Does the world really need another survey? Every day we seem to hear that 47% of consumers are worried about this or 83% of businesses feel the Government must do something about that. I haven’t seen any research indicating what proportion of businesses or consumers feel there are far too many surveys but I would hazard a guess that the percentage would be fairly high. It’s not just that there so many surveys being produced these days; I think it’s also because many of the results add very little to our knowledge of what’s happening in society or the economy. The problem of surveys for surveys sake is well illustrated by US comedian David Letterman’s cutting comment that a new US survey has shown that three out of every four people make up 75% of the population.
So why have IIB Bank and the Institute of Chartered Accountants gotten together to release a survey on Irish business sentiment? Well it’s because there are still significant gaps in our knowledge as to what is happening in the Irish economy today and what official information is available can be quite dated. To put this into perspective, the Central Statistics Office won’t release its first really detailed estimate on Irish economic activity for 2005 until this coming summer. While we do have some more timely preliminary official estimates and indications of trends in various sectors of the economy, there are few reliable snapshots of what is happening now across the spectrum of business sectors that go up to make Ireland’s dynamic and rapidly changing economy.
We decided on a sentiment survey rather than a straightforward measure of activity for several reasons. First of all, it’s difficult to add together all the computers and cappuccinos, the pharmaceuticals and furniture, new houses and haircuts in a coherent fashion. Indeed, official data that go to a great deal of trouble to arrive at such measures frequently run into the difficulty that because changes in vagaries in the timing of a major delivery to or from some multinational giant operating in Ireland can result in statistics that don’t really capture what’s happening across the Irish economy as a whole.
There are a couple of other important reasons for opting to focus attention on business sentiment. First of all, sentiment measures encompass both an evaluation of the past and an assessment of the future. Critically, it has long been recognized that changes in confidence are often the key driver of business decisions and broader economic trends. More than 70 years ago John Maynard Keynes, the most influential economist of the past century, emphasised the importance of these ‘animal spirits’ in determining the business outlook. He also suggested that “if the animal spirits are dimmed and the spontaneous optimism falters… enterprise will fade and die.” (J.M. Keynes: The General Theory of Employment, Interest, and Money).
By opting for a sentiment based measure, the IIB Bank/Chartered Accountants Survey can also examine emerging trends in areas such as employment and costs as well as business activity. So, it provides a broadly based take on the pulse of Irish business. Finally, and of considerable importance, by including ‘Special’ questions on topical issues, the sentiment survey can quickly address emerging developments of significance to the business community.
One key difference between the IIB Bank/Chartered Accountants Business Sentiment Survey and many other surveys reported in the Irish media is the quality and breadth of survey respondents. I should emphasize this assertion is not a brazen attempt to court popularity with survey participants or readers of this magazine but the fact is that the survey canvasses the views of a wide range of the key decision makers in Irish business. The same cannot be said of some other surveys reported in the media. So in that regard, I would like to take this opportunity to thank all those respondents whose efforts make this survey such a significant barometer of what’s happening in the Irish economy today.
Is the Irish Economy Strong or Weak or Both?
So what is the Business Sentiment Survey telling us about the current health of the Irish economy? Well, in brief, it would seem business conditions are a good deal stronger than some other recent economic news would suggest. Encouragingly, healthy conditions seem to be fairly broadly based. As many as 6 out of 10 companies indicated that business levels have picked up in the past three months. The bulk of the remainder reported that business had remained fairly consistent. So only 1 in 9 firms reported a deterioration. For the vast majority of these, the decline was modest.
A pessimist could choose to focus only on the proportion of firms reporting that conditions worsened of late. Certainly, the fact that some firms indicated weaker activity suggests that circumstances across the Irish economy and indeed even across firms in the same sector can differ significantly. In many respects, this sort of information underscores the value of the survey because too often we try to summarize what is happening across the spectrum of the economy in one figure or soundbite. The survey details tell us that a rising tide doesn’t necessarily lift all boats and some companies face problems at present. However, when serious problems surface in TV or newspaper reports about a business closure or layoff announcement this often sends an excessively pessimistic signal about broader economic conditions.
