ISME's third quarterly business trends Autumn 2007
The results of the ISME's third quarterly business trends survey confirm that business confidence among SMEs has plummeted to a four year low with a large percentage of smaller companies less optimistic about business prospects in comparison to previous quarters. Economic uncertainty can be identified as the primary factor behind the sharp decline in optimism. However, business is confident in its own ability to deliver with many companies still planning to increase employment and investment over the next 12 months in spite of the current concerns.
The survey, which attracted a response from over 500 companies, confirms that 38% of respondents are less optimistic about business prospects than they were 12 months ago, in comparison to only 18% who are more optimistic. The figures compare very unfavourably with previous quarters. For instance, the last quarterly survey (Summer 2007) confirmed that 28% of SMEs were more optimistic about business prospects with 28% pessimistic. The significant reduction in confidence levels should act as a wake up call to the Government particularly in the lead up to Budget 2008.
Distribution companies were the least positive with a net 51% less optimistic, followed by the Retail sector (net 48%), Construction (net 32%) and Manufacturing (net 28%). In comparison, the Services sector bucked the trend to an extent with 24% confident about business prospects as opposed to 23% who were negative, representing a net 1%.
On the employment front businesses recorded a slowdown in employment creation in the last quarter with some sectors reporting a net reduction in employment. For instance a net 10% of companies outlined that they employ more than in the corresponding period for last year. However, this is a substantial 10 percentage points down on the previous quarter where a net 20% of companies had increased employment. The retail sector in fact recorded a significant reduction in employment numbers with a net 15% of companies employing less that they did 12 months ago, which reflects the tumbling consumer confidence figures of the last number of months and confirms the ever-increasing pressure that independent retailers are facing from the ever-growing expansion of the multiples. The only other sector to record a reduction in employment numbers was Manufacturing with 25% employing less in comparison to 23% who employ more, a net reduction of 2%. All other sectors recorded a net increase in employment with a 2% increase in Distribution, 13% increase in employment in Construction and 25% in the Services sector.
Looking ahead, employment prospects are generally quite positive with a net 17% of companies planning to increase employment in the next 12 months. This compares with a net increase of 18% in the previous two quarters. While employment creation has not reached the heights of record increases over previous years the indications are that employment in SMEs will remain positive over the next year. Sectorally, the Services sector will continue to lead the way with a net 34% of companies planning to increase employment, followed by Distribution (13%), Construction (9%) and Manufacturing (1%). The Retail sector however is not as upbeat on the jobs front with 21% of businesses planning to reduce employment in comparison to 16% who outlined that they would increase their numbers.
Nearly half (46%) of companies plan to increase investment in the next 12 months, up slightly from the previous quarter where 45% indicated increased investment. 8% of companies plan to reduce investment in comparison to 4% in the previous quarter.
55% of companies reported an increase in turnover, up from 52% in the previous quarter. 28% of respondents have sales/order books below normal for this time of year. This can be partly attributed to cancellation of orders, which was experienced by 19% of companies. Cancellations were from,
· Locally based Multinationals 21%.
· Export Destinations 10%
· Local Indigenous Firms 69%
It should be noted that cancellations from local indigenous firms has increased by nine percentage points in the last quarter pointing to the increasingly worrying trend where local indigenous companies are battling against the rise in business costs and their inability to increase prices, due to stiff competition from cheap imports.
Compared to 12 months ago, 30% of respondents confirmed that the credit period being taken is longer, with only 4% stating that they get paid faster. Credit delays remain a significant impediment to small business, with a lack of cash flow identified as a major impediment to company growth and a significant factor in company closure.
The value of exports has remained the same as in the previous quarter with a net 7% reporting an increase. It should be noted however that this is down in the first quarter of year were a net 14% of companies reported an increase in their value of exports.
Firms continue to experience inflationary pressures, with increases of 10% plus being reported for energy, raw materials, transport and local charges. These cost increases are exacerbating the difficulties for SMEs in competing in an open economy, with an ever-rising cost base negatively affecting the value of exports.
