Irish business sentiment reaches strongest level in two years

Broadly based pick-up in activity levels as 2018 begins

Number of firms reporting weaker conditions at lowest level in survey’s eleven years

New hiring strengthens but costs on the rise

87% of companies report faster growth in Dublin than elsewhere in Ireland  

Business outlook positive for 2018 but firms cite diverse range of risks

Brexit the key concern most commonly cited but only by 17% of companies

Pay and personnel issues as well as global uncertainty also notable worries

Overview

Irish business sentiment has improved to its best level in two years as companies reported a strong end to 2017 and expectations of continuing growth in activity levels in early 2018. With confidence in relation to Irish economic prospects continuing to grow, new hiring also gained momentum. The only blemish evident in the survey was a significant and broadly based pick-up in costs.

Importantly, the number of firms reporting weaker conditions in the past three months was the smallest recorded in the eleven year history of the survey. This result suggests the upswing in business conditions has become much more broadly based of late even if the intensity of the improvement still varies considerably at a regional level. Some 87% of companies indicated that their business was growing faster in the Dublin market than elsewhere in Ireland. 

Section I: Business conditions improving as 2018 begins growth of late

The KBC Bank Chartered Accountants Ireland business sentiment index rose to 120.8 at the end of 2017 from 116.6 in the previous quarter. The survey was undertaken in the middle week of January. So, the three month comparison straddles end-year and sheds some initial light on business conditions in the Irish economy at the start of 2018. As diagram 1 below suggests, momentum in Irish business activity is very positive at present.

Diagram 1 also suggests reported business conditions fall somewhat short of the outsized 10.5% GDP growth rate reported for the third quarter. The sentiment survey implies that the environment facing the majority of Irish based companies would be consistent with an underlying economic growth rate of the order of about 5% in late 2017.

Stronger and more broadly based activity drives pick-up in business sentiment

The improvement in business sentiment was largely driven by companies reporting stronger activity levels in late 2017. As diagram 2 indicates, the number of firms reporting increased activity was the highest in eight quarters but a more notable feature may be the drop in the number of companies reporting weaker conditions to its lowest level since the survey began eleven years ago. 

These results suggest a renewed momentum in activity as 2017 ended that is driving more broadly based gains in output. The improvement in activity was broadly based across sectors but notable improvements were reported by firms in food and consumer focussed areas. 

Irish based companies envisage further increases in their activity levels in the next three months. As diagram 3 suggests, expectations for the business outlook have not changed markedly in the past three months. While all sectors see ongoing growth, firms in manufacturing and consumer facing activities were somewhat more cautious than three months ago while construction firms were more slightly more optimistic. 

Jobs market strengthens further

The pick-up in activity levels reported by Irish based companies has fed through to a stronger jobs market trend of late.  As diagram 4 indicates, the proportion of companies reporting increased headcount in the past three months was the largest in nine quarters. So, the survey is pointing towards solid momentum in new hiring as 2018 begins.

The pace of hiring activity was similar across most sectors, supporting the sense of a widely felt pick-up in business conditions. However, there was some variation in the number of firms reporting reduced payrolls with relatively few firms in areas such as business services and consumer-focussed activities reporting lower headcount. Firms in these areas also reported a marked decline in the availability of suitably qualified employees of late. So, staff retention may have become an increased focus for many businesses of late.

Costs rising widely

 While the general tone of the survey is one of a clear and healthy improvement in Irish business conditions, one concerning aspect is a marked rise in costs as diagram 5 illustrates. Some 58% of companies reported higher costs in the past three months the highest share in ten years.  The pick-up in costs was broadly based but it was most marked in areas other than food and manufacturing. This may reflect the greater importance of labour costs or perhaps a larger or more immediate sensitivity to increases in energy costs.  It could also be a consequence of a scaling up of activity by domestic focussed businesses that is leading to capacity strains. The survey details also suggest respondents expect their operating costs will remain on a similar trajectory in the next three months.

‘Macro’ confidence improves

Encouraged by the improvement they are seeing in their own companies’ operating environments and a sequence of positive ‘macro’ reports on the Irish economy, respondents were more confident in the Irish economic outlook than at any time in the past two years. Through this period, as diagram 6 shows, this improvement in sentiment in relation to the Irish economy has been driven primarily by a drop in negative responses that likely reflects an easing in concerns about the speed, spread and scale of negative ‘Brexit’ effects. Importantly, as responses to questions in part II of the survey reveal, Brexit remains a central concern for many businesses but, thus far at least, the Irish business sector appears to be weathering any impacts better than had been feared.    

Section II: Supplementary questions

Brexit important but not the only risk

With the general tone of the survey underlining the strength and spread of the improvement in business conditions, it is worth examining Irish based companies’ views as to their sense of the nature of the risks to their activity levels in 2018.  We asked companies to identify and rank the areas of concern to their business in the coming year from a long list of issues (full details available on request).

