SME SECTOR CONCERNED AT GLACIALLY SLOW AND PATCHY RECOVERY IN DOMESTIC MARKET.
SME SECTOR CONCERNED AT GLACIALLY SLOW AND PATCHY RECOVERY IN DOMESTIC MARKET.
Duality of the economy clearly evident in survey results.
Wage demands based on GDP growth rates totally unsustainable.
Retail sector beginning to feel slight and fragile recovery.
Euro exchange is most immediate concern for SMEs.
ISME, Friday 10th April, 2015
The results of the ISME Quarterly Business Trends Survey for the first quarter of 2015, released today (10th April) clearly demonstrate the vagaries of the Irish economy and the domestic economy in particular. While national figures from Central Bank, ESRI and the Exchequer show an overall healthy growth trend, the figures specifically from the SME sector show a contrarian view which confirms the duality of the Economy and, even within that sector, the variation in results and sentiment.
Despite generally positive figures nationally, eleven (11) of the twelve (12) SME key indicators are showing a reduction in figures, reflecting a step back from the more optimistic indicators at end of 2014. In contrast, within the overall, the retail trade shows a more optimistic outlook with all their ten indicators being positive, albeit coming from a low base.
The survey was conducted in the last week of March and first week of April, with 932 SME respondents from nine main sectors. 51% of the respondents employ less than 10, while a further 41% employ between 11 and 50 and the remaining 8% employ between 51 and 250. Geographically, 37% are from Dublin with 63% spread across the country, giving a good reflection of the country as a whole, both sectorally, geographically and by employee numbers.
Business Confidence and Expectations have reduced in this Quarter (50% to 39% and 65% to 57% respectively) after steady increases in the previous year.
SME owner-managers perception of the Business Environment has not changed appreciably in the last three Quarters. Profitability Expectations however have reduced (34% down to 25%) after two quarterly increases.
Despite increasing national figures a net 16% say Current Employment levels are better than last year (a reduction from 25%). However the further drop in Future Employment Expectations is a cause for concern. This is the third successive decrease for this indicator.
Current Sales and Sales Expectations have reduced in this quarter, despite the positive results from retailers. The overall figures are down due to the effect of reduced sales from manufacturers and services sectors.
Both Current and Future Investment levels decreased in this Quarter after steady increases in the last four Quarters. It is hoped that this is as a result of seasonal preferences for new investment in business.
The decrease in Current Exports from 38% to 29% and Export Expectations from 57% to 45% is a continuation of the up and down profile of SME exports. The trend lines for both indicators in the last two years are positive.
For the first time in over seven years Economic Uncertainty at 16% is not the most pressing concern and has been replaced by concerns over the Euro Exchange, which has jumped from 4% to 21% in the quarter.
Commenting on the Trends Survey, ISME, CEO Mark Fielding said, “Despite the exceptionally strong net exports, mainly from the FDI sector, which on GDP figures alone made Ireland the fastest growing economy in the EU in 2014, the domestic facing SME sector continues to struggle out of the recession. The better macroeconomic environment has boosted tax revenues and helped achieve fiscal targets while the quantitative easing has devalued the euro, giving a boost to exports, the reality for SMEs is that the recovery is glacially slow and patchy”.
“To-day’s figures confirm once again the duality of the economy and the danger of measuring everything against GDP figures, which are prone to exaggeration from ‘patent cliffs’, transfer pricing and ‘contract production’, leading to uninformed claims for wage increases, based on international sleight of hand figures and Father Ted, ‘resting in my account’ economics.
The continuous whine from election facing government TDs pushing for wage increases, both private and public, is slowing down job creation and the small increase in take-home pay from Budget 2015 is yet to entice consumers, in any great numbers, to spend.
Retail figures are however the most optimistic in years and point to an expectation that consumer sentiment will soon convert into cash at the tills. The danger here is that, while volumes are increasing, prices are being cut to the bone, resulting in decreased margins. Recent retail figures from CSO, for February, showed an annual increase of 8.2% in volume and 4.4% in value. However, when the motor trade is excluded, sales were 4.8% higher in volume and only 0.7% higher in value, clearly showing the price reductions. In addition, owner-managers are facing increased uncertainty concerning wages, particularly the National Minimum Wage, and Government pre-election rhetoric is exacerbating the situation”.
The slight recovery being felt in Dublin is not replicated throughout the country and this creates a challenging environment for consumer facing provincial businesses and the ability to protect or grow margins through price increases, is very limited. Quite clearly there is no room for wage increases across the SME sector and this is a situation that is repeated throughout the entire country.”
The Retail sector has turned from being very negative at end of 2014, where 9 of 10 indicators showed a decrease, to a positive 10 out of 10. While the figures are coming from a low base many of the indicators are at their highest in 7 years. Business Expectations, Profit Expectations, Future Employment and Investment all hit highs and bode well for the immediate future in the sector. The biggest concern is Economic Uncertainty, mainly driven by worry over proposed unsustainable labour cost increases.
The Manufacturing sector has reversed the positive Q4 2014 results, with only 2 positive moves compared to 9 of 12. Current Sales and Business Environment are positive movers, while Business Confidence shows the largest drop of 16 points to +39. Both Current and Future Employment are showing drops of 10 and 12 points respectively.
Exporters, in line with the majority trend are less positive this quarter, with 11 of 12 indicators showing a decline. The exception is Sales Expectations which has risen 9 points. However this sector remains the most optimistic on a continuous basis and despite the present drop, expectations are good for the year ahead.
The Services sector has 5 out of 12 positive moves, Business Expectations, Future Employment, Current Sales, Current and Future Exports. The fact that exports have improved is a positive sign in this sector and while current employment has dropped marginally, the expectation of increased future employment has risen 7 points in the quarter.
The Association called on the Government to assist the recovery by:
Reducing government influenced business costs to below the EU average.
Ensuring real measurable access to credit for viable SMEs.
Outsourcing more state sector services to SMEs.
Reforming the social welfare system to make it more profitable to work.
Expanding the export capacity of the SME sector through soft supports.
Attacking the scourge of ever-increasing black economy activity.
“We believe that the Irish economy will grow strongly in 2015 from a macroeconomic perspective, however the rebalancing of the domestic sector is slower than anticipated and the results of this SME Trends Survey for Q1 2015 give many reasons for caution. The main caveat to this upbeat assessment is that excluding car sales, consumer spending is still fragile; many aspects of activity are coming off a very low base and growth rates are somewhat exaggerated; and the recovery has been concentrated in the Greater Dublin Area, and ‘Contract Manufacturing’ is exaggerating the growth statistics. There is still a strong level of fragility surrounding the economy and there are still many problem areas to work through and challenges to be surmounted.
A big plus for the economy in 2015 is the oil price decline of recent months, this is akin to a tax cut, welcome but transitory.
Ireland has been insulated from the weakness in the Euro Zone by the strength of growth in the US and UK. This should continue in 2015, and Irish exports to both of those markets will be helped by the fact that the euro has declined by 19% against the dollar and by almost 12% against sterling over the past year.
From a political perspective, an election must be held in April 2016 at the latest. This is leading to two issues;
The tendency of ministers to over promise, in particular on the labour front.
There is no guarantee that a stable government will be possible due to the growing proliferation of Independents. Political stability has been a key factor in selling Ireland to investors in recent years.
Both of these aspects are a source of concern because political promises and any instability can often result in poor policy making, with long-term negative consequences. This is already having a dampening effect on SME investment and job creation,” concluded Fielding.