible explanations occur to us as potentially being significant in terms of relating the survey to the evolving Irish business environment. First of all, when the number of companies signalling expectations of higher activity gets above 60% and the number envisaging lower output drops to 5% as occurred in the previous quarter, this implies very strong conditions overall. As a result, further quarter on quarter improvements in this measure become less likely. In this sense, the survey hints that the peak rate of growth may be behind us even if the recovery is still at a fairly early stage. That would be consistent with the view that Irish GDP growth is likely to be more modest in 2015 than in 2014.
A second possible explanation of this result is that companies are adopting a more cautious outlook in response to notably increased uncertainty about the global economic outlook of late as well as elevated political disquiet at home. As we noted previously, Irish business sentiment is heavily influenced by the shadow of the recent downturn and any renewed element of unease is likely to act as a restraining influence on business activity plans.
Jobs Growth Accelerates
Sustained increases in business levels prompted significant increases in employment in late 2014. The trend in hiring and layoffs is the strongest since summer 2007 and the second strongest in the survey’s eight year history. As diagram 3 shows, this stemmed from similar scale increases in the number of companies that increased their headcount and declines in the number with fewer employees. The strongest improvement in job conditions was in the construction sector largely as a result of a sharp drop in layoffs. The same factor drove an improvement in both manufacturing employment and food companies but increased hiring was a more important influence for companies in the business service area and particularly those focussed on Irish consumers.
Through the past two years our jobs market indicator has been boosted in almost equal proportions by increased hiring and reduced layoffs. Most commentary on employment and unemployment tends to focus on new job creation but the survey suggests the recent improvement in Irish employment trends comprises two distinct elements and a marked easing in the scale of job losses has been as important a factor in the turn as a step-up in job gains.
Costs Edge Higher
The survey suggests the broad cost environment faced by Irish business has changed little of late. As diagram 4 shows, there were small increases in both the numbers of firms reporting increases and reductions in their costs in the past three months. The broadest incidence of rising costs was reported by construction firms presumably reflecting a range of pressures as output attempts to respond to notably stronger demand. Similarly, notably more consumer focussed business cited rising costs than three months ago.
As ‘step-up’ factors boost domestic costs and the impact of a weaker exchange rate affects the prices of imported goods and services, it would appear that there are some counterweights to the broader disinflationary climate now becoming more evident globally. Our sense is that the prevailing international climate that emphasises downward pressure on costs will constrain any broadly based increase in domestic costs, particularly in the context of expectations of fairly modest increases in pay discussed in section 2 of this note.
Irish Business Still Positive But A Little More Cautious On Irish Economic Prospects
This quarter’s results suggest Irish businesses have seen strong gains in their activity levels of late and responded to this by stepping up employment. A slightly more cautious if still very positive view is taken of the next three months. In summary, this suggests a very positive assessment of their immediate operating environment. So, it might be expected that companies would also be fairly upbeat about the broader Irish economic climate. In general terms, that is the case but the answers shown in diagram 5 below also hint at a little more uncertainty about the outlook for the Irish economy of late.
It should be emphasised that with 60% of companies more confident about general economic prospects and only 7% less optimistic than three months ago, these are very strong responses. However, they are not quite as strong as the previous survey when as many as 71% of companies indicated increasing optimism on the economic outlook. Interestingly, there wasn’t any significant increase in the number who said they were less optimistic of late. So, there is little suggestion in these answers that companies think ‘macro’ conditions are deteriorating markedly.
However, a more uncertain global outlook and increased political turbulence at home may be making Irish business at least a little more cautious about the general economic environment for 2015. While the pull-back in more optimistic views was broadly based, responses from food and other manufacturing companies were notably more cautious than three months earlier. There was also a markedly more cautious response from construction companies that likely reflects uncertainty about the potential impact of proposed Central Bank changes to loan-to-value and loan-to-income ratios on activity in the property market.
Section 2: Supplementary Questions
Roughly Half Of Firms Adding To Capacity In 2015
Although we sense that companies might be a little more uncertain about the economic environment they face in the coming year, there is still a strong sense that the recovery in Irish business conditions will continue. As diagram 6 indicates, roughly half of the companies surveyed envisage growth in their headcount and/or physical capacity with one quarter expecting increases in both areas. In contrast, one in ten see declines in any of these areas, implying the focus of a modest but not negligible number of firms is on survival rather than recovery. So, the strong message from these responses is that 2015 is expected to be a year of broadly based but not universal expansion.
