|
From Accountingnet.ie Recession
Results of the Spring 2010 KBC Bank / Chartered Accountants Ireland Business Sentiment Survey Summary:
The KBC Bank/ Chartered Accountants Ireland Business Sentiment Survey reflects the view of chartered accountants working in senior positions (CEO’s, MD’s and FD’s) in Ireland’s leading companies. The survey was conducted in mid March and the results presented are based on 353 completed responses. Spring 2010 KBC Bank /Chartered Accountants Ireland Business Sentiment Survey Results: Activity still weak but looks set to improve. The climate facing Irish business remained difficult in early 2010. In keeping with survey results for the past two and a half years, more firms reported a weakening in activity levels than reported an improvement. However, the negative balance between these two responses was the smallest since the Spring 2008 survey implying an easing in pressures facing some Irish companies. As many as 27% of firms reported an increase in business volumes in the past three months. This is the strongest number in two years and a drastic improvement on the 9% reported a year ago at the most intense point of the downturn. A still substantial 40% of companies indicated a further decline in business volumes but this is the smallest level of negative responses in two years.
As diagram 1 indicates, these results are somewhat better than reported in the two previous quarters and markedly better than those seen in late 2008 and early 2009. So, the Spring 2010 survey seems to confirm that the worst may be over for the Irish economy even if there are few signs of any dramatic improvement. A sense that the extreme conditions of the past year have faded is also provided by a halving in the number of firms reporting a substantial decline in activity to 1 in 10 responses. While the number of firms reporting a substantial improvement doubled, it remains a meagre 1 in 20. So, business conditions appear to be stabilising. Unfortunately, these results also hint that any emerging recovery could be slow and sluggish. An encouraging aspect of the Spring 2010 results is that some sectors have already begun to pull out of the downturn. A larger number of manufacturing firms (35%) reported an improvement in business than reported a deterioration (30%) in the first three months of the year. Firms operating in the broad business to business area also reported stronger than average results even though slightly more of these indicated activity had shrunk in the first quarter of 2010 than reported growth. As has been the case for some time, companies focussed on construction and consumers reported the weakest results. Just over half (56%) of consumer-oriented businesses responded that activity had weakened but a not insignificant number (21%) said business had improved. So, there appear to be significant variations in conditions even in similar sectors. This may reflect the consequences of increasingly intense competition between firms as well as important differences across such sectors (for example, consumer durables v non-durables). With the exception of public sector activities, all areas reported less negative conditions than in the previous quarter. Drawing together these results, it would appear that the past three months has moved Irish business a little further along what was always expected to be a painful and protracted bottoming out process. It is not surprising that the major positive impetus to activity appears to be coming from outside the Irish economy and, consequently, is seen most clearly in the improvement in manufacturing and to a lesser extent in business services. In contrast, weakness in areas such as construction and consumer spending looks set to be a drag on Irish economic performance for some time to come. The sense that the Irish economy is some considerable way through what has clearly been a major adjustment is further suggested by answers to a question about anticipated business levels in the coming three months. As diagram 2 indicates, more firms envisage stronger activity in the next three months than foresee a further weakening. The associated balance is positive for the first time in two years and this quarter’s results are the strongest reading since the Winter 2007 survey.
These findings hint that a recovery in Irish economic activity might not be too far away. Unfortunately, the business surveys relatively recent origins in 2007 mean it isn’t possible to correlate these results with official GDP/GNP data. That said, the vagaries of official statistics mean those numbers may not give a flavour of conditions right across the Irish economy. For this reason, circumstances in which a majority of businesses report improving economic conditions might be regarded as a potentially significant indicator of a possible turning point in the economy. Graph 2 also suggests any emerging improvement is likely to be very different in intensity and breadth to the downswing that preceded it. The diagram highlights a speedy and severe deterioration in activity in late 2008 and early 2009. In contrast, the emerging upturn looks set to be slow and patchy. So, the turnaround could be quite protracted and, for many businesses and households, it may be some significant time before there is a material improvement in their circumstances. That said, any emerging signs of even a tentative improvement might be expected to bolster confidence and support activity across a broader spectrum. Expectations for the next three months vary widely across sectors and even across businesses within the same sector. Far and away the strongest responses are from business services where half of those surveyed see activity straightening and fewer than 1 in 5 see further weakness. This is particularly encouraging because it could hint at some improvement in domestic conditions. Some 41% of manufacturing firms anticipate stronger business levels in contrast with 15% who expect a further decline. Again, these figures testify to significant variations in the experience of individual firms and the problems inherent in ‘one size fits all’ summary measures of economic activity. The details also indicate that there is little expectation of any near term improvement in consumer spending. Responses by firms in this sector are by some distance the most negative in relation to likely activity levels in the next three months - with 27% of firms expecting an upturn and 41% seeing a further decline. In contrast and perhaps surprisingly, slightly more construction firms feel conditions will improve (21%) rather than deteriorate (18%). This likely reflects the scale of adjustment already seen in construction in the past couple of years and shouldn’t be regarded as signalling any marked improvement is in prospect. Nonetheless it is a markedly better result than suggested by responses to the Winter survey when just 10% of firms anticipated an improvement and 47% expected a deterioration. Interestingly, that expectation was broadly borne out by the actual experience reported in results for the past three months. So, the Spring 2010 response hint that some elements of construction activity may be close to bottoming out even if this is set to be an unsteady and possibly lengthy process.
