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Spring 2012 KBC Bank Ireland/Chartered Accountants Ireland Business Sentiment Irish Business Activity On Improving Trend in Early 2012
Irish Business Activity On Improving Trend in Early 2012
Results of the Spring 2012 KBC Bank Ireland / Chartered
Accountants Ireland Business Sentiment Survey
The KBC Bank Ireland / Chartered Accountants Ireland Business Sentiment Survey reflects the view of chartered accountants working in senior positions (CEO’s, MD’s and FD’s) in Ireland’s leading companies. The survey was conducted in the first half of April and the results presented are based on 305 completed responses
Spring 2012 KBC Bank Ireland / Chartered Accountants Ireland Business Sentiment Survey Results:
Section I: Quarterly Business Sentiment Survey Results
Conditions improved across a range of sectors in early 2012
Business conditions across the Irish economy improved in the first quarter of 2012. It remains the case that activity levels vary widely but responses across all sectors were clearly healthier than those reported for the final months of 2011. As Diagram 1 shows, the Spring 2012 Survey saw the first significant quarterly increase in business volumes since the Winter of 2007.
Encouraging results for early 2012 may have been boosted by a number of exceptional factors including an easing in concerns about the Euro area that seem to have weighed on the end 2011 numbers. A relatively mild winter could also have supported activity levels in a range of areas of late. It might also be that we are seeing a repeat of the relatively strong first half reported in 2011. So, a number of arguments suggest we should not simply extrapolate the positive first quarter outturn onwards and upwards. In any event, as Diagram 1 indicates, it remains the case that a significant 29% of companies experienced a further reduction in their output in the most recent quarter. This means that for many companies recent conditions have remained very difficult. For these reasons we should be cautious in our interpretation of the first quarter results. That said, the improvement in activity levels reported in the survey appears consistent with a somewhat healthier picture emerging from tax revenues as well as the somewhat better tone to consumer sentiment and some other recent data. As a result, it does appear that there has been some firming of business activity levels across the Irish economy in early 2012. That points towards an improvement in economy wide activity in recent months that business expects to be sustained in the months ahead.
Diagram 2 suggests, that the Spring 2012 Business Sentiment Survey is hinting at a return to positive economic growth in the first quarter of 2012. As the diagram suggests the trend in activity in the previous three months reported in this survey tends to show a closer relationship with a smoothed measure (ie 4 quarter moving average) of Irish GDP changes than with the more volatile official series. This means that we can’t be sure there will be a corresponding pick-up in GDP when official data are released in late June. However, the first quarter survey results point towards the possibility of a reasonably encouraging trend in official measures of economy-wide activity for the early part of 2012.
The sectoral details of the survey continue to emphasise notable differences in conditions across different sectors of the Irish economy. However, the sense of a broadly based improvement in the overall business climate in early 2012 is reflected in the fact that all the main sectors reported significantly better results in this survey than in its predecessor. The strongest area of activity in the first quarter of the year was the business services sector as it has been for some time. Almost half the respondents in this area reported stronger business volumes in early 2012 compared to just under a quarter of firms that indicated weaker activity. While the number of companies reporting healthier conditions was modestly better than three months ago, the most notable change was a halving of the number of companies reporting weaker activity.
Manufacturing firms also reported a healthy positive activity balance in early 2012, with roughly one third signalling increased volumes compared to roughly one in four reporting a decline. Here too, a comparison with the previous survey shows the drop in negative responses was greater than the increase in positives although the latter did register a reasonably decent increase. The tone of manufacturing responses suggests a clear renewal of the weakness that marked the Winter 2011 results for this area. Responses of firms in the food sector followed a similar pattern with the key driver of the first quarter results being an easing in negative responses to the point where there is now a clear positive balance in activity in this section.
The nature of the changes in early 2012 – driven particularly by fewer firms reporting declining business volumes – seems to suggest that activity levels had been held back in late 2011 by uncertainty about the outlook for the Euro area and widespread fears that the break-up of EMU might be imminent. This likely weighed on the planning decisions of the corporate sector and the purchasing decisions of its customers.
While few would argue that the economic skies became cloudless in early 2012, the absence of the threatened apocalypse may have produced some element of ‘normalisation’ that contributed to the reported pick-up in activity – particularly in areas such as manufacturing and business services where the general international economic climate may be particularly influential. This is not to say that ongoing uncertainty is not continuing to have some dampening impact on Irish business activity at present or that renewed concerns couldn’t have a negative impact in the future. It simply seems that the improvement in the Spring Survey results partly reflects to some easing in the uncertainty that afflicted the business environment in late 2011.
