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Growth in activity and hiring slightly softer of late but conditions still very positive
Survey hints pace of Irish economic growth likely to moderate but remain healthy
Irish businesses resorting to multiple responses to staff/skill shortages rather than simply raising pay
Brexit, staff shortages and data protection the key concerns facing Irish business
Irish business sentiment has slipped somewhat as companies reported a slightly slower pace of growth in their activity levels and hiring in the past three months. We don’t think this points to any marked weakening in the prospects for Irish business or the broader economy although it does suggest the rate of GDP growth might ease compared to that seen in 2017.
Some element of this recent ‘pause’ likely reflects weather and other seasonal influences and, as such is likely to prove temporary. Moreover, firms remain confident about the outlook for business volumes in the upcoming quarter.
Responses to supplementary questions in this quarter’s sentiment survey suggest Irish based companies are actively managing a wide range of ‘headwinds’ to their businesses. While Brexit remains a key concern, it is no longer seen as the predominant issue facing Irish business at present.
The survey highlights how companies have taken a wide range of measures rather than simply resort to pay increases to respond to staff/skill shortages.
The survey also finds an acute focus on data protection issues, with the vast majority of firms taking actions to address concerns for their businesses in this area of late.
The KBC Bank/ Chartered Accountants Ireland business sentiment index slipped to 116.4 in the spring of 2018, largely reversing the gains seen in the previous quarter that had taken the sentiment index to a two year high of 120.8 at end 2017. The sentiment index remains some distance below its 2015 peak (130.5) which implies that the pace of improvement in business conditions has moderated of late.
The slightly softer tone of the sentiment survey is likely driven by a range of factors. In part, it owes something to the normal volatility in economic and business indicators. More fundamentally, it may reflect both a normal easing as the recovery has moved to a mature and broadly based phase as well as the continuing shadow cast on business planning by a range of ‘known unknowns’ such as Brexit and tax changes in the US or mooted in the EU.
The trend in business sentiment in early 2018 remains consistent with a strong Irish economic performance as diagram 1 below indicates. While measured GDP growth may not always capture the experience of the ‘average’ Irish company, the broad comparability of developments in the sentiment index and the official GDP data suggest both are signalling the persistence of robust growth.
The relationship between the level of the sentiment index and the pace of GDP growth illustrates why the softer sentiment reading for spring 2018 should be seen as signalling a moderation in the pace of growth rather than any marked weakening in the business environment of late. A simple visual inspection might suggest the current sentiment reading (if sustained) could be consistent with a GDP growth rate in the region of 5% in 2018.
A key driver of the slightly softer business sentiment reading was a somewhat slower pace of increase in activity levels reported by companies in the past three months. As diagram 2 below indicates, it remains the case that the majority of firms (some 57% of those surveyed) reported stronger conditions of late and only a small number (11%) reported weaker conditions but on both of these metrics, the latest survey reading was less favourable than that of three months ago.
The slightly softer tone of business growth was broadly based but it was particularly notable in two sectors; food and construction. Our sense is that seasonal influences and the particular disruption caused by exceptionally poor weather in March may have exaggerated the pull-back compared to the previous quarter. A somewhat surprising exception to the recent slip in activity was reported by manufacturing firms where an improvement in the current survey may reflect generally strong global conditions in early 2018.
One reason we would not overstate the significance of the slightly softer reading for activity levels in the past three months is that companies have not pared back their expectations for the coming quarter. Moreover, the prospect of some softening in the spread of growth had been signalled in the expectations element of the previous survey.
As diagram 3 below indicates, companies are generally upbeat in that the majority continue to see stronger business volumes through the summer. In the main, the sectoral breakdown of responses implies no dramatic change from the trend seen of late. In turn, this might suggest the survey implies the persistence of a strong but slightly slower pace of growth in the Irish economy than that recorded for 2017.
Companies responded to a somewhat slower pace of growth in their output in recent months by scaling back their hiring. Again, it is important to emphasise that the responses shown in diagram 4 below remain consistent with the persistence of strong conditions in the Irish jobs market of late. More than one in three companies added to their payrolls in the past three months and this exceed the number reporting a lower headcount by nearly four to one.
