Drop in Irish business sentiment second steepest globally

Business confidence in Ireland this year has fallen by more than in all bar one of 17 countries examined in a worldwide survey amid fears that strong inflationary pressures could drive the economy into recession.

The latest Accenture/S&P Global Ireland Business Outlook survey signals a marked downward revision to business confidence midway through 2022, amid concerns that strong inflationary pressures are impacting demand.

The survey uses net balances to indicate the degree of future optimism or pessimism for each of the survey variables. These net balances vary between -100 and 100, with a value of 0 signalling a neutral outlook for the coming 12 months.

The report, which is based on a on a panel of around 600 Irish companies in the manufacturing, services and construction sectors, finds steep cost pressures are set to persist over the year ahead.

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Only one of the 17 other countries surveyed by Accenture and S&P was more pessimistic about the outlook. The other countries studied in the report were the US, the UK, Russia, Japan, India, China, Brazil, Germany, France, Italy, Spain, the Netherland, Austria, Greece, Poland and the Czech Republic. Altogether around 12,000 businesses were surveyed.

A combination of slowing demand and sharp price rises has led to predictions of a fall in profits in Ireland for the first time on record, and a scaling back of expectations around employment and investment.

In contrast, hiring intentions are still holding up relatively well and are the strongest in Europe.

The net balance for business activity in the combined manufacturing and services sector has fallen sharply between February and June, dropping to +24 per cent from +55 per cent. Only Germany turned more gloomy.

Downward revisions to growth forecasts are particularly sharp in the manufacturing sector, where sentiment is the lowest since the global financial crisis. Inflation and a fear of looming recession, ongoing difficulties in securing materials and staff are also key threats to the outlook. There is no sign of an expected let-up in cost pressures over the coming year, with net balances for both staff and non-staff costs broadly in line with those seen at the start of the year.

In fact the net balance for non-staff costs ticks up to a new peak of +66 per cent amid a further upward revision in the service sector. Services expectations of higher staff costs hit a new series high, with the combined net balance for the two sectors at +78 per cent.

Firms continue to predict rises in output prices as they look to pass higher costs through to customers. Although the net balance dips from the peak seen in the previous survey, at +59 per cent it is still the second highest on record.

Expectations of a slowdown in demand coupled with still high inflationary pressures mean that companies are pessimistic regarding the outlook for profits. At -7 per cent in June, the net balance was down sharply from +25 per cent in February and in negative territory for the first time on record. Profit sentiment is particularly weak in the manufacturing sector.

On a more positive note the employment net balance is at +24 per cent in June, broadly in line with the series average and signals the highest sentiment of all the European countries covered. This is despite Irish firms scaling back their plans to increase employment since the February outlook survey. Forecasts for job creation are positive, but less bullish, across both monitored sectors.