In sectors such as construction and other property activities as well as those areas related to consumer activity, the balance of activity remained clearly negative in early 2012. In the case of construction there was a slight easing in the proportion of negative responses and a similar increase in positive responses in the recent survey but the broad message remains that activity in the building industry area has been unambiguously weak of late. Conditions across the remainder of the broad property industry also remained under pressure but here there was a notable improvement compared to the previous survey.
The negative activity balance reported by consumer related firms was not nearly as pronounced as in the Winter Survey. In the final quarter of last year there were twice as many negative responses as positive responses among consumer focussed companies. In early 2012, the gap between the two fell to around 5 percentage points. In the context of the Budget 2012 increase in the upper VAT rate and poor retail sales data for the early part of this year this might appear a slightly surprising result. It could reflect a better than feared new year sales period and, perhaps, it might point to an improvement in spending patters that is more recent than the period covered by the latest available official data.
Business conditions are expected to improve further in the months ahead
The Spring 2012 Survey suggests economy-wide business activity levels will improve further in the second quarter of this year. Some 37% of companies anticipate an increase in business volumes compared to 20% that expect a further decline. Diagram 3 indicates this is the most positive expected balance for activity in a year. Compared with results for the past couple of years in this area, the most notable aspect of the Spring 2012 responses is an easing in the number of firms that envisage a further drop in their activity levels.
With the downturn now clearly into its fifth year, a declining trend in the number of firms seeing lower activity might be considered overdue. Of course, a significant number – roughly 1 in 5 companies, still expect their output to decline further in the months ahead. However, signs in the Spring 2012 Survey that fewer firms were continuing to suffer from declining business volumes may hint that a protracted bottoming out process in business activity across the Irish economy could be coming towards an end. The fragility of the global economy and continuing difficulties in the Eurozone counsel against definitive judgements at this point in time but the Spring 2012 Survey results at least point in an encouraging direction.
As has been the case through most of the Business Sentiment Survey’s five year history, companies’ expectations for the quarter ahead diverge widely across sectors and along fairly predictable lines. Positive responses from manufacturing firms and from companies in the food area outnumbered negatives by about five to one in the Spring 2012 results. These represent notably more positive expectations than reported in the previous survey. The business services sector also reported a healthy positive balance but not nearly a definitive as recorded in manufacturing or food and this quarter’s results were not dramatically stronger than this sector had reported in the previous survey.
Unusually, construction firms reported a marginally positive balance that stands in stark contrast to the sentiments expressed by firms in this sector three months ago. Businesses focussed on Irish consumers continue to see further declines in activity in the coming quarter but this is fairly marginal compared to the roughly two to one negative balance in forward looking responses in the Winter Survey. So, while conditions remain tough, there is more of a sense that this sector could be levelling out as consumers have now adjusted to the additional austerity imposed on them by Budget 2012.
The Irish Jobs Market Stabilised In The First Quarter of The Year
Healthier activity levels – both recent and anticipated in the next three months - also prompted a clear improvement in employment trends in the Spring 2012 Survey. As Diagram 4 shows, the number of companies reporting increased payroll numbers in the past quarter is the same as the number signalling lower employment. This is the best outturn since Winter 2007 for this element of the survey. It is broadly consistent with the marginal increase in seasonably adjusted employment in the final three months of 2011 reported in the Quarterly National Household Survey published by the Central Statistics Office. It also chimes with the reasonably solid performance of income tax receipts in early 2012.
Again, we would caution against extrapolating this trend too far. There were tentative signs of stabilisation in this component of the survey a year ago that subsequently faltered. Moreover, the fragility of the economy and the comparatively weak performance of labour intensive areas means the outlook for employment across the Irish economy remains challenging. However, the Spring 2012 Business Sentiment Survey results seem to signal that the worst may be over for the jobs market and a more stable trend in employment could now be set to emerge.
The sectoral breakdown of responses to the question on employment was broadly consistent with responses given by companies in relation to their activity trends. Sectors such as business services and manufacturing recorded clear-cut improvements in activity of late and similarly reported increases in numbers at work. However, there was a decline in numbers employed by food companies in spite of stronger activity in that sector. In addition, employment balances in both construction and consumer areas showed poorer trends than in the previous survey in spite of slightly less negative activity balances.
The detailed sectoral responses hint that firms continue to try to ‘right size’ their payrolls for what are expected to be lasting constraints on domestic demand. In these circumstances, large differences in sectoral employment conditions also imply that skills mismatches could contribute to a continuing high level of unemployment even, if at an aggregate level, an upswing in activity gathers momentum.