Most Firms See Themselves As Ahead Of The Irish Economic Cycle
To get some sense of how far along the recovery path companies felt they were, we also asked companies what stage of the business cycle their businesses were at present. Diagram 7 tends to confirm a picture of a recovery that is progressively building but remains relatively young. Just 14% of companies feel their business is now at the ‘mature upturn’ stage, a somewhat larger 25% regard the upturn in their business as ‘established while as many as 40% think their companies are in the early stages of an upturn. Not all Irish firms see themselves in an upswing at this point. A Significant 15% feel they are still in a bottoming out phase while another Irish Business Enters 2015 Confident But A Little More Cautious27 January 2015 9 The above information is believed to be reliabe, but is subject to change without prior notice. All our reports are available on http://www.kbc.ie/corporate/theeconomicsdesk/economicsbriefings 7% are still reporting a downturn in their businesses. Presumably, many of these firms are among the group that plans to ‘downsize’ in 2015 as noted in the previous paragraph.
A sectoral breakdown shows comparatively more firms with an international dimension to their business- such as food and other manufacturing, see themselves at a mature stage of recovery. However, a relatively large number of manufacturing firms also classified themselves as in a downturn, highlighting the very uneven nature of current conditions and the lack of the usual broadly based momentum that would be expected in the global economy in a more normal upswing. Not surprisingly, firms in sectors such as construction and consumer goods and services were more likely to describe their current phase as one of ‘early stage upturn’.
We asked firms a related question as where they felt the broader Irish economy is in the economic cycle at present. As diagram 7 indicates, there was a general sense that the ‘macro’ cycle is at a somewhat earlier stage than that of the average company- only 16% saw the economy in an established or mature stage of upturn whereas 38% saw their own firms at that stage.
This likely reflects the significant external dimension to Irish business that reduced its sensitivity to the substantial retarding impact of weak domestic spending in the past few years. Indeed, only 10% of firms saw their companies’ activity levels as extremely closely linked to conditions in the broader Irish economy while 24% indicated the two were not at all Irish Business Enters 2015 Confident But A Little More Cautious27 January 2015 10 The above information is believed to be reliabe, but is subject to change without prior notice. All our reports are available on http://www.kbc.ie/corporate/theeconomicsdesk/economicsbriefings linked. There was notably smaller variation in firms’ assessments of the cyclical position on the Irish economy than there was in relation to their own businesses but, at the margin, domestic focussed firms also tended to see the economy at a somewhat earlier stage in the cycle than their export oriented counterparts.
Lower Oil Prices Expected To Have Only A Limited Positive Effect
We asked firms what impact they expected the sharp drop in oil prices to have on their businesses in the year ahead. As diagram 8 indicates, only 2% envisage a very positive impact. While a further 42% see a modest positive effect. Roughly half of those surveyed see no significant impact while 5% expect some modest negative effect (our sense is that these would be in areas such as alternative energy or energy conservation but the survey responses don’t provide further detail in this regard).These responses suggest Irish business doesn’t see lower oil prices having a dramatic impact.
In part, this may reflect a significant drop in the energy intensity of Irish business in recent years, in many instances heightened by the sharp runup in energy costs in the past fifteen years. These responses also reflect the substantial tax wedge that limits the impact of lower global energy prices on retail costs. Finally, these responses seem to mirror financial market sentiment that in the current climate, savings in energy bills are most unlikely to prompt substantial increases in the spending plans of businesses or consumers.
In this respect, companies may be responding on the basis of little evidence of a marked impact to this point. It is also possible these responses suggest companies are more focussed on falling oil prices as a symptom of global economic difficulties than as a potential cause of stronger spending power.
Pay Increases To Remain Modest
We also asked companies how they envisaged average pay rates in their businesses would change in 2015. Some 68% of companies indicated that average pay would increase but as diagram 9 indicates the majority of these envisage pay increasing by less than 2%. Very few (2%) envisage pay rates rising by more than 5%. Interestingly, responses in this category were concentrated in domestic focussed areas such as construction. In contrast, although responses indicated pay increases were more likely in manufacturing than across the survey as a whole, no firms in this area envisaged average pay increases of more than 5%.
These results may point to some specific pressure points as companies attempt to ramp up output in response to improved demand of late. Of those firms envisaging pay increases for their staff, some 47 % indicated that the increase would be similar to last year. Slightly more companies (30%) said increases in 2015 would be smaller than in 2014 than the number planning larger increases than last year (23%). Although this pattern didn’t vary much across sectors, food companies are more likely to pay smaller increases this year while construction companies are more likely to pay larger increases. This suggests that demand and price conditions are key elements in pay increase variations.
More generally, these data don’t indicate any broadly based acceleration in wage growth. This may hint that the uneven and still uncertain nature of the economic upturn, together with the current disinflationary environment, are significantly constraining wage growth. These results may appear to contradict some other recent surveys that seem to suggest a prospect of notably larger pay increases. Our sense is that there could be some scarcity related pressures in a small number of roles but our survey suggests that more broadly based upward pressures on wages remain distinctly absent.