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Irish business conditions brightened
• Improving activity levels now seen across a broader array of companies.
• Recovery expected to build modestly in next three months
• Irish business notably more optimistic about Irish economic outlook of late.
• Budget 2014 seen as important by 70% of companies.
• 69% think what Budget does rather than how much it takes away as key to their prospects.
Section 1: Business Activity Notably Stronger Of Late
Irish business conditions brightened through the third quarter of 2013. As diagram 1 indicates, the improvement was driven by a significant rise in the number of firms reporting increased activity levels in the past three months. At 47% of respondents, compared to 42% in the spring quarter, this was the largest number of positive responses since the summer of 2007. The number of firms reporting that their activity levels declined fell more modestly to 15% from 19% in the previous survey but the autumn 2013 reading also marks the lowest number of negative readings since the spring 2007 survey. These results suggest there has been a clear improvement in the environment facing Irish firms of late.
It should be emphasised that the survey doesn’t say how much output has increased. The focus instead is on getting a picture of the range of conditions experienced across the spectrum of Irish business. These results tell us that an improvement in activity has become evident across a much broader range of companies. Several other indicators and other elements of this survey, such as the trend in employment, suggest that the emerging upswing remains modest in intensity. However, the wider range of companies reporting increased activity is an encouraging development because a broadly based improvement in business conditions is likely to be more durable than a more intense upturn that is concentrated in a small part of corporate Ireland.
A particularly notable feature of the autumn survey is a changing pattern of results across sectors. A consistently solid performance has been posted by manufacturing firms through the past couple of years and through most of this period, a broadly similar picture emerged from business services firms, where export markets likely offset marked weakness in domestic demand. Recently, a more encouraging trend in domestic focused firms has started to emerge in the survey. However, it is slightly surprising that the strongest positive balance of responses in the autumn 2013 results came from firms in the construction and other property related areas. More than half of respondents in these sectors indicated that their activity levels had increased in the past three months—roughly ten times the number who reported lower business volumes.
This very strong result probably says more about the extent to which activity has been depressed in the recent past than it does about the scale of improvement now emerging. Our judgment is that the improvement is modest in scale but it does appear to be fairly broadly based and is consistent with official data on construction output and employment as well as reports from companies engaged in these activities. The comparatively broadly based nature of the improvement reported in this area may also highlight the degree to which productive capacity has been reduced in these areas in recent years. Encouragingly, signs of a broadly based upswing in activity may serve to ease emerging concerns that a ‘bubble’ in property prices might be developing in some areas.
If the results from construction and property firms represent a notable improvement from the marginally positive responses reported in the past couple of quarters, the turnaround in the climate facing consumer focussed firms is altogether more limited. Positive responses significantly outnumber negative by a factor of two to one, but a still notable 20% of firms report a further decline in their business volumes in the past three months. This result emphasises both the tentative nature of the ‘bottoming-out’ seen in recent official data on consumer spending as well as the intensity of competition in this area, circumstances which have contributed to Irish inflation falling to a year low of 0.0% in the year to August 2013.
As has been the case for a couple of surveys, firms in the business services area reported very strong readings. More positive responses and fewer negatives are seen in areas such as food and manufacturing, where solid positive balances overall coincided with significant divergences in the conditions reported by individual companies.
Momentum Building Modestly To End Year
The strengthening in business conditions reported in the past three months is seen gathering momentum in the final quarter of 2013. However, as diagram 2 indicates, the change between the outlook anticipated in the summer and autumn surveys is relatively modest. So, there is no great sense in these results that a rapidly accelerating recovery is taking hold. Instead, either firms see no marked improvement in their business environment in the next three months or their expectations are being restrained by a sense of caution forged through the experience of the past few years.
Compared to their reported experience of the past three months, companies in areas such as food and manufacturing are more upbeat while those in the business services area are also somewhat more optimistic about their prospective level of activity. Companies focused on consumers report broadly similar expectations to the next three months to that experienced in the past three months. While still positive on balance, fewer construction and other property related businesses expected growth in the next three months than reported gains for the most recent quarter and there are correspondingly more companies expecting a modest decline in activity levels. So, it seems that the pick-up in construction activity is still tentative in nature.
Hiring Up But Companies Still Taking A Cautious View
The fact that business volumes have increased and are set to improve further underpins a generally positive trend in employment, as evident in diagram 3. That said, the positive jobs balance is largely unchanged from that reported in the summer survey. This implies companies continue to adopt a cautious approach to hiring. We previously suggested that companies were deciding on their appropriate headcount on the basis of past improvements in their business volumes rather than prospective activity levels. In part, this is a logical response to increased uncertainty about the business outlook in the wake of the traumatic events
It seems that even in the light of notably stronger activity levels in the past few months, companies appear to be relatively slow to make corresponding additions to their payrolls. In broad terms, the sectoral breakdown of the employment question showed that across industries, the pattern of hiring followed a scaled-back version of output trends. This means that in many respects the emerging recovery seems to be backward looking rather than forward looking in nature. Indeed firms remain cautious in their hiring plans for the coming quarter. However, this seems to be affecting the pace rather than the direction of change in the Irish jobs market of late.
Costs Still Subdued
As diagram 4 below indicates, the trend in costs in recent months has not changed materially. At the margin, fewer firms are reporting continuing reductions in their cost base. However, these data still suggest that the majority of companies are not experiencing any marked increase in their costs. It would seem that pressure to restrain costs remains a powerful force, as exceptionally low Irish inflation of late would imply. In the main, trends across sectors were fairly similar.
