Irish companies report slightly softer slower growth as Brexit risks persist
20 November 2017
Companies report slight easing in pace of growth in past three months
Hiring remains strong as confidence in economic outlook improves.
Vast majority of firms don’t see ‘overheating’ in their operating environment at present.
Pay increase of 2% the norm for 2018; very few firms seeing no rise or increases above 5%.
Expected Brexit impact varies widely but predominantly negative and slightly greater than first envisaged; adverse impact expected by one in two firms, positive impact by one in six.
Roughly half of Irish companies not focussed on Brexit at present, implying a risk of some unpleasant surprises.
Section I: Irish business sentiment suggests solid but slightly slower growth of late
Irish companies continued to post solid gains in business volumes in recent months but the pace of growth in activity appears to have eased somewhat
of late. The KBC Bank/Chartered Accountants Ireland business sentiment index edged lower to 116.6 from 118 in the previous quarter
but, as diagram 1 below indicates, the autumn 2017 business survey reading remains consistent with a relatively robust rate of growth in Irish GDP.
The slight easing in business sentiment was largely driven by modestly slower growth in companies’ own activity levels in the past three months
. As diagram 2 illustrates, it remains the case that a majority of firms are reporting increased business volumes but, compared to the previous quarter, there was a small reduction in the proportion of companies reporting higher activity and a similarly small rise in the number reporting lower output levels.
change was most pronounced among construction firms and hints at some easing in the pace of growth in building
activity in recent quarters and the possibility that some firms in this area may already be experiencing capacity strains. However, several other elements of the survey suggest such problems are the exception rather than the rule.
There were also notably smaller corrections in areas such as food and other manufacturing that might be due to adverse currency movements. However
, it should be noted that positive responses from companies in these areas remain a multiple of negative responses. So, these results continue to point to the persistence of solid growth conditions in these sectors punctuated by material difficulties affecting small but not insignificant numbers of firms.
to most other areas, firms focussed on Irish consumers reported some strengthening of demand
conditions of late. This result might be explained by the fact that for most businesses focussed on the Irish consumer the current recovery is still at a relatively early stage of the cycle.
The slightly softer pace of growth reported by Irish businesses in the past three months is expected to persist in the final months of 2017
. As diagram 3 indicates, most companies see solid growth continuing and the number of firms anticipating higher output is identical to the previous quarter but there was a small increase in the share of firms that expect their activity levels to weaken. It should be emphasised, however, that all sectors saw notably more firms predicting higher output than expect a decline.
Reflecting their experience in the past three months, the scaling back of growth expectations was most notable in the case of firms in construction and manufacturing while companies in the business service area and those focussed on consumers reported an expectation of more broadly based growth in the next three months.
Healthy activity levels underpinning hiring
While there was a slight easing in the pace and spread of growth of late, it remains the case that Irish business conditions are very healthy at present. This has translated into continuing strength in payroll trends in Irish companies
. As diagram 4 indicates, new hiring picked up slightly in the past three months but there was an offsetting increase in the number of firms reporting a drop in their headcount. Again, we would emphasise that these findings caution against a ‘one story tells all’ description of Irish business conditions.
It is worthwhile repeating that all sectors continue to report notably larger number of firms expending their payroll than those seeing lower employment levels
. The improvement in the Irish jobs market is now broadly based with firms in manufacturing, business services and consumer goods and services all reporting a pick-up in the pace of payroll gains in the past three months.
In contrast, businesses in construction and food reported a somewhat slower pace of headcount increase than in the previous survey. In both of these areas firms also reported increased difficulties in finding suitably qualified employees of late although their experiences in this respect were far from unique. Indeed, the autumn survey suggests there was a broadly based step-up in hiring difficulties but this doesn’t appear to have prevented firms in many sectors maintaining a relatively strong recent rate of hiring.
While the autumn survey points to a modest increase in the difficulties faced by firms in hiring new employees this hasn’t translated into an increase in cost pressures
. In fact, the latest three months saw a drop in the range of companies reporting higher costs to the lowest level in five quarters. Diagram 5 still suggests Irish firms are facing increasing costs but the extent of these pressures has eased of late.
