Irish Business Activity Still Solid But Optimism Notably Dented


Activity growth across Irish companies remained robust in past three months as did hiring

Outlook for business still healthy but expectations clearly scaled back

Confidence in broader Irish economy sharply downgraded

Brexit seen as key risk but not the only cloud in economic sky

Some 80% of companies now considering some implication of Brexit for their business

Sterling weakness the main risk but one in ten firms looking at potential relocation into or out of Ireland

Section I: Irish Business Conditions In Summer 2016

Key Findings

While business activity weakened only marginally, Irish Business sentiment worsened markedly in the past three months. Concerns regarding Brexit, coupled with broader uncertainties about global economic prospects, caused a marked downgrading of the general business climate which, in turn, prompted companies to take a more cautious approach in regard to their own future output and hiring.

The deterioration in business sentiment primarily reflects a response to notably increased uncertainty in the wake of the UK referendum vote to leave the EU. The reported trend in activity and employment for the past three months remains reasonably robust and appears consistent with the persistence of solid growth in the Irish economy as a whole. However, respondent firms also signalled weaker expectations in relation to their future business volumes and hiring intentions.

Business Sentiment and Irish GDP

The KBC Bank/Chartered Accountants Ireland Business Sentiment Index dropped to 99.9 in the past three months from 117.7 in the spring quarter.  This represents the sharpest quarterly fall since the third quarter of 2010 and brought the index back to its lowest level in three and a half years.  As such, it clearly signals a marked change in the mood of Irish business of late.

On the basis of the past relationship between the business sentiment index and Irish GDP, the most recent survey still seems to be pointing towards reasonably solid economic growth in 2016. However, it signals a clear easing in the pace of growth. As diagram 1a indicates, through the period 2007 to 2015, the headline business sentiment index has followed a broadly similar path to that taken by Irish GDP. The dramatic surge in reported GDP for 2015 implies some recalibration of that relationship but, as diagram 1b shows, the latest sentiment reading appears consistent with GDP growth of around 3.5-4% at present.


Business Activity Remained Reasonably Solid Through The Summer

Companies report a solid trend in their business volumes in the past three months. As diagram 2 indicates, some 55% of companies indicated stronger activity of late, the same proportion as seen in the spring survey but some way below the levels seen in late 2015. The number of companies reporting a drop in activity at 10% of responses was largely unchanged from three months earlier and remains comparatively modest. So, business volumes continue to improve, albeit at a more modest rate than was evident through most of 2015.

This element of the survey suggests that while the pace of growth may have eased, there has been no dramatic change in the immediate operating environment of most of the companies responding to the survey. In this respect, the recent experience is altogether different from the sharp decline in activity levels that characterised the dramatic worsening of business conditions reported in the survey through 2008 and 2009.

Activity has continued to increase in all the main business areas. There was no marked change from the activity trends reported in the previous survey in most sectors. The food sector did see a notable easing in the proportion of companies reporting increased activity levels of late, a result that could owe something to the recent weakening in Sterling. However, responses from firms in this sector still point to a strongly positive balance that remains comparable with that seen in other sectors.

Although there was little indication of any notable change in the Irish business climate in companies’ reports of their activity levels for the past three months, there are suggestions of more modest growth in companies’ expectations for the coming quarter. As diagram 3 below illustrates, the number of firms expecting a further increase in output slipped below 50% of respondents for the first time in three years. It should be emphasised that with just 9% of respondents envisaging lower business volumes, the survey still suggests reasonably solid gains in activity at the aggregate level but it also seems that the spread and scale of future gains will be notably more modest than those seen through the past couple of years.

At the sectoral level, balances remained solidly positive but there was a marked pullback in positive responses from food companies and there was also a clear cooling in expected conditions in areas such as business services and consumer focussed activities. While there was some increase in the number of manufacturing companies expecting weaker activity, this was offset by an increase in the number of companies envisaging stronger activity- a development that was at odds with responses from most other sectors.

Responses to this question don’t seem to point towards any clear divergence between conditions in ‘traded’ and ‘non-traded-activities’ along what might be expected lines in the wake of the Brexit vote. The weaker outlook signalled by food companies might be consistent with an impact from adverse currency movements but from responses to this question  it also appears that manufacturing companies are less immediately vulnerable, possibly because of hedging or company specific characteristics. At the same time, a clear markdown of expectations by firms in areas such as business or consumer services may hint at broader negative ‘confidence’ effects reflecting increased uncertainty of late.