Job and cost cuts continuing but at a slower pace If the survey points to emerging signs of stability in activity, the message on employment is less encouraging. It remains the case that significantly more firms reduced rather than increased employment of late. At the margin, however, job losses may be easing. As diagram 3 shows, there was a modest increase in the number of firms indicating they had increased staff numbers in the past three months and a similar reduction in the numbers reporting reduced employment. While the direction of change is encouraging, these figures suggest that economy-wide employment remains under downward pressure. It could be the case that the usual time delays between changes in activity and employment mean responses to this question will soon reflect the more encouraging tone of the activity questions in this survey. However, the prospect of a fairly subdued recovery and a continuing focus on productivity and costs could imply the possibility of further weakness in employment even as an upswing becomes established. On the other hand, the scale of job shedding evident in this survey and in official data seems to imply there has been relatively little labour ‘hoarding’ through the downturn. As a result, any palpable improvement in activity should have some positive effect on the Irish jobs market. In this context, respondents expect employment to weaken further but some further easing in the pace of job shedding is envisaged in the next three months. There were marked differences in sectoral employment trends in the Spring 2010 survey results. It was notable that broadly similar numbers of firms in the business services area reported increases and decreases in headcount. Presumably, this reflects improving activity levels in this area. It may also point towards the employment-intensive nature of activity. In some instances, it might hint that job cuts were made in anticipation of a weaker outturn than has materialised. In contrast, roughly twice as many manufacturing firms reduced employment as reported an increase. This occurred in spite of a positive balance in relation to activity in this sector. Presumably, this stems from a continuing and intense drive towards increased productivity and lower costs. Construction firms also reported comparatively high levels of job shedding as did food firms and those focussed on consumers. So, the survey points to very divergent job conditions across the economy even if the general picture is one of significant weakness. The Spring survey points to persistent downward pressure on costs even if there has been a slight easing in the intensity of this pressure of late. Some 45% of firms reported lower costs in the past three months compared with just 10% reporting an increase. Diagram 4 highlights the extent to which the cost environment in Ireland has changed in the past couple of years. It should also be noted that the responses on costs showed a much greater degree of uniformity across sectors and firms than those in relation to activity and employment. So, there is still a strong and broadly based momentum towards lower costs in the Irish economy in early 2010.
Worries about economic prospects increase Not all the elements of the Spring survey point in a more positive direction. If Irish businesses were slightly more optimistic about the emerging trend in their own companies, they were also somewhat less optimistic about the broader economic outlook than they were three or even six months ago. It has been common for firms to be more optimistic about their own business than about the economy as a whole. However, it is not entirely clear why confidence in the broader economy has slipped of late. This weakening of general economic sentiment was broadly based but was particularly notable in firms in the manufacturing sector who switched from a positive balance to a negative view. In addition, construction and consumer firms also became notably more gloomy. While this result is disappointing, it is not entirely surprising. Broadly similar developments have been seen recently in sentiment series in other countries. Those show that initial optimism, sparked by relief that the worst is over, has faded of late because of a growing realisation that the recovery is unlikely to deliver a marked improvement in circumstances anytime soon. Our survey did not ask what factors might have prompted a more pessimistic assessment but, drawing together answers to other parts of the survey, some possibilities might be suggested. First of all, there may be a greater sense of risks to the emerging upturn such as the concerns now centred on Greece but possibly applying to a much broader group of countries including Ireland.
Other worries could include the still very fragile state of Ireland’s Public Finances, increasing risks of disruption to economic activity as a result of public sector work stoppages as well as worries about the availability of credit and the resolution of the banking crisis. While different concerns might pre-occupy different businesses, the clear message from responses to this question is that Irish business sentiment remains fragile. Several factors could spark faster recovery As is usual, we also asked a number of questions on additional topics in the Spring 2010 survey. As diagram 6 indicates, there were differences in opinions as to what development might contribute most positively to a stronger Irish economic outlook. Recognising both the fundamental importance of global developments to the health of the Irish economy as well as concerns about the likelihood of persistent weakness in domestic demand, it is not surprising that the most common answer to this question, given by 31% of respondents, centred on an improvement in overseas markets. Perhaps surprisingly, 25% of those surveyed felt that increased confidence in Ireland’s economic and political leadership would make the greatest positive contribution. This result is also consistent with the slight weakening in sentiment among businesses towards Irish economic prospects reported above. A slightly smaller number (23%) felt that an increase in bank lending offered the greatest prospect of healthier economic conditions. These three rather disparate influences account for roughly 4 out of 5 responses. A relatively modest 16% of answers favoured a further reduction in domestic costs while a very small 4% of responses suggested a more favourable exchange rate offered the greatest potential support to activity. This may seem a slightly surprising result in view of the degree of focus on costs and currency movements in the past year or two. In part, this could reflect significant progress in reducing costs described elsewhere in this survey and slightly less unfavourable exchange rate trends in recent months. It also hints at a widely held view that the key constraint on Irish economic activity at present is the weakness of demand rather than a particularly uncompetitive Irish business base.