Manufacturing and construction firms reported above average rates of hiring but in both of these areas there was also a higher than average incidence of firms reporting reduced payroll counts. In the case of manufacturing, our sense is that these results reflect the diversity of conditions across what is a very heterogeneous sector.
Our suspicion is that the divergence in construction employment at least partly reflects movements between firms in circumstances where there is an overall shortage of skilled workers but it may also owe something to the casual nature of employment in parts of the sector that would have seen headcount cut in response to weather-curtailed activity levels.
After a sharp increase in the number of firms reporting higher costs in the previous survey, there was a notable (and somewhat unexpected) easing in the trajectory of costs in the past three months. This was largely the result of an easing in the scale of cost growth reported in areas such as construction and business services and could reflect some easing back after large once-off jumps such as ‘start of year’ list price increases for certain inputs or annual pay rounds.
In contrast to results from three months ago, there was a step-up in reported cost increases from food and other manufacturing firms that may reflect slightly greater global ‘pricing power’ as the world economy strengthens or, possibly, some impact from a slight strengthening in Sterling in recent months.
Firms also reported a slightly more cautious outlook on broader Irish economic prospects in recent months. Again, it is important to note that the picture painted by diagram 6 below is one of predominantly positive sentiment but a smaller number of respondents indicated they had become more positive on the Irish economic outlook than at any time in the past year.
There is a sense in these responses that an improving Irish economy is now been seen as the norm. It might also be speculated that these responses reflect a view that official data might overstate the nature and extent of the improvement in Irish economic conditions being experienced by many survey respondents.
As usual, the KBC Bank/Chartered Accountants Ireland business sentiment survey asked a number of questions about topical issues. This time around, we focussed these on two areas; the actions taken by firms in response to staff/skill shortages and a consideration of the nature and extent of issues firms regarded as concerns to their businesses at present.
We began by asking respondents how important skill shortages were to their companies at present. Some 23% indicated skill shortages were ‘very important’ to their current circumstances while a further 48% suggested the issue was of ‘moderate importance’. A further 25% of companies indicated staff/skill shortages were of ‘limited importance’ and just 4% said the issue was of ‘no importance’ to their business. So, only one in four companies currently see staff/skill shortages as relatively unimportant to their current circumstances. More generally, as we discuss later, hiring/staff constraints were rated among the most important concerns facing Irish companies today.
We then asked what companies had done in response to staff/skill shortages. It may be worth prefacing the survey findings by rehearsing the standard economics text book suggestion that the issue could be resolved by having the relevant price/wage increase to the point where demand is in line with supply. Significantly, in recent years, in a range of economies, wages have not responded to declines in unemployment to levels that would have previously signalled skill or staff shortages.
While there is plenty of commentary suggesting rapidly rising wages in Ireland, thus far there is little evidence of such developments in official data on earnings. For this reason, we felt it might be useful to examine whether Irish based companies were responding to pressures resulting from the strong recovery in the Irish jobs markets in ways other than simply increasing pay.
A lot of attention internationally has been focussed on the implications of the recent downturn for the complexion of the recovery now underway and the behaviour of individuals and firms. A number of studies have suggested that the scale of losses suffered in the recent crisis may have resulted in ‘wage scarring’, which caused employees to downgrade pay demands relative to other goals such as job security.
While the examination of such scarring effects are usually focussed on the behaviour of workers, it may also be that the experience of the downturn has prompted Irish based companies (and their counterparts elsewhere to varying degrees) to seek responses to the increased demand for labour of late other than pay increases because of concerns that pay costs might move onto an unsustainable trajectory in the future. To the extent that companies agree such initiatives with their workforces, it might be expected to dampen recorded pay grow at the aggregate level.
