Irish business activity has strengthened furthe

• Irish business activity strengthens in second quarter of 2013.

• Survey suggests business conditions may be somewhat better than recent GDP data imply.

• Business hiring steps up with layoffs notably lower.

• Improvement in business activity expected to build gradually in coming months.

• Labour market turn becoming evident—25% of firms feel outward migration affecting their ability to fill vacancies.

• Companies see markets growing somewhat faster than twelve months ago and are less focussed on further cost reductions.

• Credit concerns not negligible but lower than in Summer 2012.

Section I: Irish Business Conditions In Mid-2013

Irish business activity has strengthened further in the past three months and this further improvement has prompted an increased rate of hiring as well as fewer layoffs. Healthier job market conditions should facilitate an emerging improvement in conditions facing domestic focussed companies while exporters also report some improvement in demand for their output of late.

Activity Continuing To Improve

Irish business activity has shown a further improvement through the second quarter of 2013. The KBC Bank Ireland/Chartered Accountants Ireland Business Sentiment Survey showed a positive activity balance for a seventh successive quarter. The gain since the first quarter was modest, suggesting we are not seeing a dramatic change in business conditions. However, activity has moved onto a slightly stronger trajectory than reported in the previous two quarters. As a result, the Summer 2013 numbers represent the strongest reading in almost six years and, consequently, point towards a progressive pick-up in activity. Taken together with results for the two previous quarters, this survey suggests Irish business activity has moved on to a somewhat clearer recovery path of late.




The Summer 2013 Business Sentiment results are notably less downbeat than might be expected in the light of last week’s disappointing official GDP data for the first quarter of 2013. As diagram 1 above indicates, the business sentiment survey closely tracked the sharp downturn in activity reported in official data for 2008 and 2009 as well as the uneven stabilisation at relatively weak levels seen through 2010 and 2011. However, the Business sentiment survey has been on a notably more positive – if still fairly modest – upward trend through 2012 and during the first two quarters of 2013.While the survey data paint a notably different picture to that suggested by the GDP data, they are broadly in line with the more encouraging evidence coming from official employment data and other recent indicators that also point to a moderate improvement in Irish economic conditions through 2012 and into early 2013.

It is important to remember that the Business sentiment survey and official GDP data look at Irish Economic conditions in a different way. For example, the fairly basic weighting method used in the sentiment survey tends to understate the influence of the pharmaceutical sector relative to its importance in official trade and GDP data. In this way, the sentiment survey attempts to provide a broad snapshot of emerging conditions across the business spectrum at a point in time rather than focus on a summary aggregate measure of economic activity. Similarly, the influences of special factors influencing consumer spending such as TV purchases in Q3 and Q4 2012 and the introduction of ‘131’ and ‘132’ motor registration on car sales in Q1 2013 would be expected to have much less of an impact on the sentiment survey results than they had on official national accounts data. Finally, it should be remembered that the official GDP estimate is an average figure derived from separate measurements of the output and expenditure sides of Ireland’s national accounts. Measured from the output side alone-which should be more comparable with the survey results—the first quarter GDP data would have shown a small increase. For these various reasons, it could be argued that the sentiment survey provides a better ‘broad brush’ picture of the underlying business climate in Ireland in the first half of 2013 than that offered by the official GDP data. Significantly, the survey implies activity has continued to move modestly forward rather than slipping back into the first half of 2013.

Diagram 2 shows that some 42% of those surveyed for the Summer 2013 survey indicated that their business volumes had increased in the past three months while 19% reported weaker activity. A balance of this scale is clearly pointing towards stronger conditions but it also cautions that the current Irish business environment isn’t one of runaway growth. When account is taken of the difficult and uncertain international backdrop as well as ongoing fiscal adjustments at home, the significantly positive activity balance reported for the past three months may be regarded as a very encouraging performance. The combination of a small increase in companies reporting increased activity and a small decrease in companies indicating weaker activity implies that while conditions continue to vary widely across sectors and companies, the last three months have seen a fairly broadly based improvement. In this regard, the fall in the number of companies reporting a drop in activity to the lowest proportion of survey respondents since the summer of 2007 is a particularly positive development.



The improvement in activity in the past three months was broadly based with all sectors reporting a positive activity balance. The business services area reported broadly based output gains as it has done for some time and posted the second strongest activity balance in the current survey. After a relatively difficult start to 2013, manufacturing firms reported a much stronger positively activity balance in the past three months with positive replies increasing by 10 percentage points and negative responses declining by the a similar amount. There was also a material improvement in conditions reported by firms in the construction industry with nearly half of those surveyed reporting increased activity against one in five that indicated business volumes had fallen. Companies focussed on Irish consumers also saw a positive activity balance which increased from 10 percentage points in the spring survey to 19 percentage points in this report. So, the summer survey seems to confirm clear signs of a turnaround in domestic economic conditions that had been signalled in the previous couple of surveys.

