Stable Irish Business Sentiment Reading Reflects Contrasting Influences
01 November 2016
Irish business sentiment stabilises in 3rd quarter after sharp 2nd quarter fall
Some easing in the pace of activity growth and new hiring may reflect Sterling impact as well as a more cautious Irish consumer
Broader than expected Brexit effects may be suggested by slowdown at a range of consumer-focussed companies
Businesses cautious but pessimism about Irish economy eases slightly as immediate Brexit impact less traumatic than feared
Surprising cost uptick may reflect firmer energy and payroll costs. Could pricing policies be throwing up unexpected results?
Brexit and uncertain global outlook seen as key business concerns for 2017
Section I: Irish Business Conditions In October 2016
After a sharp pull-back in Irish business confidence in the summer survey
that significantly reflected the influence of the UK vote to leave the EU, the KBC Bank/Chartered Accountants Ireland business sentiment index was effectively unchanged in the most recent three month period
to late October as indicated by diagrams 1 and 2 below.
The October reading reflects notable but largely offsetting movements in various elements of the business sentiment survey. As such, the details of the survey hint at notable changes in the Irish business climate of late.
A clear if contained slowdown in the pace of increase in activity and employment was reported
by companies responding to the survey, particularly, by those selling consumer goods and services
. We interpret this as highlighting the pervasive nature
across Irish economic sectors of the difficulties posed by Brexit.
Acting in the opposite direction was a partial reversal of the sharp drop in business confidence
in the broader Irish economic outlook that
had followed the UK referendum
vote to leave the EU. While companies remain cautious, the absence of a more immediate and more widely seen deterioration in Irish economic conditions may have eased some more extreme fears.
It might be suggested that the previous reading of the business sentiment survey captured the knee-jerk reaction of companies to the UK ‘Brexit’ vote in that it emphasised emerging concerns but didn’t report any instant impact on activity levels. The October business sentiment reading suggests an element of correction reflecting work in progress in both of these areas. Firms now judge the ‘macro’ consequences of the UK vote in a slightly less negative light. However, they have begun to report a modest and uneven but still clear-cut impact on their own activity levels and hiring decisions.
As diagram 3 indicates, the past three months have seen a small but not insignificant pull-back in the number of firms that increased their output and a slight rise in the number of firms reporting lower activity levels
. This diagram also suggests that an easing in the pace of output growth has been underway for some time and, as such can’t be attributed entirely to a reaction to the Brexit vote although it may owe something to the weakness in Sterling that preceded that vote and has become more pronounced of late.
The sectoral breakdown of responses to the question on output trends over the past three months continues to show notably more firms reported increases in their business volumes than indicated they had cut output. So, the October survey should be seen as signalling still heathy levels of activity across the spectrum of Irish business.
Perhaps, surprisingly, the most notable easing in business growth came in the area of consumer goods and services
which reported quite a marked stepdown in growth from particularly buoyant responses given to the previous survey. This result seems broadly consistent with a more cautious tone to recent consumer sentiment readings as well as somewhat softer retail sales and spending tax data of late.
The scale of pull-back in this area may also owe something to an impact from Sterling weakness in as much as this heading may include firms in the broad tourism sector as well those servicing UK consumers through various product offerings. Of course, firms in industries such as tourism may have less inclination or capacity to hedge their earnings from abroad and, consequently, may see an earlier impact from the recent drop in Sterling than other affected industries. We think this result may hint at a broader fallout from Brexit than is sometimes envisaged reflecting the ‘domestic’ nature of Ireland’s economic links with the UK.
Possibly of equal surprise, there was little evidence of any marked weakening of growth momentum in areas such as food or manufacturing and only a slight softening in business services
. A clearer easing in the pace of growth- albeit to a still buoyant pace reported by construction firms may partly owe something to competiveness vis-à-vis competitors from Northern Ireland but this is as likely to be influenced by uncertainty about Budget property measures as well as capacity constraints in this area.
The softer growth trajectory of the past three months reported in the October business survey was broadly consistent with responses given to the forward looking activity question in the previous survey. This time around, as diagram 4 above illustrates, expectations for activity in the next three months envisage a broadly similar pace of growth to that seen in the past three months.
