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Comment: Economic data and sentiment are becoming detached

SMEs are the engine of the Irish economy. They make a major contribution to economic development and employment. Their performance is very closely linked with overall economic health, including to consumer sentiment – because people’s confidence in their own finances and purchasing ability influence the performance of SMEs.

Businesses’ confidence is equally important; the more confident business owners and managers are, the greater the prospects for their companies, for overall employment and incomes. Confident firms are more likely to make investment and purchasing decisions.

So how confident are Irish SMEs?

The SME Monitor shows evidence that not all is as robust as the indicators might suggest.

The latest BPFI SME Market Monitor assesses the economic environment in which SMEs are operating. The Monitor concludes that the economic environment remains considerably positive.

There has been continued improvement in the labour market, unemployment has almost halved in three years to reach 5.4pc in September and the underlying growth in the economy, as measured by Modified Domestic Demand, is a healthy 6.5pc.

Moreover, while SMEs continue to reduce their debt, the total new lending to Irish SMEs has expanded on an annual basis in each of the three quarters to the middle of this year.

However, the annual growth has moderated – from 16.5pc in the last three months of 2017 to 6.3pc in the second quarter of this year. The latest Credit Demand Survey from the Department of Finance reported that only 26pc of SMEs sought bank finance, while 89pc cited a lack of need as the reason they did not access credit. This is at odds with an economy which is expected to be the fastest growing in the EU for the fifth consecutive year.

The key area of concern is consumer sentiment. The latest ESRI/KBC Consumer Sentiment Index for September fell sharply for two months in a row, to its lowest level since December 2016.

Consumers are feeling detached from the strong macro data and are increasingly nervous about their own financial situation, as they cope with rising housing and energy costs. They are also worried about external factors, notably Brexit.

Who is thinking about how Brexit will impact the consumer?

While the economic environment is strongly positive, there are undoubtedly a number of challenges for SMEs, not least Brexit.

There is no clarity on what will happen at the end of March and no prospect of any clarity any time soon.

Yet we know that a number of sectors have already been heavily impacted by exchange rate developments since Brexit, notably the agri-food and beverage, traditional manufacturing and retail and wholesale sectors.

The prospects of tariffs and/or onerous regulatory arrangements after Brexit, whatever the ultimate deal is, are likely to give rise to many challenges for SMEs, particularly those in the most vulnerable counties most dependent on the sectors which are most at risk.

Article Source: http://tinyurl.com/kbwqb42


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