Irish Business Ends 2012 On A Strong Note


Irish business activity levels picked up significantly

 Irish business volumes show clear improvement in final quarter.

• Activity balance at strongest level since Winter 2007.

• Growth seen continuing in early 2013 but no marked strengthening is expected.

• Healthier business levels have prompted increased hiring of late.

• In spite of increased activity, companies are slightly more pessimistic about Irish economy.

• Budget 2013 seen as erring on the side of deficit cut at expense of a fragile Irish economy.

• International environment seen as key uncertainty for Irish business in 2013.


Activity Notably Stronger Of Late

Irish business activity levels picked up significantly in the final three months of this year
 according to the results of the Winter 2012 KBC Bank Ireland/Chartered Accountants Ireland Business Sentiment Survey. As diagram 1 below indicates, business conditions in the final quarter were markedly better than reported in the previous survey. Indeed the balance between positive and negative responses to the question on recent company performance was the healthiest seen since the Winter 2007 survey.

These results are encouraging. However, they should probably be interpreted as signalling an ongoing if uneven recovery rather than a hugely better business climate in Ireland towards the end of 2012. This quarter’s results at least partly reflect a correction to somewhat disappointing results in the Autumn survey. Moreover, as noted previously, the Irish economy lacks any compelling driver of notably stronger activity at present. Continuing uncertainty about the condition of the global economy allied to the impact of budget austerity in Ireland mean that the ‘animal sprits’ that would typically drive an accelerating upturn at this stage of a normal cycle remain largely absent. As a result, activity levels in the Irish economy have exhibited something of a saw tooth pattern through the past couple of years. That said, the Winter 2012 Business Sentiment Survey appears consistent with some step-up in the pace of growth as the year ends and this could lead to a gradual but progressive improvement through 2013. So, while these results don’t signal a sea change in conditions across Irish business in late 2012, they do point towards a gradual strengthening in activity. In view of the range of forces weighing on the business environment at present, this should be seen as a very positive outcome.

The improvement in activity levels in the past three months was particularly evident in a sharp and perhaps surprising upgrading of conditions in the manufacturing sector of late. This comes against a backdrop of difficult global conditions and is particularly striking in that context. The number of companies in this area that reported stronger activity rose to two-thirds of respondents from just under a half in the Autumn survey. Similarly, the number of manufacturing firms reporting lower output dropped from one in three to one in eight between the two surveys. If the biggest change in conditions of late was reported by manufacturing firms, arguably a more significant change was reported by those companies that are focussed on the Irish consumer. Their overall activity balance swung from negative into positive territory in the past three months thanks to both a sharp rise in the numbers of firms reporting increased activity and an equally large fall in the number of firms reporting lower activity. There was also a modestly positive activity balance in the construction sector, but food companies again reported a decline in output of late. With the general climate becoming more positive, it is not surprising that business services firms reported a notably stronger positive balance than in the Autumn survey.

Growth Expected To Continue In Early 2013

The improvement in business activity reported for the past three months is expected to continue into early 2013However, as diagram 2 below indicates, companies don’t expect any dramatic strengthening of the pace of recovery. This suggests the pace of the upswing may remain more hesitant than normal. Obviously, companies are not extrapolating forward the strong results they have posted for the past three months. This seemingly cautious approach is understandable given the range of influences weighing on the economic outlook but it should be sufficient to support a further increase in activity levels in early 2013.

The sense that moderate growth is likely to remain the norm in early 2013 is clearly conveyed by responses given by firms in the manufacturing sector. After reporting exceptionally strong activity in late 2012, these companies expect further growth in the early part of next year but the balance between positive and negative responses is altogether smaller in terms of expectations for the coming quarter than the experience they reported for the past three months. This is mirrored to varying degrees across responses from most other sectors but construction firms expect renewed weakness in activity while food firms see recovery in their output.

Business Employment Picks Up

The improvement in activity levels seen in the past three months was sufficient to prompt a modest increase in employment levels. Again, it should be emphasised that the small positive balance doesn’t suggest any dramatic change in job market conditions of late. Instead, it seems that we have moved to a position of broad balance where new hiring is now running at similar or possibly even a slightly faster pace than layoffs. These results are consistent with signals on the jobs market coming from the consumer sentiment survey of late. In both instances, recent results show a level of volatility around a slightly improving trend. This implies a turnaround is emerging but it is modest and uneven as firms remain reluctant to ramp up their payroll numbers given continuing uncertainty about the economic environment.

The improvement in job market conditions in the past three months was broadly based. As might be expected, the oversized improvement in manufacturing sector activity did not produce a correspondingly large positive employment balance. While the Winter Survey suggests that numbers at work in manufacturing increased in the past three months, cost concerns and productivity demands on companies in this area as well as relatively restrained expectations for growth in business volumes in the coming quarter acted to restrain the rise in employment. Most other sectors also reported a marginally positive jobs balance in keeping with the broadly based nature of the improvement in activity levels in the past three months. However, the construction sector reported a significantly lower level of employment. Again, the jobs element of the Business Sentiment Survey emphasises the ‘iterative’ nature of the upswing as firms adjust their payrolls in response to emerging needs rather than on the basis of anticipated growth.