Credit conditions still tough. NAMA will help… a little. We also asked a series of questions about the availability of credit to Irish businesses. Roughly four out of five firms responded that credit conditions had not changed significantly in the past quarter. However, a significant 19% indicated a deterioration while only 2% noted an improvement.
We also asked what impact Irish business felt NAMA would have on the availability of credit. The results set out in Diagram 7 suggest. The overwhelming majority felt that any impact was likely to be modest with only very small numbers expecting a major impact. Some 2% expect a significantly positive impact and 5% anticipate a significantly negative impact. However, the most widely held view expressed by 44% of respondents was that NAMA would have a modestly positive effect while only 8% envisaged a modestly negative effect. So, roughly three and a half times as many respondents take a positive view of NAMA as see it being negative - even if the general expectation is that any boost to lending will be relatively limited. (It should be noted that the survey was conducted in the first half of March 2010 at which time the NAMA discounts were not known.) Pay cuts have been broadly based and substantial. The Spring survey also indicated a number of questions on the nature and extent of pay cuts. This has been a hotly debated issue in the past year. The Spring 2010 results found that two thirds of firms had cut pay in the past couple of years. This result is broadly consistent with responses to a similar question in the previous survey. Once again, pay cuts were common across most sectors but were notably less widely implemented in manufacturing than elsewhere. This may seem surprising given that manufacturing firms are generally seen at the sharp edge of cost concerns. In part, this result could reflect a more flexible pay structure in those companies. It should also be noted that in spite of improving activity, manufacturing firms have continued to shed employees. So, the adjustment process could be somewhat different. Finally, it is clearly the case that domestic demand in the Irish economy weakened far more than exports in the past year. So, the need for pay cuts may have been more pressing for firms competing on the domestic market. Diagram 8 provides some detail on the scale of cuts seen in various companies. Of those firms that cut pay some 69% had reduced pay once, 28% more than once and 3% had imposed repeated pay cuts. Most companies that had implemented pay cuts applied them across the board. Some 64% of respondents indicated that all employees had taken pay cuts. A further 22% had seen cuts applied to the majority of staff. Relatively small numbers had implemented pay cuts for either a significant minority of staff (9%) or just a small number of staff (5%).
The scale of pay cuts implemented has varied widely across firms as diagram 8 indicates. The most common cut was in the 6-10% range but notably larger cuts were relatively common. As a result, the average reduction in pay was 13%. The vast majority of firms (77%) do not intend to cut pay in 2010 but a significant minority (23%) envisage further reductions. What matters now? There is little doubt that 2008/2009 saw a major adjustment in the cost and capacity structures of most Irish businesses. We wanted to see if firms felt this process was ongoing or if their primary attention had now shifted elsewhere. So, we asked them whether they felt the current focus of their company was on cutting costs, on stabilising activity or on preparing for an upturn. The results set out in Diagram 9 show that Perhaps surprisingly, only 20% of those questioned felt that the main task in which their company was engaged at present was cost cutting. The majority (56%) felt their attention was now on stabilising activity while a not insignificant 24% were focussed on recovery and an upturn. This is consistent with responses to other survey questions that suggest the adjustment process undertaken by Irish business is now well advanced and even complete in some cases. The clear evidence coming from responses to questions on employment and costs is that a very large adjustment has taken place in the past year. Many firms seem to be of the view that the cost cutting process is now seen as almost complete. This is not to suggest that Irish business has become complacent. The trajectory for employment and costs set out in the responses to various questions in this survey points towards ongoing and frequently painful changes in Irish business structures that are likely to be permanent features of ‘the new normal’. However, there is also a sense running through responses to various questions in the Spring 2010 survey that much of the necessary and major adjustment in response to the crisis is now in place. As a result, many firms now want to take measures in response to more stable conditions and a gradual improvement in the conditions facing them.
The KBC Bank / Chartered Accountants Ireland Business Sentiment Survey reflects the view of chartered accountants working in senior positions (CEO’s, MD’s and FD’s) in Ireland’s leading companies. The survey was conducted in mid March and the results presented are based on 353 completed responses. © Copyright 2005 by Accountingnet.ie |