A reasonably healthy picture is also suggested by the jobs element of the IIB Bank/Chartered Accountants Survey. In general, the Irish job market is strong but layoffs remain an important feature. A surprisingly high, 38 per cent of firms indicated they had increased employment in the past three months. This is nearly three times (13 per cent) the number of companies that reduced the number of people they employ. A broadly similar result was seen in the previous survey which suggests the Irish job market remains dynamic and quite exceptional by international standards. To put this in context, the hiring rate in Ireland is around 3½ times that seen in the US while the number of companies shedding labour is fairly similar to that in the US. This underscores the strength of job creation here, but it also suggests that the risk of job loss remains an important reality even in a buoyant Irish economy.
The coincidence of business optimism and consumer worries in regard to employment suggests the pace of job turnover is increasing. A faster ‘churn’ rate is a relatively new and increasingly important feature of the Irish labour market. Indeed, it may be the case that the capacity to fire when difficulties arise encourages firms to hire more aggressively in Ireland then in many other countries. The pace of layoffs may also hint at problems within certain areas of the economy but the survey evidence suggests these aren’t indicative of a ‘meltdown’ in employment as some media reports would suggest.
The Spring 2007 survey found that the Irish job market remains fairly tight with only 7 per cent of firms reporting increased availability of suitably qualified employees while three times as many indicated that suitable job candidates had become harder to find of late. This finding is consistent with evidence from recent Central Statistics Office data pointing towards the persistence of strong employment growth and the growing importance of non-Irish nationals as a safety valve in a tight job market.
Special Questions Provide Greater Insight
Quite apart from its value as a measure of current business conditions and the emerging outlook, I think the survey has an important role as a sounding board on important issues affecting the economic outlook. One issue that has constantly been highlighted in response to ‘Special’ questions is the importance of infrastructure. It was identified as the key priority for business in the recent budget. There also appears to be significant concern that the recently announced National Development Plan may not deliver the needed improvement in this critical area. Only 22 per cent of firms think the Plan will deliver a major improvement in Ireland’s infrastructure. 61 per cent are unclear whether the Plan’s goals will be attained while roughly 1 in 5 feels it may not lead to an improvement or could lead to a deterioration in inflation. These results might be interpreted as suggesting many Irish companies feel infrastructure is set to remain a serious constraint on economic growth in coming years.
What role is migration playing?
Perhaps the most interesting findings of the Spring IIB Bank/Chartered Accountants survey relate to questions on immigration. Ireland’s experience of immigration both because of its recent nature and its scale is virtually unprecedented. Migration is also an important and occasionally vexed issue in a number of other countries. In this context, a recent Financial Times Harris poll found that in Great Britain, France, Germany and Italy significantly more people felt the economic impact of migration is negative rather than positive. In the UK, roughly three times as many people feel the impact on that economy has been negative, as think it has been positive.
Judged from this perspective, the results of a similar survey for Ireland appear quite significant. Admittedly, we asked these questions of people in business rather than the broader population. Nonetheless, the difference in attitudes in Ireland and in its nearest neighbour appears quite startling. Irish business is overwhelmingly positive in its assessment of immigration, with only 3 per cent of firms thinking immigration poses increased risks to the Irish economic outlook. However most responses were not unquestioningly positive. Only 1 in 3 respondents opted to answer that immigration is making a major positive contribution. The majority view acknowledged that while the overall impact is largely positive, migration does carry some risks. Although these risks were not specified, it could be speculated that fears about the capacity of the Irish economy to handle a continuing surge in its population and broader absorption/integration issues may have been responsible for the verdict. If this is the case, it could be argued that the survey results suggest Irish companies have some concerns about the economic consequences of completely open borders.
At first glance it might seem that these results represent a somewhat guarded welcome for immigration from the business sector, which probably stands to benefit most from the inflow of new workers. However this may reflect some appreciation of the scale of the change in the Irish economic landscape wrought by large scale inward migration of recent years.
The tone of the responses could also owe much to the sort of impact immigration is seen having at the company level. In view of the relatively recent nature of immigration, it is striking that the majority of companies – some 57 per cent, reported that migration was having a direct impact on their own business. For the vast bulk of these, 44 per cent of all firms surveyed, the major effect had been to ease bottlenecks. An altogether smaller number; around 10 per cent, felt the key impact was to reduce costs while an even smaller proportion; roughly 4 per cent, reckoned immigration had boosted demand for their companies goods and services. These results suggest that inward migration has now become a safety valve to allow firms operating in Ireland to tackle capacity problems and handle higher output volumes. In such circumstances it is not surprising that firms recognize some potential risks in terms of absorption in the light of the scale of migration into the Irish economy.
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© The Institute of Chartered Accountants in Ireland, 2007.