Irish Business Activity Improves In First Quarter As Debt Deal Boosts Confidence


Irish business has made a solid start to 2013

 Business activity posts solid growth in the first three months of 2013.

• Majority of companies see deal on national debt helping their business volumes, with improved sentiment and reduced austerity the key drivers.

• Business sentiment in regard to Irish economic outlook shows much greater recent improvement than companies’ own operating environment.

• Signs of rebalancing evident as domesticfocussed companies report notably better conditions.

• Stronger improvement expected to take hold in second quarter but hiring plans remain cautious.

• Recent exchange rate developments have had only limited impact but firms regard currency movements as critical to outlook.

Section I: Irish Business Conditions In Spring 2013

Irish business has made a solid start to 2013 and stronger conditions are expected to take hold in coming months. While companies remain cautious in their hiring, there are signs of greater confidence in the outlook for the Irish economy as a whole.

Activity Has Increased In Early 2013

Results for the spring 2013 Business Sentiment Survey compiled by KBC Bank Ireland and Chartered Accountants Ireland suggest that business activity has continued to increase in the first three months of this year. As diagram 1 indicates, the number of companies reporting stronger business volumes of late outnumbered those reporting weaker activity by a margin of 2 to 1 for a second successive quarter, indicating the business environment has continued to improve in early 2013. That said, the broadly unchanged positive balance compared to the final quarter of 2012 suggests that there has been no marked acceleration of activity in the economy through the Spring of 2013 of the sort that might be expected in a normal cyclical upswing.

In view of the relatively weak conditions prevailing in the Euro area and the UK of late as well as the impact of Budget 2013 on domestic purchasing power, a stable and reasonably significant favourable activity balance should probably be regarded as a fairly positive outcome. It should be noted that the make-up of this balance was somewhat different from that in the Winter 2012 survey with slightly fewer firms reporting weaker conditions than three months and also slightly fewer firms reporting stronger conditions. This might signal that a gradual turnaround now underway in Irish business conditions owes more to an easing in the intensity of negative pressure on activity than to a strengthening in the forces supporting expansion. In other words, the Spring 2013 Business Sentiment Survey suggests that ‘headwinds’ to recovery may be diminishing but there are few signs that broadly favourable ‘tailwinds’ are emerging.

Detailed sectoral responses to the question on recent output trends indicate that the improvement in business activity in recent months was broadly based but they also point towards some slight shift in the balance of activity across the economy of late. In the past, sectors such as manufacturing that are primarily externally focussed tended to show notably larger positive activity balances than other areas. In contrast, the spring survey showed the healthiest balance in the early months of 2013 was in business services—an area that tends to reflect a quite diverse array of activity. More strikingly, the positive active balance reported by those businesses focussed on Irish consumers was slightly larger than that within manufacturing. Construction firms also reported a modestly positive balance suggesting activity in that industry may be bottoming out. In broad terms, these results are consistent with tentative signs of a rebalancing of activity hinted at in national accounts data published by the Central Statistics Office (CSO) last week. Both sets of data suggest that times may be slightly better in many domestic-focussed businesses of late but there are also hints of a reduced impetus to Irish economic growth from external demand in the early months of 2013.

Activity Expected To Strengthen In Coming Months

The Spring 2013 Business Sentiment Survey shows that Irish based companies expect their activity levels to increase markedly in the next three months. As diagram 2 shows, the positive future activity balance has improved notably from the previous survey and represents the strongest reading for this element of the survey since the Autumn of 2007. It again seems worthwhile highlighting the way in which this positive balance has come about. The number of firms anticipating stronger activity levels in the next three months at 44% has remained fairly steady for much of the past year. However, the number of firms that expect their business to contract in the next three months has come down sharply in the past two quarters. So, there is a consistent message coming from various parts of the survey that an emerging improvement is coming from fewer firms reporting declining activity rather than more firms reporting notably stronger activity.

Again, sectoral responses to the forward looking activity question suggest an expectation of a broadly based improvement. A notable feature is a particularly sharp improvement in responses from manufacturing firms compared to their assessment of trends in the past three months. So, companies in this area don’t envisage any lasting impact from a poorer global backdrop of late. In general terms, firms across most sectors are notably more optimistic than they have been in previous surveys with far fewer respondents expecting their business volumes to decline. With the exception of areas such as construction, where a relatively modest positive activity balance is anticipated, the number of positive responses outweighs negative responses by at least 3 to 1 in most sectors.

