Business optimism falls amongst Irish SMEs

The report noted that 39% of respondents said they increased prices during the quarter
Business optimism falls amongst Irish SMEs

The positive impact of the removal of pandemic restrictions in January has been outweighed by businesses concerns about a feared slowdown in the economy due to the invasion of Ukraine, high inflation rates and cost-of-living factors. Picture: Sasko Lazarov 

Business optimism for Irish SMEs has declined in the first quarter this year amid concerns regarding Ukraine and high inflation rates.

A new report conducted by peer-to-peer lender Linked Finance, showed that the SME optimism index had fallen to 61.1 in the first quarter of 2022, a decline from 67.9 in the previous quarter. 

This marks the lowest index level since the last quarter of 2020, when Ireland was facing a rapid increase in Covid-19 cases.

Figures from the Central Statistics Office (CSO) showed that inflation hit 7.4% in April. Rising input costs have led to Irish SMEs increasing their prices. The report noted that 39% of respondents said they increased prices during the quarter, an increase from 31% in the previous quarter, which was already the highest level of price increases in ten years.

However, the increased prices do not seem to be increasing profits for SMEs. Only 29% of respondents in the report stated that operational profits were higher this quarter, well below the 39% of companies that increased prices. Such figures suggest profit margins are being squeezed by rising input costs in areas like energy, rent and food.

The positive impact of the removal of pandemic restrictions in January has been outweighed by business concerns about a feared slowdown in the economy due to the invasion of Ukraine, high inflation rates and cost-of-living factors. 

The report revealed that only 35% of respondents said their business activity in first quarter was better than the previous quarter. Future optimism among Irish SMEs has also declined, with just 38% of companies saying they expect future business activity to improve, this is a decline from 48% in the final quarter of 2021.

Smaller SMEs are facing the most challenges, with many facing fewer hiring opportunities and lower future outlook sentiment. 

"Just 33% of micro-SMEs (those with 1-3 employees) are more optimistic about their future prospects compared to 68% of mid/large SMEs (with 10+ employees)," the report said.

The declining economic sentiment shown in the SME optimism index is consistent with other recent economic reports. In March, the ESRI revised downwards its growth forecast, and the following month, the Central Bank of Ireland (CBI) did the same. 

Niall O’Grady, Chief Executive of Linked Finance, said: “Hopefully this is a short-term stalling of the recovery trends we have been seeing recently from the Index, but clearly a lot has changed in recent months that makes the business environment more challenging. 

"Irish SMEs have been looking to recover pricing power and improve profitability, but with their own input costs also rising, margins are still being squeezed even where customers are facing higher prices."

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