Costs Continue To Creep Higher
Consistent with recent evidence from official measures of inflation in Ireland and elsewhere, the Spring 2012 Survey found some further increase in business costs in Ireland in the past three months. As Diagram 5 indicates the Spring 2012 results are very similar to those of the previous quarter. Indeed, a fairly stable pattern in costs has been evident for the past year. While the survey does not identify the causes, these responses likely reflect the impact of higher energy and food costs. This is hinted at in relatively large cost increases reported in areas such as food and manufacturing where such costs tend to be relatively important. However, an above average increase in costs was also reported in the business services area. This bears monitoring in future surveys in case it reflects some increase in costs associated with a scaling up of activity from current levels in this area.
Companies Have Become A Little More Concerned About The Irish Economy As A Whole
The broad picture emerging from responses to questions on activity and employment points towards a clear if modest improvement in activity levels across Irish business in early 2012. In these circumstances, it might have been assumed that companies would also have become even a little more positive in relation to the condition of the Irish economy as a whole. Instead, the mood was slightly gloomier - with 26% of respondents more positive than three months ago compared to 31% who were less positive. Admittedly, as Diagram 6 shows, this negative balance is considerably smaller than that seen in the Winter Survey but it still points towards the persistence of significant concerns about the general Irish economic outlook on the part of corporate Ireland.
It could be that companies (rightly) recognise the importance of continuing headwinds facing the global economy and the even more significant constraints weighing on domestic activity in Ireland. In that sense, a negative balance in the Spring 2012 Survey is not entirely surprising but the question is specifically framed to ask whether respondents feel more or less optimistic compared to three months ago rather than whether they are generally positive or negative. Given the unambiguously positive tone of responses given by companies to questions on their own activity levels on this survey, this may appear a somewhat surprising disjoint.
In fact, differences of this sort are the mirror image of responses given to the KBC/ESRI Consumer Sentiment Survey of late. Consumers seem to have some sense of a measure of improvement in the Irish economy of late but their own financial situation remains under strain. While they are aware of a more positive tone to a number of economic indicators and perhaps more importantly in recent news on the jobs market, these developments have not translated into any easing in what remain intense pressures on their household finances.
A comparison of survey results suggests Irish consumers feel less in control of their immediate circumstances and under greater continuing pressure than their corporate counterparts. A consistent message of recent Business Sentiment Surveys is that companies have taken strong action and many now appear to be sensing a clear improvement in their business volumes. However, as their immediate environment begins to stabilise or improve they have become more fearful about the general economic climate in which they operate. Having adjusted their business significantly, they may now see the broader ‘macro’ environment as posing the main threat to further progress.
So, a comparison of Sentiment Surveys highlights different perceptions as to where key problems now lie for households and firms. It is particularly noteworthy that apart from construction firms, companies in area reporting reasonably healthy activity levels such as food and other manufacturing posted the most negative responses to the question on the broad economic outlook in the Spring 2012 Survey. This would be consistent with the view that companies own actions may be bearing fruit but a further macro adjustment could derail this progress.
Section II – Supplementary Questions
What sort of recovery do firms expect in coming years?
As usual, the Business Sentiment Survey asked a number of additional questions on topical issues. One group of questions sought to elicit business expectations as to how quickly a more broadly based upswing in activity levels might become established. To assess this, the survey asked what scale of increase in business volumes might be envisaged in one, three and five year timeframes. The responses to this question are presented in Diagram 7 below.
The presentation of Diagram 7 depicts as line graphs the proportion of respondents anticipating various increases in their future business volumes one, three and five years from now. The diagram indicates that the most commonly given answer for firms’ one year ahead output is broadly flat, the most common answer at the three year range is an increase of between 10 and 24% and at the five year point, the most frequently given response anticipates increases of over 25%.
Diagram 7 here
In very broad terms, just over half of the companies surveyed see their activity levels increasing in the year ahead while one in six expect a further decline. In the main, companies expect relatively modest changes in the next twelve months. Indeed, as noted the most common response given was an expectation of broadly flat output but one in six see an increase of 10% or more while 1 in 17 expect a decline of 10% or more. So, the main message from these responses is that an improvement is becoming established but momentum in business activity will build fairly slowly through the coming year.
A more broadly based recovery is expected to be in place in three years time although it may be significant that as many as one in ten companies still expects their business volumes to be lower at that point than today. A little over half of the companies that anticipate growth expect their business volumes to be up more than 10 per cent over this timeframe but this implies the majority of companies operating in Ireland today envisage a relatively modest improvement in their operating levels in the next couple of years. As might be expected, a further broadening of the recovery is expected within a five year timeframe. However, it may be slightly disappointing that some 8% of companies expect their business volumes in 2017 to be below current levels. On a more positive note, just over half of the firms surveyed see their business volumes 10% or more higher in five years time.