Activity Seen Improving Further Through Summer

As diagram 3 indicates, it is widely expect that business conditions will strengthen further in the next three months. Here again, a comparison with results from the previous survey points to a fairly modest uptick in activity but one that continues a generally strengthening sequence evident for the past three quarters. With an unchanged 12 per cent of respondents continuing to anticipate a drop in their output, the improvement seen this quarter came from an increase in the number of firms expecting their business volumes to increase. Positive expectations for output are now running at levels last seen in late 2007. These numbers imply that a period of painful adjustment in the business environment faced by Irish companies is coming to an end. They also point toward the continuation of a clear if modest upturn in activity through the second half of 2013.



The most significant expectations of an improvement in coming months came from property sector firms other than those engaged in construction. This has consistently been among the weakest areas of the survey in recent years. The summer survey results suggest the anticipation of a healthier level of property transactions in the second half of the year. While construction firms also expect an increase in activity, they envisage a relatively modest upswing. Firms in the business services area remain comparatively upbeat—with positive responses outnumbering negatives by nearly five to one. There were broadly similar solid positive outlooks reported by firms in manufacturing, food and consumer related activities. Again, these responses point towards the possibility of a more broadly based expansion in output in the months ahead.

Companies More Positive About Payrolls

Probably the positive element of the Summer 2013 Business Sentiment Survey is a notable improvement in employment trends of late. As diagram 4 shows, there was a modest increase in the number of companies indicating they had increased their payrolls in the past three months while there was quite a significant drop in the proportion of companies that reduced their headcount of late. The net positive employment balance of +13 is comfortably the strongest outturn for this element of the survey in the past six years. In common with the trend in official employment data, this measure has moved into positive territory through the past year or so but the net gains in jobs have been relatively limited. We previously attributed this to an understandable measure of caution on the part of prospective employers given the trauma of the downturn. In contrast to a ‘normal’ recovery, companies appear to be hiring based on a backward-looking assessment of their needs rather than forward-looking plans.



The Summer 2013 survey results suggest that at the margin there has been some easing in the scale of layoffs relative to decline in activity and a corresponding improvement in the pace of hiring relative to increased business volumes. In other words, the employment intensity of activity appears to have improved of late. This likely reflects compositional effects such as somewhat healthier reports from companies focussed on consumers and construction. More generally, it may also hint at companies having reached particularly ‘lean’ headcounts that may need to adjust significantly as their output increases. Seen in this way, these responses may signal the consequences of an extremely cautious approach to hiring in recent quarters rather than any expectations of a dramatic pick-up in activity in coming quarters. Indeed, in view of the caution and the general expectation of a reasonably modest paced increase in business volumes, it seems unlikely that hiring will experience a surge in coming months.

With the exception of the Public Sector, where employment fell, and the food sector, where it stabilised, most sectors saw net hiring in the past three months. As has been the case for several quarters, the strongest jobs balance reported was in business services, where there was a further modest increase in net jobs and a similar scale decline in layoffs. Manufacturing reported notably fewer layoffs. So, an unchanged rate of new hiring created compared to three months ago implied a significant improvement in the ‘net’ jobs position. There was a notable turnaround in consumer focussed companies from job shedding in the spring quarter to a solid rate of net job gains in the summer survey. Although respondents are asked to exclude seasonal influences, it is possible that the swing in this sector owes something to the impact of post-Christmas layoffs and pre-Summer hiring but it may also reflect a slightly better trend in retail sales of late.

Less Downward Pressure On Costs

The number of firms reporting increased costs has held broadly steady for the past couple of years and did so again in the Summer 2013 survey. Alongside this there have been some significant fluctuations in the number of firms reporting lower costs through this period. In keeping with this ‘choppy’ trend, the Summer 2013 survey shows a decline in the number of firms experiencing lower costs from the relatively large number reported in the Spring survey.



The change in the cost climate compared to three months ago was particularly marked in relation to responses from consumer-focussed firms. There was a negative cost balance—more firms reporting declines than increases, in the previous report. In the Summer survey, however firms reporting price increases outnumbered those reporting declines by about three to one in this area. Again, this change may owe something to seasonal influences. It doesn’t seem entirely consistent with the current very low official inflation rate but it may hint at some moderate upward pressure on the inflation rate in coming months. Elsewhere, costs remained on significant upward trajectories in areas such as food and other manufacturing but price trends were more mixed in other areas. In broad terms, the summer survey doesn’t signal any dramatic change in cost trends but it appears consistent with modestly rising prices for Irish business and consumers in the months ahead.