It remains the case that for all the main sectors, notably more firms expect stronger activity levels than envisage weaker output in the coming quarter
. Once again, there is some divergence of expectations across sectors and, again, it may be something of a surprise that businesses focussed on consumer goods and services
is the area where responses are again notably less optimistic
than in the previous survey. Encouragingly, firms in food and manufacturing report continuing expectations of broadly based increases in activity.
A somewhat less buoyant activity picture has prompted a slight pull-back in hiring intentions
even if the employment picture shown in diagram 5 below remains a very positive one. The diagram indicates that there was no pick-up in the number of firms reporting a drop in their payrolls. Instead, there has been a reasonably contained drop in the range of firms reporting an increase in headcount in the past three months.
All sectors continued to report notably more firms expanded rather than contracted their workforce in the past three months
. Differences in the tone of activity readings across sectors were mirrored in responses to the question on employment with consumer focussed firms seeing the most notable scaling back of new hiring
. Other sectors continued to report fairly broadly based increases in hiring in recent months.
A surprising aspect of the October business sentiment survey was the responses given to the question regarding the trend in companies’ costs. The answers to this question, shown in diagram 6, suggest there has been a marked and broadly pick-up in costs of late
. In circumstances where some sterling related disinflation might have been anticipated, this is a very unexpected result.
In an effort to shed some light on this reported rise in business costs, we looked at various components of official data on Irish producer and wholesale price data. Our examination of those data doesn’t suggest any clear evidence of the emergence broadly based price pressures of late. As diagram 7 indicates, there has been a marked increase in the cost of oil products since the spring and there is also some indication of a slightly firmer tone to prices in other areas compared to the early months of the year.
Official data on producer prices which reflect the prices of output
rather than inputs
don’t point towards any marked build-up of inflationary pressures. Separate to this, it could be that there has been some uptick in labour costs of late
reflecting the influence of persistently strong hiring trends in recent years.
It might also be that some companies particular pricing policies
such as that attributed to Unilever are causing some counter intuitive cost movements
in instances where firms have sufficient dominance in particular niches that they can exercise significant pricing power. However, the broadly based nature of the rise in costs reported in this survey would seem to argue against this being the key influence unless such supply chain issues are widespread across Irish business.
It could be that firms used to a significant disinflationary impulse in recent years are altogether more conscious of the impact of the recent pick-up in oil prices or, possibly, greater wage cost pressures. The moderation in the pace of output growth of late signalled in this survey might also intensify the focus on cost developments. We would be reluctant to infer that a generalised step-up in inflation is underway at this point but feel this aspect warrants an increased focus in future surveys.
The general tone of responses in the October survey to questions related to companies’ immediate operating environment was positive but somewhat more cautious than had been the case in previous surveys
. As noted above, some moderation in output had been anticipated in the previous survey which was carried out in July in the immediate aftermath of the UK’s referendum vote to leave the EU.
The most notable if entirely understandable feature of the July sentiment survey was a sharp downgrading of companies’ optimism levels in relation to the broader Irish economy. As diagram 8 below indicates, there has been a marginal improvement in this element of the October survey. Tellingly, there has been a further slight slippage in the proportion of firms signalling a more positive view of economic Irish prospects than three months ago. However, there was also a modest but somewhat larger drop in the share of firms expressing a more negative view. A revision along these lines seems broadly consistent with the absence of any deterioration
in economic conditions in the UK or elsewhere of late on the apocalyptic scale envisaged in some commentary
in the immediate aftermath of the Brexit vote.
The October survey responses to this question suggest Irish based companies are still inclined towards an increasingly cautious view of a very uncertain ‘macro’ environment but they are a little less pessimistic than three months ago in relation to the Irish economy’s capacity to withstand upcoming challenges.
The sectoral breakdown of responses to this question reveals marked variations in thinking on Irish economic prospects. Firms supplying consumer goods and services were far and away the most pessimistic in their assessments, an outcome that is presumably influenced by their own experiences described above. Construction companies were also notably negative, which may reflect particular difficulties they face in ramping up their output to meet buoyant demand.
Not surprisingly, given well publicised difficulties in the sector of late, food companies were also more negative in their verdicts on Irish economic prospects than in July. However, companies in the manufacturing area and in business services were a little less pessimistic than three months ago.