The sectoral breakdown of responses to this question shows divergences along broadly expected lines in terms of the one year outlook. The strongest expectations of output gains came from firms in the business services and manufacturing areas. In both instances as many as 1 in 5 felt their company’s business volumes would be more than 10% higher in a years time. Again, probably reflecting current circumstances, only a minority of firms in construction and consumer related areas anticipate higher activity levels in a years time. Roughly one in three construction firms and one in five consumer firms expect their output levels to be lower in twelve months time. While most consumer firms expect only marginal declines, one in five construction firms expect their output to be more than 10% lower than it is today. As has been the case in a number of recent surveys, responses from firms within the food sector show significant differences that may stem from whether the focus of the particular company is on exports or the domestic market in Ireland.
Looking further ahead to 2015, there is a notably greater convergence of expectations in terms of the direction of activity. Some 78% of firms across the Irish economy expect their business volumes to be higher than they are today while only 10% expect their output will be lower. However, it is notable that about one in five construction firms expect weaker activity levels in three years’ time than today.
Turning to the five year outlook there is a further convergence in output expectations across sectors although the ranking of replies across sectors in terms of the scale of output gain remains broadly similar. It might be argued that this ranking reflects a tendency to simply extrapolate forward current circumstances but the differences reported between one, three and five year outcomes suggest firms are taking a more nuanced view.
The sectoral results also seem consistent with most conventional economic forecasts that expect Irish economic activity in coming years to be driven primarily by exports with domestic demand recovering relatively slowly. In this respect, the survey suggests companies in areas focussed on domestic spending don’t appear to have wildly optimistic expectations for the years ahead.
Not surprisingly expectations of stronger business volumes tend to drive hiring intentions for the coming years ahead. As might be expected, the number of firms planning to boost employment is somewhat smaller than the number expecting to increase output. Only 30% of firms plan to increase employment in the next twelve months. Given that 22% of companies reported increased employment in the past three months, this doesn’t suggest any marked step-up in employment in the near term. As might be expected additional hiring was notably more prevalent in areas such as manufacturing and business services where output prospects are notably brighter.
As Diagram 8 indicates, the proportion of firms planning to increase employment levels within a three year timeframe roughly doubles compared to their expectations one year ahead. It then improves very little further if we extend the planning horizon to five years. This may suggest firms will ‘rightsize’ in response to stronger activity levels gradually once the economic outlook is clearer. Perhaps significantly, as many as 38% of firms do not expect to add extra staff even within a five year timeframe. This may reflect a particular concern not to repeat the experience of boom-bust seen in the past decade.
As Diagram 9 indicates only 28% of companies expect to add additional productive capacity to their businesses in the coming year. What seems a striking result is that roughly half of firms surveyed do not expect to add to capacity in the next five years. This suggests Irish businesses are taking a relatively cautious view of their prospects that probably reflects painful lessons learned during the downturn of recent years. Such caution is likely to act as a constraining factor on the pace of the recovery in activity and employment at least in its initial stages.
Some Degree of Uncertainty Is Evident In Relation To The Fiscal Treaty
The Spring 2012 Survey also asked a number of questions about the looming referendum on the Fiscal Treaty. Reflecting the nature of the Business Sentiment Survey, we limited our questions to a consideration of the fiscal compact as it might affect the business climate in Ireland. As Diagram 10 reveals, we first asked whether the broad issues in relation to the Treaty were clear. Some 69% of respondents indicated that they felt they understood the broad issues covered by the Treaty. Although only 12% said they didn’t understand the issues, the fact that a further 19% said they were unclear or uncertain implies there are still significant gaps in the public understanding of what the Treaty entails.
We also asked whether companies felt the Treaty was important to their business environment. The results shown in Diagram 11 are that some 25% of those surveyed felt it was very important and a further 39% indicated it was quite important. A reasonably sizeable 27% felt it would not have a notable impact on their business environment while 9% regarded it as unimportant. Firms in the food sector attached the highest importance to the Treaty but by and large there weren’t too many significant differences in responses to this question across sectors. One possibly surprising aspect of these responses is that a somewhat greater proportion of firms focussed on Irish consumers tended to view the Treaty as not being materially important to their business environment.
Finally, we asked companies whether they thought the Fiscal Treaty if enacted would significantly alter the thrust of budget policy in Ireland in coming years. Responses to this question seen in Diagram 12 show that opinions were divided. A significant 25% said they were unclear or uncertain; a response that again highlights a degree of uncertainty as to what the Treaty might mean in practice. The gap between those feeling the Treaty would make a difference to the thrust of Irish Government budget policy at 34% and those that felt it would not at 41% was relatively modest. The Treaty doesn’t override the terms of Ireland’s agreement with the Troika, and consequently the impact on fiscal policy out to 2015 is negligible. So, these results may suggest an element of concern within the business community that in the longer term the Treaty will result in an increased level of fiscal austerity than might otherwise be expected.