Costs An Issue For Some Sectors

The Winter 2012 Survey also saw a further increase in business costs
, continuing a sequence that now stretches back three years. However, as diagram 4 shows, the number of companies reporting higher costs was marginally lower than three months ago. Again, manufacturing firms were more likely to report higher costs as were construction companies whereas companies in business services and consumer focussed areas reported a mixed picture with nearly as many reporting a drop in costs of late as indicated that costs had risen. This suggests that cost increases are primarily concentrated in particular inputs, such as energy for example, rather than emerging as a concern across the spectrum. 

Economic Worries Increase In Spite Of Improved Business Volumes

With business levels up notably in the past three months and a further modest improvement envisaged for early 2013, it might have been expected that companies would be a little less gloomy about the broader economic situationInstead, diagram 5 suggests companies have become slightly more pessimistic of late. Again, we would emphasise the change in thinking between the Autumn and Winter surveys is not particularly dramatic but the lack of a followthrough from stronger business volumes to a greater sense of optimism about Irish economic prospects highlights the difficulty in building substantial forward momentum or any clear ‘feel-good factor’ in the Irish economy at present.


As usual the Winter Survey included a number of supplementary questions. One of these asked what companies regarded as the most important ‘macro’ factors likely to influence their business in the year ahead. As diagram 6 indicates, the global economic environment is judged to be far and away the most important external consideration for Irish businesses. Well over half of the companies surveyed chose to focus on this issue—nearly four times as many as highlighted any of the other options mentioned. The international environment was regarded as the most important issue by companies across all sectors, including largely domestically focussed businesses such as construction and those in the consumer space. Clearly, the global environment exerts a direct influence on the fortunes of a range of Irish companies. However, responses to this question suggest more broadly based worries across the wider Irish business community in relation of external developments. In circumstances where Euro area growth prospects have been repeatedly downgraded and the term ‘fiscal cliff ‘ has recently entered the business vocabulary, such responses likely reflect fears about a range of ‘unknowable unknowns’ and their potential impact on domestic sentiment and spending. These results may also shed some light on the weakening in sentiment in relation to Irish economic prospects reported above. Although companies are seeing some improvement in their immediate operating environment as signalled by recent increases in activity levels, a deeply ingrained ‘fear factor’ means that a typical cyclical upswing in sentiment remains absent.

Budget Concerns Centre On Weak Economy

The Winter Survey was taken in the five working days immediately after Budget 2013 was presented. So, a number of questions sought to establish business thinking on the strategy and shape of the Budget package. We first asked whether the targeted €3.5 bio adjustment struck the right balance between the need to reduce the deficit and the need to limit short term damage to a generally fragile Irish economy. As diagram 7 illustrates, only 24% of respondents thought the Budget got the balance right, with 41% taking the view that there was an excessive focus on cutting the deficit and only 13% suggesting that the Budget adjustment should have been larger. While a significant 22% indicated they were uncertain in relation to whether an appropriate balance was struck, it seems clear that Irish business is of the view that the threats posed by a weak economy are notably greater than those implied by a still comparatively large Irish Government deficit. The tone of these responses is notably more cautious than those given to a similar question a year ago when only 30% had concerns about growth and a somewhat higher 18% favoured somewhat larger cuts. This might imply some measure of adjustment fatigue is setting in following six ‘austerity’ Budgets, but we think it owes more to the current position of the Irish economy.

Responses to these questions appear to highlight a widely held view that the Irish economy is now at a particularly delicate point in terms of turnaround at present and a renewed weakening is seen as the most threatening risk facing a still fragile recovery. The sense of a very testing economic backdrop is also hinted at in answers to another Budget related question. Some 51% of companies felt a weak economy meant the Government was unlikely to achieve its tax targets for 2013 compared to a surprisingly low 15% that feel targets will be met. Companies were also asked whether Budget 2013 struck the right balance in terms of reliance on tax increases relative to cuts in Public Spending. Responses were about equally split between those that felt the balance was broadly right and those that felt there was too much reliance on higher taxes. In turn, some 54% believe future Budgets should rely more heavily on Public Spending cuts and less on tax increases whereas only 12% favoured a greater emphasis on tax increases. While this might be seen as reflecting a typical private sector bias, it likely also speaks of strong concerns about the need to sustain a fragile recovery—a view that is seen across responses to a range of questions in the survey.

2015 Should Be Somewhat Better But Not Dramatically Different

The survey also asked how different Irish economic conditions might expect to be in 2015 compared to today. Answers given to this question are shown in diagram 8 and we compared these to those given to a similar question in the Winter 2011 Survey to get a sense of whether Irish businesses believe the longer term outlook has changed in any substantive way in the past twelve months. Diagram 8 suggests that in general, economic conditions are expected to be somewhat better but not radically different in three years time—an outlook that is largely unchanged from a year ago. Expectations of a very sharp improvement have receded slightly but fears of a further deterioration in the Irish economy have eased to an even greater degree.

So, the view appears to be building that the Irish economy will slowly come to provide a better operating environment for business. This might be regarded as a relatively limited expectation in the light of stronger levels of business activity reported of late. However, it matches the generally cautious tone of the Winter Survey. In addition, views on the three year outlook are probably coloured by increased nervousness about the near term economic outlook as highlighted in many aspects of this survey. 

The survey also asked companies to identify the most important measure announced as part of the Tax Reform Plan for the SME sector in Budget 2013. The extension to the three year relief for start-up companies was highlighted in this regard.  Budget 2013 provides for an extension to three-year relief for Start-up Companies to allow any unused relief arising in the first of the three year of trading due to insufficiency of profits to be carried forward for use in subsequent years.