Our sense is that this might reflect an adjustment to the impact of Sterling weakness both because of its direct effect through the cost of goods and services imported from the UK and indirectly because of it forces a correction in domestic costs in order to minimise competitiveness losses. More generally, this result suggests that the sustained strength in domestic economic activity is not generating any notable worsening in the trajectory of costs that would signal widespread ‘overheating’ pressures at present.
Confidence gradually rebuilding after Brexit shock
The business sentiment survey focusses primarily on companies’ own circumstances but it is also important to get a sense of firms’ assessment of their broader operating environment. As a result, we include a regular question asking for opinions on the broader Irish economy. The results shown in diagram 6 below suggest business confidence remains on a solidly positive trajectory as concerns about Irish economic prospects that emerged dramatically in the wake of the UK decision to leave the EU continue to ease.
A comparison with responses to this question in surveys taken before the Brexit referendum seems to suggest that Irish business still sees a material adverse impact from the UK’s prospective departure from the EU but it appears the resilience of the Irish economy through the past year implies companies are less apprehensive about the likely scale and speed of Brexit effects.
In light of responses given to some additional questions in the current survey, it might be argued that this result could suggest a measure of ‘Brexit fatigue’ or complacency on the part of Irish business may have set in regarding this important issue.
Section II: Supplementary questions
Brexit impact now seen slightly more negative
The autumn business sentiment survey asked a number of questions to assess companies’ attitudes and actions in relation to the UK’s exit from the EU. We began by asking the direction and scale of impact they envisaged Brexit would have on their business. The responses shown in diagram 7 below suggest Irish companies anticipate a significantly negative outcome overall although there are notable differences the effect of Brexit is seen having on individual businesses;
one in two firms expect an adverse impact compared to one in six that expect a boost to their business. Only one in five firms expects no significant impact from Brexit on its activities.
Perhaps surprisingly, a broadly similar proportion of companies across all major sectors envisage their activities being harmed by Brexit
. While manufacturing firms tended to report a greater incidence of expected problems and consumer focussed firms a lesser incidence, variations between sectoral responses were relatively modest. One exception was a relatively large number of firms within the food sector
that indicated they were ‘unclear’ about the likely implications
, a response that may reflect the varied channels through which Brexit could affect these businesses.
An equally significant implication of diagram 7 is the extent to which a non-negligible number of firms anticipate Brexit will have a positive impact on their activity levels
. Again, a notable aspect is the extent to which positive effects are seen across all sectors although the lower incidence in manufacturing and greater incidence in property related businesses is along expected lines. This cautions against ‘macro’ or ‘one size fits all’ analyses of Brexit related prospects for Irish business.
The survey went on to ask whether companies’ assessments of Brexit impacts had altered much in the sixteen months since the UK referendum vote. The answers given in diagram 8 below suggest that Irish business has become somewhat more pessimistic in regard to Brexit in spite of the apparent resilience of the Irish economy to the early currency related fallout
Roughly one in three firms is more negative now than in the immediate aftermath of the UK vote
while roughly one in five now takes a more positive view. Manufacturing and construction firms were more likely to have downgraded their assessments of late whereas upgraded views were more common among property and business services firms.
We also asked firms when they expected the peak impact of Brexit on their business would be felt. As diagram 9 shows, answers vary widely with the most common responses pointing towards the beginning of a transition period or the exit date itself. A not insignificant number, roughly one in nine, indicated that they felt the peak impact was already being felt with above average numbers of food and construction companies giving this response. As was the case with responses shown in diagram 7, roughly one in five firms does not expect any significant impact on its activities from Brexit.
A related question asked when companies now think the UK will leave the EU. One in four companies expects or is now working on the assumption that this will occur as soon as March 2019 – just over sixteen months away, while a broadly similar number cited a March 2021 departure date. Of the remainder, the majority are unsure with less than one in ten firms indicating an expectation that the UK would leave the EU later than 2022.