Companies Still Cautious About Adding To Payrolls

In the light of the positive activity balances reported for both the past three months and the next three months, it is not surprising that there was also a positive balance in terms of employment trends in the early months of 2013. However, as diagram 3 shows, the scale of positive jobs balance is altogether weaker than that of the activity balance in the current survey and is also marginally weaker than the jobs balance was in the Winter 2012 survey. This result may be disappointing but it is not entirely surprising. As noted above, the emerging improvement in activity owes more to fewer firms reporting declining output than it does to more firms expanding output. These sorts of circumstances wouldn’t be expected to prompt substantial new hiring. More generally, an uncertain global backdrop, the expectation of a tough year for domestic economic activity and a judgement that any shortfall in manpower can be more easily remedied than might a problem of excess capacity are all likely to weigh on hiring. As we noted in our commentary on the Winter survey, the pattern of employment changes suggests that firms are hiring in response to clearly established current needs rather than the anticipation of future expansion. While perfectly understandable at the level of the individual firm, this approach will tend to constrain the growth in employment and domestic spending in the Irish economy in the near term. This ‘just in time’ approach also seems to be in marked contrast to that being seen in the UK and many continental economies where a ‘just in case’ philosophy seems to entail an element of labour hoarding at present.

At the sectoral level, employment responses in the food sector were broadly in line with a notably stronger activity balance but firms in manufacturing and business services adopted a far more cautious approach. Perhaps the most striking responses were from firms focussed on consumers or construction. In spite of notably more positive activity balances in these areas of late, these firms reported significant net job shedding. This would appear to suggest that these companies feel there is ample excess capacity to cope with any improvement now emerging in these areas.

Cost Pressures Still Contained

For the past year, the number of companies reporting higher costs has outnumbered those reporting lower costs by a broadly similar amount. At the margin, the Spring 2013 survey might point towards some easing in cost pressures of late. Diagram 4 shows an increase in the number of firms indicating an easing in costs in the past three months. At 20% of respondents, this is the highest share reporting lower costs since the Autumn 2011 survey. Overall, the Spring survey suggests inflationary pressures remain contained but it should also be emphasised there is little evidence of the sharply deflationary pressures that were evident in 2009 and 2010. As has been the case for some time, there were notably more broadly-based cost pressures in areas such as food and manufacturing while areas such as construction and consumer activities reported strong downward pressure on their costs. Although firms in these areas reported some improvement in activity levels, generally deflationary environment in these sectors might also help explain why these firms continue to cut jobs at present.

Business Was Notably More Positive On The Irish Economy

The broadly positive assessment of firms own activity levels in early 2013 reported in the Spring Business Sentiment Survey is encouraging but it doesn’t represent any radical change. Rather, it marks a continuation of the gradual progress seen through recent quarters. However, the Spring 2013 results do show a significant change in business thinking in relation to the broader Irish economic situation. A notable feature of surveys through the past year or so has been a marked dichotomy between a gradual improvement reported in business volumes and the persistently downbeat assessments of the broader Irish economy offered by the same respondents. Viewed from this perspective, the notably more positive thinking on the broad Irish economy reported in this survey appears to reflect a major change in thinking on the part of corporate Ireland. As diagram 5 indicates, the number of companies who felt more positive about the Irish economy in the past three months at 55% of respondents was the highest proportion in the six and a half year history of the surveys. Similarly, the number expressing a negative view at 13% was also the lowest since the Business Sentiment Survey began in late 2006. So, these results argue that Irish business senses some ‘green shoots’ in the Irish economy of late.

Taking responses given to this question together with those from other parts of the survey, the Spring 2013 survey marks a significant change in business thinking on the health of the Irish economy. We think these results should be interpreted as signalling a more broadly based confidence that the economy is now improving rather than suggesting that the economy is improving sharply. Arguably, this represents a healthier scenario but it should caution against any expectation of any dramatic near term improvement in the main Irish economic indicators.

Section II: Additional Questions

Recent Exchange Rate Changes Not Too Painful

As is the case each quarter, the Spring 2013 Business Sentiment Survey also asked a number of supplementary questions intended to shed light on business thinking in relation to a number of economic issues.