The main finding of the KBC Bank/Chartered Accountants Ireland business sentiment survey is that Irish companies have resorted to multiple solutions to address staff/skill shortages. While increased pay has been an important element, as diagram 7 indicates, it has not been the most prevalent response. Indeed, the multidimensional nature of these responses may be at least a partial explanation for the relatively modest trend in official data on pay growth in Ireland and elsewhere of late. Of course, the diversity of approaches taken by companies in response to staff/skill shortages serves as a broader indication of the increasing complexity and changing dynamic of the ‘payroll’ area in the modern economy.
Diagram 7 suggests that the most widely seen response to staff/skill shortages, adopted by three out of four Irish based companies, has been to address the problem by internal training, which of its nature is likely to translate a broad spectrum of initiatives tailored to specific firm or industry requirements . By improving productivity, this investment in the human capital of its work force assists the competitive position of business while enhancing the career prospects of those employees receiving the training. Training was the most commonly cited response by all sectors but it was particularly prevalent in responses by firms in the construction sector as well as in consumer and business services.
The prevalence of measures to increase flexibility of contracts, hours and work practices which were cited by just under half of respondents likely also reflects important changes in the intersection of cost constraints on the part of firms and the importance of non-monetary elements of compensation to employees. Such changes are driving a notable different dynamic in the structuring of employer/employee relations. Firms focussed on consumers and those in business services tended to adopt this response more than most other sectors.
The openness of the Irish jobs market, augmented perhaps by the relatively recent nature of outward migration, together with the global connectivity of many Irish businesses means that as many 38% of companies resorted to overseas hiring in response to staff shortages. This response was particularly prevalent among food and other manufacturing firms.
Again, such broadly based recourse to a pool of labour from abroad would both tend to raise the capacity of businesses to expand as well as constraining headline pay growth. To a broadly similar extent, the use of graduate programmes, internships and apprenticeships would also tend to enhance the range of potential employees. Food and construction firms tended to cite this response more frequently than the average.
While Irish based companies have adopted a large number of initiatives to minimise the impact of skill shortages, a not insignificant 17% of firms have been forced to modify their expansion plans to reflect this constraint on their capacity to grow. This response was more prevalent among firms focussed on consumers and in the business service area whereas construction and manufacturing firms tended to report comparatively low rates of adjustment in their growth plans.
We also asked companies what issues were of particular concern to their business at present. To get a sense of the spread as well as the strength of particular concerns, respondents were asked to rank various issues on a numerical scale from ‘very important’ to ‘not very important’. The responses shown in diagram 8 below show the proportion of companies who felt a particular issue was very important to their business outlook.
The results shown in diagram 8 suggest that most companies are typically focussed on a range of concerns rather than a single specific issue at present. It remains the case that Brexit is a key concern but these results cast it in the role of ‘first among equals’ rather than a predominant topic of concern. It appears that companies are paying equal attention to pay and data protection issues as they are to Brexit at present.
The importance attributed to staff/skill shortages and hiring costs is not at all surprising and the response of companies to such concerns is treated at some length earlier in this report. The fact that data protection issues are regarded as broadly based a concern might appear a little surprising but this reflects the confluence of the introduction of the General Data Protection Regulation, some high profile cases around alleged data misuse and broader and quite fundamental questions about the gathering, storage and use of personal data by companies.
Significantly, the importance of data protection related issues to Irish business is highlighted by Diagram 9 which shows that 80% of businesses had taken specific actions to address concerns in this area in the past six months. As the diagram indicates shows this response rate dwarfs all others, implying data protection issues have emerged as an urgent concern of late. An important consideration in this regard is that the responsibility conferred by developments such as GDPR is placed firmly at the company itself whereas concerns such as Brexit are more ‘macro’ than ‘micro’ their nature and, in many instances, less concrete in terms of their immediate implications at the level of the individual firm.
The KBC Bank Ireland / Chartered Accountants Ireland Business Sentiment Survey reflects the view of Chartered Accountants working in senior positions (CEOs, MDs and FDs) in Ireland’s leading companies. The Spring 2018 survey was conducted from April 6th to April 16th 2018 and the results presented are based on 302 completed responses.
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.