From these responses, it is clear that Brexit stands out as the most notable concern, being cited by 17% of respondents as the key risk to their business. It assumed even greater prominence when account is taken of the top four or five risks cited by all respondents.

Significant as worries about Brexit are, the survey implies that more than 80% of companies feel other specific concerns are more pressing. As diagram 7 shows, these results suggest a diverse range of concerns are occupying senior management in Irish based companies at present.  In that respect, the survey highlights the large number of ‘known unknowns’ that cloud the business outlook. The broader positive tone of the survey suggests such concerns are now regarded as an inevitable feature of the current environment.

The difficulty in planning-and the related need to commit long term resources , in a very uncertain world  likely lies behind the significant 13% of responses that highlighted more general economic/political risks as the most pressing issue.  A more mundane but widely felt concern was reflected in the 12% of responses that focussed on the strains caused by an increased regulatory burden.

While a notable 11% of responses identified US tax reform as the key risk they face, it is not entirely surprising that this tended to be a relatively concentrated worry and figured less prominently in the broader list of concerns cited by most respondents.

Some 10% of respondents cited domestic wage pressures as the key risk facing their business in 2018. A further 9% highlighted the availability of suitable staff. So, the number of Irish based companies that see pay and personnel issues as the key risk facing them in 2018 is broadly similar to the number focussed on Brexit. Significantly, only 2% of companies regard overheating in the Irish economy as their key concern. So, issues in relation to staff costs are seen as specific rather than a symptom of more generalised cost pressures.

Significant Brexit uncertainty persists

We asked firms if the conclusion of phase 1 of the Brexit negotiations had altered their expectations in relation to the likely impact on the Irish economy of the UK’s exit from the EU. Importantly, the question wording asked whether the manner in which negotiations were conducted and concluded had affected respondents thinking.So, the answers relate to the process as much as the results of the first phase of Brexit talks.

The responses shown in diagram 8 show no uniformity of views. However, it is notable that only a small minority-some 17% of respondents, have become more optimistic about the likely impact of Brexit on the Irish economy.  While the most common single response (given by 41% of firms) was that their assessment hadn’t changed, a substantial 42% were either less optimistic (24%) or more unsure (18%).  So, notwithstanding the significant effort expended at both official and business levels and the achievement in focussing significant attention on Ireland’s interests in the phase 1 agreement, the survey shows little evidence of a progressive improvement in visibility/positivity on the part of corporate Ireland as Brexit talks move into the critical second phase.  

We also asked companies to indicate where they felt their own preparations for Brexit were at this point. The responses shown in diagram 9 below testify to the expected broad reach of Brexit across Irish business.  Only 37% of companies do not expect to be impacted by Brexit. Of the majority that do, some 29% are actively engaged in assessing the important issues and actions while and an equal number are still awaiting further clarity before acting. So, a significant number of companies indicated they have yet to develop any significant Brexit response within their organisation. 

While recovery has now spread broadly, its intensity varies considerably

Across a range of questions, responses to the KBC Bank/Chartered Accountants business sentiment survey highlight a strong and increasingly broad based improvement in business conditions of late. In part this reflects a synchronised recovery in the global economy of late while for many domestic focussed it reflects the progressively wider reach of a pick-up in Irish domestic spending. To assess the extent to which conditions now vary across key markets, the survey asked companies to rank growth conditions across the various geographic areas of interest to them. 

In terms of external markets, as diagram 9 indicates, respondents highlighted the improvement in the Euro area of late. This is unsurprising and reflects the marked contrast between the recent surge in activity in the single currency area and the weakness that preceded it. While the US economy has also delivered robust growth of late, this is more in keeping with a long established trend as the US recovery is now the longest in the post war era. Interestingly, a non-negligible 16% of companies are finding their most buoyant market conditions are in the UK at present, a result that emphasises the importance of market niches as well the broader ‘macro’ environment.

Ireland still seeing a two speed economic recovery

We also asked companies to rank the pace of growth across geographic areas of Ireland. As diagram 10 clearly indicates, there is near unanimity that growth in the Dublin region continues to markedly outpace that in other parts of the country. Some 87% of respondents felt their business was experiencing faster growth in Dublin than elsewhere in Ireland.   

Some element of ‘catch-up’ growth might have been expected outside the capital of late as the upswing in domestic spending broadened (in much the same way that a ‘catch-up’ element is currently being seen in Euro area growth relative to that in the US). However, this is not the case. These results point towards the persistence of a marked divergence in pace in what is clearly a two-speed recovery in the Irish economy.

It should be noted that the body of the survey suggests growth is now being felt widely across the Irish economy. However, while the survey suggests a notable broadening of the geographic reach of the economic upswing, the responses suggest that the economic momentum of the capital is altogether faster than that seen across the rest of the recovery. 

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.