Slower activity growth and increased global uncertainty weighs on business confidence.

Survey also shows jobs growth reaching fastest pace in nine years. So, upturn still solid.

Costs starting to increase particularly in relation to payrolls.

Business favours modest rather than major stimulus in Budget 2016.

UK exit from EU would have a marked negative effect on Irish business.

Uncertainty, exchange rate volatility and higher ‘red tape’ costs all influential in the event of UK exit.

Section I: Repeated Questions

Business Activity Increases Further But Pace OF Growth Eases

Irish Business sentiment weakened somewhat in the second quarter of 2015 as output growth eased and uncertainty about the global economic backdrop increased. The change in thinking was particularly marked in more externally focussed sectors such as manufacturing but there was also some pullback in expectations in construction as companies struggle to assess the likely extent of momentum in recovery in this area.


The KBC Bank Ireland/Chartered Accountants Ireland Business Sentiment Index declined to 123.1 in the second quarter of 2015 from 127.7 in the previous quarter as diagram 1 indicates. The nature of the survey means that it is intended to capture changes in the business climate. So, the summer survey points towards a further healthy expansion in Irish business activity in the past three months but the pull-back in the index hints that business conditions have not improved as much as had been envisaged.

The survey also hints at a measure of concern emerging in relation to cost pressures. Moreover, increased uncertainty of late in relation to developments in Greece and China as well as increased focus on the UK’s position within the EU may have been weighing on hopes for a ‘normal’ recovery of late.

Business activity continued to expand in the past three months but, as diagram 2 suggests, the pace of growth seems to have eased somewhat. All sectors in the survey continued to report that notably more companies saw increases in output than saw declines. However, compared to the first quarter, fewer reported production gains and more reported declines. So, while Irish business activity continues to increase, the pace of output growth appears to have moderated.


The easing in the rate of growth was primarily a reflection of responses from firms in construction and manufacturing. Construction firms continue to report very healthy trends in this sector of late -only 4% of responses indicated weaker output of late. However, the number of firms reporting stronger activity eased from just under 80% to just over 55% of responses. Our judgement is that this doesn’t imply weaker demand but instead reflects difficulties in smoothly scaling up the supply capacity of the industry. It may also owe something to uncertainty related to the potential impact on demand of new Central Bank regulations on borrowing. Construction firms reported very strong rates of hiring in the past three months and strong expectations for output growth in the coming quarter.

Responses from manufacturing firms also suggest that on balance output growth has continued of late but there was a clear reduction in the number of firms reporting stronger activity and an increase in firms reporting lower activity levels. These results are consistent with declines in industrial output in two of the past three months (the latest available data point for the official production series is May). Again, supply issues may be influential for some firms but, as the sentiment survey focuses on the spread of growth across firms, it hints that a still uneven upturn in global demand may also be playing some role.

The summer survey saw a strengthening in responses from companies focussed on Irish consumers. Just over two-thirds of business in this area reported stronger conditions of late - roughly four times the number that indicated activity had weakened. In part, these results may be a correction after comparatively subdued first quarter responses but it also chimes with other reports of a pick-up in consumer spending of late.


Irish based businesses expect their output will increase further in the third quarter but the pace of growth is seen easing slightly further. As diagram 3 indicates, the change in conditions is fairly modest. So, the broad message of the survey is that robust growth in activity is expected to continue. Again, the most notable moderation is reported by construction firms but it remains the case that two-thirds of these envisage stronger levels of activity in the coming three months.

Jobs Growth Strongest In Survey History

Responses to questions on activity levels suggest the business sector is seeing growth stabilise at a fairly robust pace at present. The summer survey cautions against expectations of ever accelerating rates of growth but we don’t interpret these results as warning of any significant softening in activity in mid-2015.  The sense of an Irish economy that is performing strongly is evident in responses to jobs element of the survey which has hinted at a relatively cautious approach to hiring through the upswing.