Section II: Supplementary Questions
As usual, we asked companies a number of additional questions on topical issues. We began by asking what external influences they believed would have the most notable impact on their busines
s in the year ahead. The responses shown in diagram 9 reveal a wide range of factors of importance to Irish business prospects but two issues overshadow all others; Brexit and broader global economic trends
Brexit was cited as the most important issue for the coming year by firms in most sectors of the economy, a result that emphasises its reach across the Irish economy and the importance of not focussing narrowly on particular business areas when considering the appropriate policy response
. Both responses to this question and the softer tone to responses given by firms focussed on consumers suggests to us that Brexit must be regarded as a domestic
rather than a foreign trade
issue for the Irish economy.
Two sectors prioritised other issues, with manufacturing companies more focussed on global economic trends and property firms more concerned about access to credit
. The only other sector where significant numbers of companies mentioned access to credit was construction but firms in that area also reported greater levels of concern about Brexit and global economic trends.
The open nature of the Irish economy and the impact external developments have on its fortunes is underlined by the strong number of responses across all sectors
that highlighted the importance of global trends to companies’ prospects for the coming year.
While this is not surprising for sectors such as business services and food companies, it may be less intuitively obvious that business in construction or consumer goods and services also recognise the importance of developments external to the Irish economy to their prospects.
The responses shown in diagram 9 suggest Budget 2017 is not widely seen as the key factor likely to influence the outlook for Irish based companies in the year ahead
. In part, this is because of the particular significance of developments such as Brexit but it likely also reflects the altogether less problematic position of Ireland’s public finances now
than a few years ago when large and painful austerity measures had significant effects on the operating conditions of the majority of businesses.
In contrast to the current results, the October 2012 business sentiment survey found that Budget 2013 was seen as the most important influence on business prospects for the following year, cited by 30%
of respondents as likely to be the major influence on their companies’ performances. That only 4% of companies regard it key to their prospects in 2017 highlights the remarkable transition to duller and less desperate Budgets of late
which should also be seen as marking a substantial improvement in the environment facing most Irish companies.
To further assess the role of Budget 2017 in mapping out the business environment for 2017 –-as opposed to its influence relative to other factors--we further asked companies to assess the importance of Budget measures to the outlook for their activity levels. The results shown in diagram 10 below suggest only a minor role, with just 20% of firms saying Budget 2017 measures would be very or quite important. This figure was boosted significantly by notably stronger Budget ratings by firms engaged in construction and other property activities.
Again, some sense of how significant the transition to ‘quieter’ Budgets has been in recent years is provided by a comparison of these results to those from similar questions asked in relation to the previous three Budgets
. As the Irish economy exited the EU/IMF adjustment programme at the end of 2013 and corporate Ireland looked for confirmation that the worst might be over, the direction signalled as well as the detail of Budget 2014 was seen as central to the economic outlook and 71% of respondents to the October 2013 expected Budget measures to be very or quite important to their companies’ prospects. The domestic economic and fiscal progress that has been sustained in the interim means Budget 2017 is regarded as altogether less pivotal to companies’ fortunes in the year ahead.
With Brexit a major focus for a wide range of companies, we also asked whether Budget measures were regarded as altering the capacity of the Irish economy to handle the implications of the UK’s departure from the EU.
As so many aspects of this issue remain to be decided, it could not be expected that Budget 2017 would radically alter the prospective Impact of Brexit.
The responses to this question set out in diagram11 imply Budget 2017 is seen having few implications for Irish business in their efforts to respond to Brexit
. Far and away the dominant response-- given by 70% of those surveyed--was the judgement that Budget measures do not alter the capacity of Irish business to deal with Brexit.
The sectoral breakdown of those signalling some improvement or some worsening of their capacity to handle Brexit in the wake of Budget 2017 was not clear-cut; responses from manufacturing firms encompassed larger than average numbers of both positive and negative responses, firms in business services gave slightly larger than average levels of negative responses and correspondingly smaller numbers of positive responses while construction firms were more inclined to give positive responses and gave relatively few negative responses.
These answers hint at notable variations both in the readiness and vulnerability of individual firms even within the same sector to Brexit impacts
. Again, they underlines that a one policy response suits all approach or one that focusses on a small number of sectors is unlikely to be efficient or effective.
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.