Business Confidence In Irish Economy Improves Slightly

Alongside questions about respondents own companies, the survey also asks a broader question about their assessment of the general economic climate in Ireland. As diagram 6 indicates, this has tended to prompt relatively downbeat responses compared to those given in relation to the immediate operating environment faced by respondents’ own businesses. This likely reflects a greater element of fear in relation to developments outside companies’ own immediate control. That said, the Spring 2013 survey saw a marked improvement in sentiment towards the Irish economy as whole. We surmised that this might reflect some greater confidence that ‘green shoots’ of recovery were appearing and that significant encouragement was taken from the deal reached on the promissory notes.



Results for Summer 2013 suggest business confidence has continued to build but the pace of improvement has eased somewhat in the past three months. This probably reflects the challenging international environment, a measure of uncertainty about the likely content and consequences of Budget 2014 and the absence of major positive ‘surprises’ of late. As such, these results might be regarded as reasonably encouraging although they also hint at a degree of caution in regard to Ireland’s current economic circumstances.

Section II: Additional Questions

As usual we asked a number of supplementary questions on a range of issues relatively to the current business environment.

Is Migration Having An Impact On Hiring?

We asked companies whether the current pattern of migration flows was affecting their hiring capability. As diagram 7 shows, roughly 40% of companies don’t see the issue as relevant to them at present. A further 31% of companies said migration was not having any material impact on their ability to fill vacancies. This response is not surprising in the Irish jobs market where there has been a sharp rise in unemployment over the past couple of years and where a significant excess supply of prospective employees should be available. However, other responses to this question suggested some companies may be in rather different circumstances. A sizeable 26% of businesses indicated that migration was making it harder to fill vacancies in their company. This suggests that for a significant number of companies recent outward flows have made it more difficult to fill vacancies at present. A comparatively minor 3% suggested migration flows made it easier to fill vacancies. These results suggest that the capacity to match existing vacancies from current or recent inward migration flows is relatively limited 



The sectoral breakdown of these responses is also somewhat surprising. It might be expected that 27% of firms in the business services area cited difficulties in filling vacancies because of migration. However, a broadly similar proportion of firms in the construction sector and a somewhat larger proportion of companies in the food sector expressed the same concern. Across other areas results were relatively close to the survey average, suggesting this issue is relatively broadly based.

It is not easy to fully explain this finding. We think it may reflect the cumulative impact of outward migration flows on Irish labour market that is now at a turning point. In these circumstances, for example, firms may find that many more highly skilled construction workers have left the country. This is not to suggest any threatening shortage of certain labour skills is emerging at present. However, it does suggest that the ‘push’ factor towards emigration may be diminishing for workers with certain skill sets. In turn, this might suggest circumstances in which net outward migration from the Irish economy is now close to or possibly even past a peak. The constraints identified in these responses might also point towards the prospect of some element of reemployment of currently jobless workers in the coming year.

A Year Further On—How Different Is The Business Environment?

For the Summer 2013 survey we repeated a couple of questions asked a year ago to assess whether the demand for the output of Irish companies had changed markedly in the past twelve months. As diagram 8 illustrates, roughly one third of respondents don’t see any marked improvement, a largely unchanged result. However, there appears to be some increase (from 18% to 25% of respondents) in the share of companies expecting some natural growth in the markets in which they operate. This has coincided with some reduced focus on labour costs as a driver of stronger activity. Otherwise expectations for the business environment for the coming year haven’t changed markedly in the past twelve months. Again, these results paint a consistent picture with other elements of the survey that suggest a gradual improvement is building but companies don’t see any dramatic change in their operating environment.



We also asked what factors might restrain demand for the output of Irish businesses in the next twelve months (see diagram 9 below). Perhaps surprisingly, weak market demand is cited by slightly more companies now than a year ago. We think this reflects the manner in which the question is structured rather than a weakening demand climate. This is because answers given reflect the relative importance of different factors and the total must sum to 100%. This means that as specific concerns ease, more firms are likely to highlight weak demand as a constraint on their activity. In the past year there has been a significant reduction in the perceived importance of credit conditions and also in relation to the level of uncertainty in the economic outlook (in the summer of 2012 the continued existence of EMU was the subject of intense debate).



It should be noted that this question also produces some insight into the importance of credit constraints to the Irish business environment in a rather roundabout fashion. This is because we asked companies to assess the degree to which they think that credit constraints feature as a constraint on the demand for their output rather than the more conventional focus on the impact of access to credit on firms’ productive capacity. The answers provided by the two approaches seem broadly consistent. Credit concerns are not negligible but they fall some way behind broader economic concerns and, importantly, they also seem to have diminished notably as a threat to the outlook facing Irish businesses in the past twelve months.