As diagram 4 indicates, 42% of firms reported increased employment levels in the past three months, the highest number in the near nine year history of the survey. Just 9% of firms reported a drop in their payrolls, the lowest number since the survey began. While it is not at all surprising that recent job trends are notably healthier than those seen through the downturn, the summer survey results are also stronger than those seen in late 2006 and through 2007 when the Irish economy had considerable forward momentum.


All but one sector reported a stronger positive jobs balance than three months earlier - food companies reported an unchanged but comparatively large positive net hiring position. In most instances, the number of companies reporting job gains dwarfed reports of job losses. In manufacturing, however, a sense of widely varying conditions at the level of the individual firm is hinted at in responses that show 50% of firms adding employees and 20% reporting lower employment.

Costs Picking Up More Broadly

The summer business sentiment survey suggests Irish based companies have seen a clear increase in costs in the past quarter. As diagram 5 indicates, the number of companies reporting higher costs of late was the highest in seven years while the number reporting a decline in costs was the lowest since the summer 2008 survey. The step-up in cost pressures was broadly based but it was particularly marked in the case of construction firms where two-thirds reported higher costs in the past three months. Perhaps surprisingly, given the importance of imported inputs and its comparatively mature recovery, manufacturing was the only business sector to report a slower pace of cost increase than the previous survey.

Firms Still Optimistic On Economy But Not Quite As Upbeat

While sentiment in relation to the general outlook for the Irish economy remains strongly positive, diagram 6 (overleaf) suggests that Irish based businesses are now a little less confident than three months ago. As the survey was taken at a time when concerns about Greece and the Chinese economy were figuring prominently in the media, this more tempered view is not surprising. Indeed, the fact that responses to this question are still the most positive in the survey suggests Irish business confidence remains very healthy. While responses from most sectors were more cautious than in the previous survey, construction firms were notably less upbeat, perhaps hinting at the difficulties entailed in ‘rightsizing’ this sector for a recovering Irish economy.

Section II: Supplementary Questions

Budget 2016; A Small Stimulus Is Preferred

As usual, the summer business sentiment survey contained a number of supplementary questions on various topical issues. Diagram 7 below sets out responses to a question canvassing business views on their assessment of the appropriate stance of Budget 2016 in term of the areas of the Irish economy that relate to their companies’ activities.

As the diagram indicates there is a strong preference for some modest stimulus measures although it should be noted that relatively few companies favour a substantial injection of spending power into their sector of the economy. Not surprisingly, construction firms show strong support for a substantial stimulus as do food related companies.

Labour Costs Moving Higher

We also asked companies a couple of questions focused on the nature and extent of any cost pressures they faced.  Some 38% of firms responded that they don’t face significant cost pressures implying most Irish-based businesses feel their costs are under upward pressure at present. Within this group, the majority (41% of all companies) are focussed on specific cost areas but a significant number (21% of the total) also report more generalised cost pressures of late.

As diagram 8 indicates, the main area of current business concern in relation to costs centres on labour costs. A significant majority of firms report upward pressure on current payroll costs while a substantial number also cite concerns in relation to hiring costs.  These results likely owe much to the particular buoyancy of the labour market at present as noted in section 1. Again, the pick-up is widely based but it is particularly pronounced in consumer focussed firms. This may reflect the relatively recent nature of the turnaround in this area as well as the intensity of competitive pressures on this sector. Firms in the business sector area also report a comparatively large incidence of labour cost pressures particularly in relation to new hiring that could reflect skill shortages in some areas.



With the summer business sentiment survey indicating that hiring in the Irish economy is now at the strongest pace since 2006, it is scarcely surprising that payroll costs are under upward pressure. It should be noted that these results are notably stronger than the trend evident in official earnings data or a range of surveys published earlier in the year.   The key question is whether the survey is reflecting a once- off adjustment to stronger job market conditions or pointing to an emerging trend that might threaten a reversal of painfully won competitiveness gains through the downturn. Unfortunately, that answer may take time to become clear.