While this survey points to some cooling in Irish business conditions of late, the overall climate remains broadly positive as seen in the recent trend in hiring illustrated in diagram 4 below. Some 40% of respondents indicated that their companies continued to add to their payrolls while the number reporting reduced headcount was the lowest level in the survey’s near ten-year history.

A pick-up in jobs growth in the past three months was reported both by construction and manufacturing firms while consumer facing companies and those in the business services area sustained the robust trends reported in the previous survey. Only food companies reported notably softer jobs growth than previously but companies reporting higher headcount still outnumbered those reporting falling employment by a ratio of almost two to one.

The survey also asks companies about their hiring intentions over the coming three months. This saw a significant but not substantial pull-back in the proportion of companies that expect to boost employment from 37% to 31% of respondents while the number envisaging a drop in employment remained steady at 8%. This suggests that heightened uncertainty of late has led to a pause rather than a panic on the part of Irish business.

The past three months appear to have seen some slight easing in the trend in Irish business costs. Diagram 5 indicates that it remains the case that notably more companies are reporting rising rather than falling costs but the number reporting higher costs has eased back to its lowest level since late 2014.

The reported easing in cost inflation was broadly based but, perhaps surprisingly, the areas reporting the most notable moderation in costs were construction companies, consumer facing firms and those in business services.   Manufacturing companies reported a slight easing but food companies indicated some pick-up in their costs that may be seasonal but seems at variance with the trend in agricultural prices.

In broad terms, the easing in costs could be consistent with declining oil prices of late but we suspect it also owes something to recent weakness in Sterling.  Interestingly, areas such as business and consumer services were among the sectors reporting the clearest slowdown in expected activity levels in the next three months. This combination of responses emphasises the complexity of impacts on Irish Business related to Brexit and associated Sterling weakness.

The range of survey responses to questions about companies’ immediate operating environment clearly points to some cooling in the business climate of late that likely reflects increased uncertainty in the wake of the UK referendum vote to leave the EU. Equally, survey responses suggest this uncertainty is expected to slow but not stop the positive momentum in output and employment.  While the change in companies own circumstances is reasonably measured, the survey suggests an altogether more substantial mark-down of the outlook for the broader Irish economy. As diagram 6 indicates, respondents have become notably less optimistic about Irish economic prospects of late.

The summer 2016 business sentiment survey marks the first occasion in three and a half years that there has been a negative balance in responses to this question (i.e. a greater number of less optimistic than more optimistic views on the economy).  Moreover, the scale of deterioration in the past three months in relation to thinking on the Irish economy was larger than at any time since end-2011 which also marked the last occasion when responses to this survey were more negative than the summer 2016 reading. It is also notable that the poorer outlook in the current survey owed more to a step-up in negative responses rather than a drop in positive responses into ‘neutral’.  This hints at a clear step-up in worries about Irish economic prospects.

The turnaround in general economic sentiment was broadly based and, with the exception of the construction sector, substantial in all sectors but it was most marked among companies focussed on consumers and business services. Again, this result emphasises the almost ‘domestic’ nature of Ireland’s business and economic links with the UK.

Section 2: Supplementary Questions

As is usually the case, the summer business sentiment survey also asked a number of supplementary questions. Reflecting the significance of the recent UK referendum decision to leave the EU, many of these attempted to assess companies’ views on the implications of Brexit for them. Several of these repeated questions asked in the previous survey to assess whether clear ‘before and after’ Brexit views could be discerned.

Brexit Prompts Increased Focus On Downside Risks

The first issue considered was whether downside risks to the outlook for the companies of survey participants-as opposed to the broader economy- had increased of late. The proportion of respondents seeing downside risks to their businesses increased to 49% in the current survey from 34% previously. This suggests a significant but not catastrophic deterioration that is notably less dramatic than the mark-down of prospects for the Irish economy as a whole implicit in answers given to the question discussed in the previous few paragraphs.

We again asked companies to indicate what they saw as the main risk to their company’s prospects at present. As a comparison of the two pie charts in Diagram 7 indicates, Brexit is now regarded as the principal risk, being cited by 40% of companies. However, this diagram also suggests that while the UK referendum vote served to crystallise a widely recognised risk, it is not seen as the only cloud in the economic sky. Slowing global demand has slipped somewhat but is still widely seen as a significant concern. Perhaps more surprising is the continuing importance attached to domestic political uncertainty which was cited by 20% of respondents.

Most sectors regarded Brexit as the principal concern but it is not entirely surprising that manufacturing companies attached greater significance to slowing global demand and also emphasised US political uncertainty. In contrast, domestic political uncertainty scored relatively highly for companies with public sector connections and also for consumer-focussed companies, perhaps reflecting the approaching countdown to Budget 2017.