About half of the firms surveyed indicated an expectation that Brexit would have a negative impact on their activities and a similar number judged that the peak effect would be felt by March 2019 even if a ‘transition’ deal is agreed
. In this regard, these results strike a broadly similar chord to those in the previous survey that indicated roughly four in five companies had a good sense of what Brexit would mean for their future operations. In these circumstances, it might have been expected that the focus on Brexit would be increasing.
However, responses to another question in the autumn survey suggest this is not the case and may also hint at shortcomings in the level of preparedness in some companies.
As diagram 10 indicates, there is little indication of any broadly based pick-up in Brexit related activities of late.
Only minimal numbers reported any change in their Brexit focus of late with a very small group even scaling back their preparations. While a substantial one in three companies say the degree of emphasis on this issue has remained constant, it is surprising that as many as half of Irish businesses have no significant emphasis on or preparations for Brexit at this point in time
It is likely to be the case that within the 50% of Irish companies not preparing for the UK’s exit from the EU are the roughly 20% of firms that don’t expect any significant impact and a further 10% who are unsure. It could also reflect responses from companies that see Brexit or its impact on their activities remaining a somewhat distant prospect. However, it implies that roughly 30% of Irish companies that expect some material impact (and the 10% who are unsure) are not focussed on the issue of Brexit at present. The autumn survey suggested this was more commonplace among smaller size companies and those primarily focussed on local or regional markets.
The new normal for the Irish economy?
A key contribution of the business sentiment survey is that it provides a sense of how broadly based changes in business conditions are both across and within sectors. In this sense it complements summary measures provided by official statistics where the aggregation is often heavily influenced by a small number of large scale companies. While most official data point to a very strong pace of economic growth at present, the survey provides a means of examining whether positive momentum is being seen widely across the spectrum of Irish businesses
. Diagram 11 provides an indication of the subjective assessment by Irish firms of their current position and trajectory in their own ‘business cycles’.
As diagram 11 indicates, the vast majority of firms characterise their operating conditions as ‘normal’ at present.
This verdict could owe something to a needed ability to adapt to changing circumstances if firms are to survive. It may also reflect how broad the definition of ‘normal’ may be after the boom and bust of the past decade. However, even acknowledging such caveats, these responses should give some perspective on the strength and spread of growth in Irish business in autumn 2017 that is often missing from more conventional summary measures of Irish economic activity. While such ‘distributional’ considerations are normally reserved for analyses of personal incomes, they are also an important influence on the health of corporate Ireland as a whole.
Only 7% of companies describe their activity levels as above normal
at present with very similar results from all sectors in this respect. Just 9% of firms saw their current activity as below normal. Again, there were no dramatic differences in sectoral responses but there were somewhat higher incidences of ‘below normal’ responses from firms focused on consumers and, particularly, from construction firms (we suspect those results reflects some remaining regional variations in the reach of the recovery).
Within the majority of firms describing current operating levels as normal, very few judged momentum in activity to be either strongly positive or weak. Instead, most responses appear consistent with an Irish economy that is moving ahead at a solid but ‘safe’ speed
. Hence, while the survey highlights clear variations between individual companies’ current circumstances, there is also an element of commonality that suggests a healthy rather than white hot upswing is now being seen in business conditions.
Pay increases expected to be broadly based but modest in 2018
We also asked companies what scale of average pay increase they envisaged making in 2018. The responses are tabulated in diagram 12 below. Increases of less than 2% are most common followed closely by increases between 2 and 3%, with two thirds of firms falling into this range
. The distribution around these norms is fairly even with 13% of companies not expecting any increase in average pay and a marginally larger number (15%) anticipating increases between 3 and 5%.
Only a very small fraction of firms see average pay increasing by more than 5% in 2018, with most of these concentrated in business services and property sectors. However, construction firms also tended to figure prominently in those companies expecting no increase in pay next year, an outcome that emphasises the extent of variations in conditions within this sector. Aggregating the responses to this question
across all sectors, the survey suggests the average pay increase envisaged in Irish companies in 2018 is 2%.
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