Irish business conditions now improving broadly but recovery is distinctly two-speed

Jan 26, 2018

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

  • 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 most common concern but only cited by 17% of companies
  • Pay and personnel issues as well as global uncertainty also notable worries

Irish business sentiment has improved to its best level in two years as companies report 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.

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 taken in the middle weeks 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. Momentum in Irish business activity is very positive at present.

Importantly, the number of firms reporting weaker conditions in the past three months was the smallest in the eleven-year history of the survey. The survey also asked companies to rank the pace of growth across geographic areas of Ireland.  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.

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.

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.  The survey asked companies to identify and rank the areas of concern to their business in the coming year from a long list of issues.

The responses show 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. 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.

It is notable that 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.

The pick-up in activity levels reported by Irish based companies has fed through to a stronger jobs market trend of late.  The proportion of companies reporting increased headcount in the past three months was the largest in nine quarters

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.

Barry Dempsey, Chief Executive, Chartered Accountants Ireland, said:

“The sentiment survey suggests Irish business conditions look very positive at the beginning of 2018. Encouragingly, it finds the lowest number of companies-just 5% of respondents, reporting weaker conditions in eleven years. So, the economic upswing is now being felt very broadly across business from both a sectoral and regional perspective.

“While the survey suggests a very positive business outlook for 2018, companies cited a large and wide range of risks from Brexit to wage costs that could weigh on their prospects. The diversity of these responses emphasises the large number of ‘known unknowns’ that are clouding even a relatively favourable economic environment at present.”

Austin Hughes, Chief Economist, KBC Bank Ireland, said:

“Just 17% of companies felt that the completion of phase 1 of Brexit talks made them more optimistic about the likely impact of Brexit on the Irish economy. A similar number (18%) felt more unsure while a slightly larger group (24%) are now less optimistic.     

“Although the survey found the upswing in the Irish economy is now being broadly felt, some 87% of companies say their market in Dublin is growing faster than elsewhere. This suggests the persistence of a two-speed economy with little sign of catch-up growth outside the capital. “       

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 survey was conducted from 15th to 19th of January 2018 and the results presented are based on 344 completed responses.

Read the full report.

ENDS

For further reference contact:

Christine Walsh, Gibney Communications, 01 661 0402 / 085 157 7127

Austin Hughes, Chief Economist KBC Bank, 087 669 6972

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