The results in diagram 8 may also be slightly surprising in that they don’t suggest any widespread increase in the cost of imported goods and services as a result of the recent weakening of the Euro against Sterling and the US Dollar. In turn, this hints at subdued inflation at the global level that emphasises the need to ensure domestic costs remain on a sustainable path.

The survey also suggests less widespread concern about public sector charges than might be expected but this likely owes something to the greater direct impact on households of relatively recent measures in this area. Indeed, it might be argued that there is some spill-over from such measures into pressure on labour costs.

The survey also reports a notable incidence of pressures in relation to the cost of various professional services incurred by firms. This may reflect difficulties in significantly scaling up such services as the economy recovers and this in part could reflect a lack of competitive forces in some areas. We might also speculate that it could encompass some element of re-pricing in areas such as insurance.


In an effort to assess whether rising cost pressures might be part of a broader inflationary cycle, we also asked companies how easy it was to pass on increased costs to their selling prices. The responses in diagram 9 suggest that current conditions are acting strongly against a sustained increase in inflationary pressures.  Only a very small number of firms said it would be possible to compensate for higher costs through higher prices with roughly one in four saying it is not possible to raise prices at present. So, the survey is flashing amber rather than red in regard to Irish cost trends at present.

‘Brexit’ A Major Concern

The summer business sentiment survey also canvassed business thinking in relation to the potential implications for Ireland in the event of a withdrawal from the EU by the UK (popularly referred to as ‘Brexit’) . Diagram 10 compares responses in terms of the expected impact on the economy as a whole and on the companies’ own activity levels. Only a very small number of responses think UK exit would have a positive impact on Ireland and a similarly small number see no impact of significance.  So, business sentiment sees UK exit as an overwhelmingly negative prospect.  The dominant view is that the negative impact on the Irish economy would be strongly negative with a slightly smaller number thinking the impact, while clearly negative, could be contained.


Companies also judge that the departure of the UK from the EU would have a marked negative impact on their business. Respondents are less pessimistic about the impact on their own companies than on the broader economy. Our interpretation of this variation is that it likely reflects a view that the impact is likely to unevenly distributed across the economy with those companies whose activities are directly linked to the UK suffering substantially and others suffering largely indirect fallout. In that sense, results that show 19% of companies fearing a severe negative impact on their own activities appear broadly consistent with the response that 45% envisage a severe negative impact on the Irish economy as a whole. The fact that 40% of companies foresee negative implications for their business, more than ten times the number that anticipate a positive effect, emphasises that the extent of the risk that UK exit from the EU may entail.

We explored the matter further by asking how companies felt UK exit from the EU would affect their business (rather than the broader Irish economy). Diagram 11 shows responses to this question. Companies were allowed tick more than one answer as the impact of a major development is unlikely to be felt through only one channel. The most widely expected consequence would be an increase in uncertainty and the associated scaling back of spending by households and firms. Some 60% of companies felt that their business would be affected in this way and of course it is likely to be the most widely dispersed effect of such a ‘shock’.  A surprisingly large 56% of companies cited the risk of increased exchange rate volatility. This obviously stretches well beyond those with direct trading links to the UK to those firms whose geographic or sectoral positioning means the UK is effectively an extension of their domestic market. It would also include companies using imported inputs or potentially competing in third markets.

A significant number of companies-some 32% of respondents, fear UK exit from the EU would result in increased administrative costs related to a notably greater  incidence of ‘red tape’ in transactions with counterparts outside the EU. While a great many companies routinely transact outside the EU, our sense is that the hurdle for smaller companies in ensuring relevant regulations are not breached would represent a notable change in trading conditions.


Interestingly, the balances of responses both in terms of potential relocation of companies or changed strategic focus both hint at opportunities for Ireland in the event of UK exit from the EU. These considerations may have contributed to the small number of positive assessments of the broader implications of UK exit. So, it would seem that that it might entail a complex range of gains and losses for Irish business. However, there is an overwhelming view that UK withdrawal from the EU would be a seriously threatening development for the Irish economy.

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.