The Spring 2013 survey included a number of questions on the significance of a strengthening of the exchange rate of the Euro to their business. As diagram 6a shows, just over half of the companies surveyed indicated exchange rate movements were very important or of some importance to their activities. A substantial 17% felt the exchange rate was very important whereas only 12% felt exchange rate movements were of no importance. As diagram 6b clearly shows, Sterling and the Dollar are far and away the currencies of most importance to Irish business.

It is understandable that the focus of discussion on exchange rates tend to concentrate on the effects of Irish exports but currency movements impact the Irish economy in a number of ways as diagram 7a shows. The difficulties exporters face is clearly an important issue and was highlighted by 38% of respondents. However, a marginally larger number (40%) referred to the consequences currency movements have for the cost of raw materials while 22% of companies mentioned the implication of increased competition from foreign firms on the domestic market. It should be noted that respondents were free to tick more than one answer. So, for example, it is possible that some firms that were concerned about the impact of a stronger Euro on their sales abroad also recognised the more favourable implication of exchange rate movements for the costs of inputs they source from overseas.

We also asked companies what sort of impact the movement seen in the Euro between mid-December 2011 and mid-March 2013 had on their business over the period. During this time, the Euro/USD exchange rate had risen from 130 to 135 before returning close to 1.30 while the Euro had risen from 81p to around 86p. As diagram 7b shows, roughly half of respondents indicated there had been no major impact but, of the remainder, a large majority (39% v 13%) felt that the impact was negative. As the diagram shows, only a very small number indicated that the currency movement of the past three months would have a major impact on their activity level. These results may seem slightly surprising but they hint that either companies have significant hedging in place against currency risk or that the fluctuations of the past three months haven’t pushed the exchange rate of the Euro to really threatening levels. In the case of Sterling, these results may also reflect the offsetting influence of notably higher inflation pressures in the UK. We will examine this issue further in future surveys.

Improved Debt Deal For Ireland Will Help Business

We also asked business what significance an improved deal on Ireland’s national debt might have for their companies’ own activities. As might be expected, a significant number of companies don’t see any material impact. As diagram 8a shows, just under half of those surveyed said a debt deal would have little or no impact. However, by extension, this implies more than half of those surveyed feel there will be some impact—with 11% anticipating a substantial impact. These responses tended to be concentrated in firms focussed on the domestic economy. As might be expected, a comparatively large share of manufacturing firms (67%) indicated they expected little or no impact on their businesses from the deal. We also asked companies what channels any impact might be felt. As diagram 8b shows, the majority of firms (53%) felt it would be through improved sentiment. A sizeable number (28%) emphasised the prospect of an easing in austerity while a smaller but still significant number (12%) anticipate lower borrowing costs. Companies in the consumer area tended to focus less on sentiment and more on reduced austerity and lower interest rates than other sectors while business services firms tended to emphasise the role of sentiment. Responses to these questions on a debt deal hint that this issue has had more of a positive impact on business thinking than results of recent opinion polls or the February Consumer Sentiment Survey suggest it had on the broader population.

Irish Corporate Focus Now On Growth

In the Spring of 2013, we also asked a couple of questions intended to establish the current focus of Irish companies. As diagram 9a shows, only 6% of companies are intent on ‘downsizing’ the scale of their operations further. Another 31% are focussed on stabilising business volumes at current levels whereas 63% are planning to increase output levels. This relatively large proportion is consistent with the generally positive tone of other responses to the Spring 2013 survey. Significantly, it suggests a fairly broadly based improvement in business conditions is becoming established in Ireland. However, there is little sense through the survey that a dramatic surge in activity is underway or expected. One other pointer in this regard is provided by results show in diagram 9b that asked about the trend in companies internal costs. Only 3% of companies anticipate a substantial increase in these costs, a figure that is less than half the number (7%) that envisage a large reduction. While 28% see a modest increase, about the same number (26%) are planning a smaller scale of reduction. With 37% envisaging no significant change in their internal costs, there is very little evidence of a marked pick up in costs that might follow a substantial ramping up of activity levels. So, the broad message of the Spring 2013 survey would seem to be that a broader improvement in business conditions is becoming established. This is probably driven by some easing in the forces restraining activity but the pace of recovery seems set to remain modest in the months ahead.