Jim Power: The Irish economy may seem to be doing well, but not so for small firms

The mood could be characterised as pretty downbeat.

Business owners and managers spoke about a very cautious consumer searching for value who is reluctant to spend, about onerous costs, staffing issues, and an inability to pass on higher prices that implies their margins are under severe pressure.

Understanding what is really going on in the Irish economy is always a challenge, and not just because of the distortions contained within the GDP metric.

On the surface, the Irish economy appears to be doing very well: Unemployment at 4.3%; employment at a record 2.7m people; tax revenues reaching record levels last year; and Vat receipts still flowing strong this year despite pressure on corporation tax revenues. 

Meanwhile, household deposits are at historical highs; retail sales by volume are ahead of last year in the first two months; new car registrations are ahead of last year; and goods exports have grown  in January. 

These are all strong statistics indicative of a decent level of activity in the economy. Yet, I spoke at a couple of business events last week that were dominated by small and medium-sized firms across many different sectors. 

The mood was less than stellar and could be characterised as pretty downbeat.

Business owners and managers spoke about a very cautious consumer searching for value who is reluctant to spend, about onerous costs, staffing issues, and an inability to pass on higher prices that implies their margins are under severe pressure. 

Business customers are also reluctant to spend money.

It is all well and good to have someone like myself spouting economic statistics, but the reality on the ground is that the business environment is genuinely challenging. 

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Apart from the general challenges posed by higher interest rates, labour scarcity, an uncertain global economy, high energy costs, and financially challenged customers, the introduction of several labour-market measures by the Government is exacerbating business pressures. 

Without action, these pressures are set to intensify.

The State-induced measures are worthy of further analysis in a week when a new Taoiseach has assumed power. The measures include the increase in the national minimum wage , the increase in the Vat rate to 13.5%, the move towards a living wage by 2026, parental leave changes, an additional bank holiday, higher PRSI; and auto-enrolment for pensions.

The measures will increase costs significantly for SMEs which are already under significant cost pressures. 

The concept of the challenged customer is worth examining. Although the headline rate of consumer price inflation declined to 2.9% in March, the cost-of-living has escalated quite in recent times. 

Between January 2021 and March 2024, the average cost of living increased by 19.6%; the cost of food rose by 20.7%; the cost of health insurance increased 16%; the cost of mortgage repayments rose 77% and rents climbed by 27.5%. Meanwhile, the cost of electricity rose 55.7% and the cost of eating out rose 17%. 

These are dramatic price increases and explain what we mean by the cost-of-living crisis. Wages have certainly not gone up by anything approaching these price increases. Businesses are dealing with a squeezed consumer who is seeking value for money and is squeezing many business margins.

The Government and the Taoiseach appear to have taken the mood music on board and a package of business support measures is thought to be imminent. These measures are likely to include changes to the PRSI for lower paid workers, and a possible postponement of some of the social measures, such as sick leave. This Government had spoken in the past of the need to help those people "who get up early in the morning", and the coming weeks will test the validity of that commitment. 

In particular, it will be interesting to see if the SME sector is actually valued. Over to you Simon Harris.