When asked to identify issues which are their immediate biggest concern, the following were the results in comparison to the previous quarters.
Table 1
Spring 07
Summer ‘07
Autumn ‘07
Economic Uncertainty
18%
20%
29%
Erosion of Competitiveness
11%
14%
15%
Labour Costs
19%
17%
12%
Increased regulations
11%
9%
10%
Reduced Orders
11%
8%
10%
Inflation
11%
8%
4%
Interest Rates*
-
5%
4%
Energy Costs
9%
8%
4%
Labour Shortages
5%
8%
3%
Euro exchange rate
2%
2%
3%
Other
3%
1%
6%
*Not included in previous survey
As can be seen from Table 1 Economic Uncertainty was identified as the biggest immediate concern with 29% of companies identifying this as their main worry. This represents a hugely significant nine percentage point increase on the previous quarter and explains why there has been a sharp decline in business confidence over the last number of months. The cost environment, in particular labour costs, and erosion of competitiveness, continue to be areas of major concern to SMEs.
The survey results clearly demonstrate that SME businesses are willing to invest in their businesses and to increase employment numbers, but there is a huge level of uncertainty with regard to the economic environment. It is imperative therefore that the Government play their part by using Budget 2008 to restore confidence in the economy, which will help to provide SMEs with a level of certainty to expand their businesses.
Commentary
The survey results send a mixed message as they confirm that business confidence has nose-dived since the start of the year with less companies having confidence in the economy and economic conditions than was the case this time last year. While companies however are concerned about the general economic conditions they are relatively upbeat about their own performance and potential. This is evident by the number of companies planning to increase investment and employment over the next number of months. While these figures are down on the corresponding period last year there is no evidence to suggest that there is going to be a dramatic reduction in business activity or job creation.
According to ISME Head of Research Jim Curran, “the results highlight that business is seeking reassurances with regard to the direction which the economy is taking providing them with a level of certainty to invest and expand their businesses.”
At a micro level however the results highlight that erosion of competitiveness and the cost environment are the key concerns for all sectors of business. The unpredictability about the level of inflation over the next number of months is creating a huge level of uncertainty within the business community, making it extremely difficult to plan ahead. This in turn is undermining confidence.
“The Government must heed the continuing disastrous inflation figures and the consequences of standing idly by, while our competitiveness is at a most critical stage as costs rise, the Euro appreciates and indigenous industry battles to stay afloat. The reality is that SMEs have been suffering under the constant barrage of cost increases, whether it is wage increases at twice the EU level, local charges and other production costs escalating at double digit rates. This scenario could have been avoided, to an extent, if the Government had taken the opportunity previously to properly address inflationary pressures in the economy, by focusing on areas that significantly impact on the business community, particularly local authority charges and public sector costs.
In order to restore business confidence, the government needs to get a firm grip on expenditure policy and ensure that the cost of living, currently at 4.8% among the highest in Europe, is brought squarely under control. It is essential that this year's budget addresses the cost competitiveness issue and ensures that policies are introduced to bring the headline rate of inflation down to below the average European rate, currently 2.1%,” continued Curran
“With the over-reliance on construction related activity in recent years being exposed, it is essential for the future development of the economy that enterprise is recognised in Budget 2008 and that an enterprise culture is nurtured and promoted with the necessary incentives introduced to maintain the impressive growth in new business over the last number of years. The risk takers in this economy need to be recognised and rewarded for their efforts with the necessary fiscal measures introduced to achieve this aim.”
In conclusion, Curran outlined that it was imperative that the Minister for Finance addresses the level of uncertainty that exists within the business community with regard to the future direction of the economy. A considerable part of this process has to include tackling the increasing cost base and desisting from introducing measures, including taxation that will fuel further cost increases in the economy. What is required, among other things, is for the Minister to concentrate on introducing initiatives, including reducing the cost of public sector pay, in order to reduce inflationary pressures and in turn wage demands.