Irish business begins 2017 on a solid footing but companies already seeing some impact from UK and US policy shifts

Feb 14, 2017

Winter 2016/2017 KBC Bank Ireland / Chartered Accountants Ireland Business Sentiment Survey

 (Full survey report attached)

  • Activity has picked up of late but caution on outlook for broader economy still prevails
  • Employment growing but slower hiring pace likely reflects uncertainty and rising wage costs
  • Pay increases becoming the norm; Some 83% of companies see their average pay increasing in 2017 while 16% see no change
  • Average pay rise still modest but wages the main driver of rising business costs 
  • 40% of companies report Brexit already impacting their business with negative effects outweighing positives by about ten to one
  • Increased uncertainty and exchange rate volatility the key issues
  • Increased uncertainty also seen as early and important effect of new US administration. Roughly one in three firms expects some impact with expectations of negative effects outweighing positives by about seven to one.

Irish business sentiment improved at the start of 2017 following a marked decline through 2016 as companies’ activity levels proved more resilient than had been feared and concerns about the broader Irish economy eased a little.

Irish based firms expect growth in their business volumes in the months ahead, but there are signs of a more cautious approach to hiring. This may owe something to an increasing focus on accelerating wage costs but it also likely reflects heightened uncertainty about the implications for their businesses of Brexit and the new Trump administration in the US.

Balancing the conflicting influences of robust increases in their own business volumes of late and the risks posed by major policy shifts in the UK and US poses a dilemma for many companies who would usually be upscaling their output, hiring and capacity levels at this point in a ‘normal’ cycle. Instead, firms may opt to take a cautious or defensive approach to their business planning for the coming year. This would be consistent with the more cautious approach to hiring even in the face of an anticipation of notably stronger activity levels in the coming quarter. In this, and some specific sectoral responses, the survey suggests heightened uncertainty may already be constraining Irish business growth in early 2017.  

The KBC Bank Ireland/Chartered Accountants Ireland business sentiment index rose to 104.8 in the winter quarter of 2016/17, a modest improvement from the 100.1 reading in the autumn survey and still well below the peak reading of 131.1 recorded a year ago. As the survey took place from January 17th to 25th, these results should be seen as representing Irish business thinking in early 2017.

One area where Irish firms appear to be taking a more cautious approach of late is in relation to pay rolls. This likely reflects increased uncertainty about the business environment prompted by Brexit and the Trump administration in the US. As a result, new hiring has remained somewhat softer of late and the results were marginal pick up in the number of firms reporting a reduction in their head count. In addition, firms signalled that wages were the area of their cost base showing the clearest increase. As relatively few firms signalled increases in their selling prices, higher wages may be prompting some pull–back in hiring.

The survey suggests that modest pay increases are likely to be the norm for most firms in 2017. Four out of five companies surveyed say they will raise average pay rates with about half of these envisaging increases of less than 2%, and a broadly similar number planning increases of between 2% and 5%. Fewer than one in twenty firms see average pay rising by more than 5%, while about one in six don’t see any increase in their average pay this year.

Austin Hughes, Chief Economist, KBC Bank Ireland, who carried out the analysis, said:

Irish business sentiment has started 2017 on a positive note as companies’ activity levels proved to be a little stronger than had been feared in late 2016 and expectations for output volumes in coming months remain promising. In a more ‘normal’ recovery, expansion plans would now be ramped up, but the survey suggests increased uncertainty of late about the impact of Brexit and more recently the prospect of a major policy shift in the US. This reflects the importance of the US to many Irish based businesses. One in three firms envisage some impact from the Trump administration on their activities, with negative concerns outweighing positive expectations by a factor of about seven to one.”

Commenting on the results, Chartered Accountants Ireland Chief Executive Pat Costello, said:

Just under half of the companies surveyed indicated that Brexit has already had some impact on their business, with negative effects outweighing positive effects by about ten to one. Increased uncertainty and exchange rate movements were cited as the key sources of difficulty.

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 winter 2016 / 17 survey was conducted from 17th to 24th January 2017 and the results presented are based on 371 completed responses.

Reead the full report here.

ENDS

For further reference contact:

Sinéad Healy, Gibney Communications, 01 661 0402 / 086 061 2441

Austin Hughes, Chief Economist KBC Bank, 087 669 6972

Brendan O’Hora, Director, Communications and Marketing, Chartered Accountants Ireland, 01 6377298