The survey shows that businesses are increasingly optimistic about the Irish economy
By Sean Whelan, Economics Correspondent
An interesting new economic indicator has been released by KBC Bank and Chartered Accountants Ireland.
It’s a Business Sentiment Index, of the sort that several other countries have, but – until now – Ireland has lacked.
We do have the monthly Investec Purchasing Managers Index, a closely watched short run indicator of activity in the economy here and in the other countries that compile PMIs. But the KBC/Chartered Accountants index measures both activity and sentiment – how business leaders are feeling about the economy – and it asks a variety of current issues questions as well, that obviously vary with each survey.
There are essentially four questions – two forward facing, two backward facing:
Company activity levels and employment changes in the past quarter, planned activity in the next quarter and sentiment towards the broader Irish economy. So it links expectations to what has actually happened in the respondents’ firms.
They started compiling this data in November 2006, and have been circulating the questionnaire every quarter since then to chartered accountants in senior positions (such as CEOs, MDs and FDs).
The average sample size is 375 completed surveys, covering a broad mix of economic sectors, but reflecting a predominantly service sector economy.
Now, with seven years worth of information charting the highs and lows (mostly lows) of Irish business, they have released their first report, with the numbers crunched by KBC’s chief economist Austin Hughes.
A notable feature of the survey data is the way it has broadly tracked both GNP and employment trends since 2006.
It is less aligned with GDP data, but this is not a bad thing – GDP is so volatile, and it is distorted by a few large multinationals.
Close alignment with GNP probably means this index is more in touch with the reality of the Irish economy.
So what does it tell us?
The bottom line is that business sentiment has hit its highest level in seven and a half years.
Activity levels and employment are increasing, but suggest steady rather than surging growth. And most companies see the economy here as being in the early stages of an upturn.
But, of course, there is more nuance to the picture than the bullet point version.
And a lot of the value is in the charts since the end of 2006.
Not surprisingly they show sentiment falling off a cliff from 2007, then slowly and erratically building again from mid 2009.
The base year of 2006 is taken as 100 in the index, with sentiment hitting the floor at 30 at the end of 2008.
For the first quarter of this year the index stands at 122.2. In the final quarter of 2013 it was 121.8.
The report says “these are strong results and entirely consistent with a range of indicators pointing towards improving conditions across Irish companies, but there is little indication of any sea change in the business climate that might suggest anything approaching boom conditions might be underway.”
55% of companies reported an increase in activity levels in the quarter, compared with 13% that saw a decline. Companies reporting an increase in activity outnumbered those reporting a decline in early 2012, and have been increasing ever since.
It’s not a uniform picture – while all sectors report more firms seeing increased activity, the food sector (a proxy for the wider agriculture sector) and other manufacturing report a slightly smaller margin between positive and negative responses hinting – the report says – at continuing constraints on export market growth.
It says the most notable aspect of the spring 2014 results is a further improvement in responses from companies focussed on the domestic economy, with 58% of respondents indicating a rise in activity in Q1, compared with 45% in Q4 2013.
A further broadening of the recovery is expected in Q2, with signs that momentum is beginning to build across all sectors – albeit relatively modestly.
In terms of employment, the survey indicates little real change in conditions in the jobs market in the first quarter.
In other words, there is an improvement, but it is incremental rather than sharply picking up pace. 33% of firms report increased hiring – mostly in business services – while 13% say they cut jobs, with no change in the remainder.
Business costs showed no substantive change during the last quarter, with only one in three firms experiencing rising costs, 14% seeing declines and half of firms seeing no change.
In the early years of the survey typically 60% to 70% of firms were reporting rising costs.
While the report says this does not tell us how close or far we are from deflation, “circumstances in which two thirds of Irish companies are not reporting rising costs emphasises how subdued the pricing environment is at present”.
As for the outlook on the economy as a whole, the report notes that for most of the survey’s history, respondents have been notably more negative about the economy than they have been about their own businesses.
However, for the past year or two, confidence in the broader economic outlook has improved markedly.
The latest survey reports that 71% of respondents have become more optimistic about the economy in the first quarter of this year, compared with just 4% who became less optimistic. The report notes that this is a measure of the change in sentiment, not in the absolute level of confidence (the flow, not the stock), but it says the results imply very strong positive momentum in sentiment of late.
As for what is troubling business leaders, the reports finds no real clear issue dominating a list of nine issues.
The biggest concern is inadequate demand – cited by 18.3% – followed, rather surprisingly, by regulatory burden, cited by 18.2%.
Access to bank funding is the main problem for 14.4% of respondents, while capacity issues – such as physical capacity constraints or availability of skilled staff – are issues for 4.9% and 5.6% respectively.
The authors suggest this range of concerns are indicative of conditions “normalising” with no overarching impediment to business growth looming large.
The next instalment in this survey is due for publication in July.