Business optimism among Irish SMEs fell in the first quarter due to rising inflation compounded by the effects of the war in Ukraine, with companies more wary of current business conditions and their future prospects as a result.
Linked Finance's latest confidence index, based on research from Behaviours & Attitudes, measured 61.1 in the first quarter, down from 67.9 in the previous quarter and 65.1 a year earlier, in what is the lowest score since Q4 2020 in the depths of Covid-19 lockdown.
The government's decision to lift pandemic restrictions on 21 January appears to have been outweighed by the feared slowdown caused by Russia's invasion and the knock-on effect on input costs and the cost of living.
Just over a third of respondents (35%) said business activity in Q1 improved from the previous quarter, down from a high of 51% in Q3 last year, and future optimism fell quarter-on-quarter, from 48% to 38%, as fewer firms said they expect future activity to improve.
Inflation hit 7.4% in April, and 39% of respondents increased prices in the first three months of the year, up from 31% in Q4, which was already the highest level recorded for a decade, but 29% of respondents reported higher operation profits, a decline from 31% in Q4.
In Association with
"Hopefully this is a short-term stalling of the recovery trends we have been seeing recently from the Index, but clearly a lot has changed in recent months that make the business environment more challenging," said Niall O'Grady, CEO of Linked Finance.
"The war in Ukraine is first and foremost a humanitarian tragedy, but it is also having a broader impact on the global economy particularly through the inflationary pressures of higher energy and input costs.
"Irish SMEs have been looking to recover pricing power and improve profitability, but with their own input costs also rising, margins are still being squeezed even where customers are facing higher prices.
"We should not be overly gloomy though, as the Index is still much higher than the levels it fell to during the pandemic, and whilst we’ve seen a pull back this quarter on most metrics it may only be temporary.”
The publication of the index follows diminished growth forecasts for the full year from the ESRI and Central Bank, with the pace of recovery following the lifting of restrictions slower than anticipated and hampered by inflation.
It also shows that smaller SMEs are struggling, with just 33% of micro-enterprises (those with one to three employees optimistic about their future prospects and 4% adding staff during the quarter compared to 68% and 34% of those with 10+ employees.
Overall sentiment on hiring has fallen slightly this quarter with 10% of companies increasing headcount, compared to 15% in Q4 2021.
In Dublin, firms are trading more strongly than those outside the capital, with 42% of Dublin companies expecting increased business activity levels, compared to 35% of businesses excluding those in Dublin.
The retail and wholesale trade category is the weakest of the three industry sector divisions measured in terms of outlooks; 28% of retail business expect the next quarter to be busier, whereas 44% of services businesses and 34% of 'other' firms believe it will be.
Photo: Niall O'Grady. (Pic: Jason Clarke)