Some 7% of respondent opted to highlight specific concerns of their own. Among these were a number highlighting regulatory and legal costs, several citing adverse consequences to their activities from low energy and commodity prices and a couple emphasising financing difficulties.

Brexit Now A Key Consideration For Most Businesses And A Multidimensional Issue

The survey also asked a number of specific questions related to the UK’s decision to leave the EU. We began by asking what particular aspects of Brexit are the main focal points for companies at present. As diagram 8 illustrates, only 20% of companies indicated that they were not focussed on Brexit. This seems particularly low but, again, this response underscores the broad reach of Brexit consequences across the Irish business sector.

Not surprisingly, the aspect of Brexit currently regarded as the main issue for companies is the weakness of Sterling. This is to be expected given both the immediacy of such effects and the extent of recent currency movements.  The risk of notably weaker demand in the UK also features prominently and may be a pressing concern for some companies.  So, for roughly half of the companies surveyed, Brexit has immediate implications for their activities. Some portion of these may be examining cheaper sources of inputs but it is likely that the vast majority of them are dealing with some prospective deterioration in their prospects over the coming year.

With roughly half of the companies surveyed dealing with the implications of some near term change in their operating environment and just one in five not focussed on Brexit, this means that almost a third of companies are now considering longer term issues.  Of these, the bulk are primarily concerned with the prospect of increased administrative and technical complexities of dealing with the UK after it leaves the EU but a notable 10% of companies surveyed now see the main issue for them as the potential relocation of some element of their activities between the UK and Ireland. This would suggest Brexit could result in a formidable level of corporate re-organisation.

Not surprisingly, food companies tended to emphasise Sterling weakness slightly more than other sectors but this was a broadly based concern that was signalled as commonly by firms focussed on consumers as it was by manufacturing businesses. Food companies also attached particular importance to prospective administrative or logistical issues while construction companies highlighted weak UK demand more than other sectors. Firms in the property sector, in particular, as well as firms in the in business services area or facing consumers attached more importance to a possible relocation of activities than those in other sectors.

Companies Primarily Concerned With Brexit Threats But Opportunities Also Being Examined

The widely held view, which the broad thrust of survey responses also supports, is that Brexit will have a negative impact on the Irish economy and on Irish business. This is illustrated by diagram 9 which shows roughly half of companies surveyed are now focussed on threats to their activities. However, a comparison of responses from the current survey with those of the spring survey shows a relatively modest step-up in this regard.

A more notable development of late, highlighted by diagram 9, is an increased focus on the prospective opportunities that Brexit might entail. In areas such as property and business services scope for additional activity clearly exists. However, in other sectors, it may, at least partly, reflect the necessity to adapt business models if companies are to withstand the adverse consequences of the UK’s departure from the EU.


In view of how recent the UK exit decision is, any restructuring of activities is unlikely to be much advanced at this point and this is consistent with responses to this survey as illustrated by diagram 10 below.  Some 87% of companies indicated that as yet they had not made any changes to their plans in relation to activity, hiring or investment in the wake of the UK vote. This was somewhat lower than the 95% of firms who had given this answer in the spring survey.  The proportion now implementing cutbacks increased from 4% to 9%.

Our sense was that this adjustment was likely to reflect the already marked impact of Sterling weakness on the profitability of some activities. In that event, we would have expected this effect to be more pronounced in areas such as food or manufacturing. However, firms in these areas reported below average frequencies of altered plans. The firms that have already scaled back activity or business plans were fairly broadly based across sectors but most frequently seen in areas such as construction and property while business services also recorded higher than typical numbers indicating they had made changes of late.

As noted above, a significant number of companies are currently focussed on opportunities that Brexit might offer. However, our judgement is that some element of these responses reflects efforts to ensure the continuing viability of these businesses. In this context, the proportion of firms surveyed who said they were scaling up their businesses because of Brexit has risen from an insignificant 1% in Spring to a still marginal 4% in this survey. This amounts to about a fifth of the number of firms that cited a focus on opportunities which represents a broadly similar ‘activation’ share to that seen in relation to responses focussed on threats posed by Brexit. These responses were concentrated in the business services area.

Although we would advise caution in light of the small numbers involved, these responses again highlight the multidimensional nature of the consequences of Brexit and argue that analysis of this important issue should consider the potential significance of impacts in both positive and negative directions across a broad range of issues that mean the consequences for Irish business are far more broadly felt than might be envisaged.

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.