There was somewhat more upward pressure on costs in food and manufacturing than elsewhere and a greater degree of divergent responses from companies in consumer focussed activities. In the latter area, the number of firms reporting upward cost pressures was similar to the aggregate figure, but there was also a somewhat higher than average number of firms indicating further downward pressure on their costs in the past three months.
Irish Business Notably More Optimistic About Economic Outlook
For most of the seven year history of the Business Sentiment Survey, companies have been considerably more negative about the prospects for the broader Irish economy than they have been about their own business. However, in the autumn 2013 survey (as was the case in the spring 2013 results) there are signs of growing confidence in the broader Irish economy. We think this reflects the improved tone of a several ‘macro’ developments. Signs of an emerging upswing in jobs and property prices in Ireland and improving international sentiment towards Ireland likely all played a role. So too has more encouraging news on the global economy, particularly a better UK economic performance and sharply reduced fears of a Euro area ‘apocalypse’.
The degree of turnaround in this area is best illustrated through a comparison of the autumn 2013 survey results with those of a year ago. From a position twelve months ago where there were more pessimistic views than optimistic, the number of positive responses has doubled while the number of negative responses has fallen to only a third of what it was.
This represents a dramatic improvement. Taken together with the guardedly positive tone of firms’ own activity and employment responses, this suggests that a deeply embedded ‘fear factor’ has significantly eased of late. That said, firms still seem to be waiting for even more encouraging economic news and order books before they will commit to a more ambitious expansion in their own capacity. Interestingly, the strongest answer to this question came from firms in the business services and manufacturing areas where international considerations probably play a relatively large role. However, answers were overwhelmingly positive across all sectors even if negative answers were slightly higher than average in areas such as construction and consumer focussed companies.
Section II: Supplementary Questions—What Does Budget 2014 Mean For Irish Business
As is normally the case in the KBC Bank Ireland/Chartered Accountants Ireland Business Sentiment Survey, we also asked a number of supplementary questions. Given the timing of the autumn 2013 survey, these focussed on the upcoming Budget 2014 and attempted to assess its likely importance from a corporate perspective.
Budget 2014 Is Important For Business
We began by asking companies how important they felt Budget 2014 might be to their companies’ prospects for the year ahead. As diagram 6 indicates, some 71% of companies see the Budget as either very important or quite important. Far and away the highest number of firms rating the Budget as very important was recorded in the food sector, which may reflect concerns about a possible return to a 13.5% VAT rate for tourism-related activities. As might be expected, other areas where there were comparatively high numbers rating the Budget as ‘very important’ tended to be domestic focussed industries such as construction and consumer goods and services.
Not surprisingly, firms in more externally focussed areas such as manufacturing and business services were less likely to regard the Budget as ‘very important’, but a clear majority in these areas still regarded it as very or quite important. We would caution that the somewhat lower importance that such companies seem to attach to the Budget may owe something to a judgement that the upcoming Budget will not contain any measures that are either particularly threatening (or wonderful) from their perspective.
The broadly strong result that Budget 2014 matters for Irish business reflects the reality that it affects both the spending power of most Irish firms’ customers as well as the cost base of those firms vis-a-vis their external competitors. Only an insignificant 2% of companies judged the Budget to be of no importance to them.
We also asked companies what aspect of Budget 2014 is likely to be most important to the outlook for their business in the coming year. Their responses as indicated in diagram 7 appear to be at odds with much of the public discussion ahead of the Budget which has focussed on whether the adjustment should be €3.1bn or some slightly smaller amount. Only 16% of respondents judged this to be the key concern.
Across all sectors, the most critical issue identified was what specific measures might be taken, with 70% of companies citing this as their key concern. From the questions asked, it is not possible to say definitively whether this response reflects hopes for the introduction of supportive measures or fears about possibly threatening measures. Given the consistent tone of responses across sectors, it seems unlikely that all industries expect helpful initiatives to support their activities. Furthermore in answer to a separate question, 52% of companies responded that tax increases were the area of Budget 2014 likely to have the biggest impact on their business.
This means there may be a degree of concern that in circumstances where most of the ‘low hanging fruit’ has been picked, further adjustments may throw up measures that have unexpected and threatening consequences. With the emerging economic recovery still modest, there may be some fears of an economic ‘accident’ prompted by an unexpected Budget initiative.
We also asked companies where they felt an adjustment of €3.1bn might be on the ‘Goldilocks’ scale of appropriateness. As can be seen from diagram 8, opinion is fairly mixed in relation to the correct size of adjustment with roughly equal numbers favouring an adjustment of €3.1bn or more as favour a smaller adjustment.
Not surprisingly, the sectoral breakdown of these responses shows that those companies largely focussed on domestic markets such as consumers and construction areas favour a smaller adjustment while those more externally focussed such as manufacturing tend to be slightly more in favour of an adjustment of €3.1bn or more. Reflecting the divergent nature of the firms in the business services area, responses from this sector featured above average proportions in favour of both larger and smaller adjustments.
Budget 2014 Less Important Than A Healthy Global Economy
Finally, we sought to put Budget 2014 in context by asking how firms judged its likely impact relative to other potentially significant influences. As can be seen from diagram 9, the factor Irish business judges to be most important to its prospects in the coming year is the international environment. This is driven by relatively large numbers of firms in manufacturing and business services citing this factor. However, a still substantial 21% see the Budget as having a key influence, with consumer focussed firms reporting the highest number of responses in this area. Possibly reflecting improving demand conditions for their output, firms in construction and other property related areas reported a comparatively strong emphasis on the availability of credit as a key factor for their businesess in the coming year.