Sunday Business Post
17 January 2010
A grant Thornton survey indicated that 2010 will be another tough year for Irish exporters, writes
Patrick Burke.
Privately-owned companies are the lifeblood of the Irish economy. When they thrive, it thrives, and when they suffer, it suffers.
The past year has seen extremely harsh trading conditions for
privately-held businesses in Ireland. This triple blight of reduced credit facilities, unfavourable exchange rates and low consumer demand has made it difficult to trade.
However, the last year has seen an upsurge in the willingness of businesses to become leaner and more efficient. This new-found focus on maximising private business efficiencies is a welcome development, and has seen business owners getting to grips with issues that may not have troubled them in better times.
The Grant Thornton International Business Report (IBR) traced the issues affecting such privately-owned companies in Ireland for the last 18 years.
Throughout this time, Irish PHBs have successfully predicted the trends that will dominate the business agenda for the year ahead.
Last year’s headline – of a deflationary period in Ireland – is testament to this, with price reductions taking place across the board. The year’s main findings provided detail on the extent of cuts in private sector pay.
The survey of 7,400 respondents in 36 economies allowed us to compare trends and highlight areas where Ireland could improve. This report said that optimism among private companies internationally had increased by 40 per cent in the last year, pushing the Grant Thornton International optimism/pessimism index to +24 per cent.
This percentage becomes more powerful when compared with last year’s -16 per cent figure, (The balance is the proportion of companies reporting that they are optimistic, minus those reporting that they are pessimistic.)
At an international level, the report suggested that the worst of the downturn was over, although optimism was still only modest in the EU and North America (see panel).
Business expectations improved across all regions, but a balance of +48 per cent in Latin America and +64 per cent in Asia Pacific (excluding Japan) contrasted sharply with figures of only +7 per cent in eth EU and +24 per cent in North America.
Given Ireland’s economic contraction, it was not surprising that seismic changes to the business landscape were reported. These results are best illustrated in terms of business outlook, selling prices and competitiveness.
Business outlook
Ireland faces many difficulties relative to our peers. Global growth of 3 per cent was predicted by the IMF for 2010. This compared with -2.5 per cent for Ireland, with the Department of Finance forecasting GDP growth of -1.3 per cent.
Business optimism here significantly lags behind the rest of the world. Some 66 per cent of Irish businesses rated themselves as slightly or very pessimistic for 2010 (28 per cent globally). Only 24 per cent of Irish privately-helped companies were optimistic about the economic outlook for the coming 12 months (51 per cent globally). This resulted in a balance optimism score of -42 (+24 per cent globally).
When asked about a pickup in the ‘global economy’, 60 per cent of such companies in Ireland said they expected to see an upturn by the end of 2010, which compared with figures of 62 per cent in the EU and globally). Worryingly, nearly 40 per cent of business surveyed in Ireland expected an upturn to occur from 2011 or 2012 and onwards. This suggests that a significant proportion of Ireland’s business community believe it may be at least a year before the global economy recovers. Given our dependence on global markets for trade, this indicates that exporters will have another particularly hard year.
Selling prices
All business must adjust their prices to match demand, but privately-held businesses tend to react more quickly when adjusting their selling prices. This is why the finding that 21 out of 36 economies were less optimistic about increasing about increasing prices than there were in 2009 is significant. A slowing in the increase of selling prices in Ireland is a welcome development, and a sign that such companies are trying to be price-competitive.
Only 30 per cent of business expected to increase selling prices in 2010, 19 per cent expected a decrease and 44 per cent expected prices to remain the same. Some 45 per cent of Irish businesses expecting selling prices to fall further in 2010, while 43 per cent expected prices to stay the same. Only 10 per cent expected an increase. In Ireland, 71 per cent of business said they had been affected by reducing prices, with 22 per cent not changing their prices.
Managing the effects of deflation was a key challenge for the Irish economy in 2009, and will remain so in 2010.
Competitiveness
With the necessary reduction in selling prices and consequential loss of income, business have had to become as efficient as possible in order to survive. Compared with businesses in other countries, Irish firms performed very favourably when taking important business decisions in adverse trading conditions.
Iris businesses looking at new target markets ranked first in the survey at 75 per cent, compared with the global average of 51 per cent. They ranked fifth at developing new products and services, and sixth at focusing on skills of the workforce.
Ireland’s international competitiveness slipped during the last decade from a top-ten ranking to 25th. Irish pay rates also moved at a considerably faster pace than the rest of Europe from 1999 to 2006.
Given the scale of the economic contraction in Ireland and the continued downward pressure on selling prices, 65 per cent of those surveyed reduced pay last year to stay in business. Of those who did this, 59 per cent implemented cuts greater than 5 per cent (see graphic).
There is no doubt that the cuts are drastic but many businesses had no option but to cut salaries or face liquidation. The fact that businesses have reduced wages is a clear sign that the private sector believes re-establishing cost competitiveness is essential for economic recovery.
About 170,000 jobs were lost in 2009, and unemployment rose to 427,000 or 12.5 per cent. Another 76,000 job losses are forecast for this year. This is coupled with an expected net outward migration of €40,000 for the year to April next.
We cannot continue to shed jobs at these rates. It is not sustainable to watch once-vibrant sectors, such as motor retail and hospitality, go into freefall.
Changes brought about last year demonstrated the innovative attitude that Irish companies were adapting to the recession. Ireland’s economic success in the past 20 years was mainly built through looking outward for opportunities. While we need to learn lessons from our recent economic mistakes, we need to prioitise Irish business as the primary vehicle for national economic recovery.
Ireland’s raking of 25th on the competitiveness table needs to be directly addressed by the government, which should continue to promote a culture of entrepreneurship in the coming years. Those wishing to start or expand their own businesses should be given access to the necessary funding, advise and vision.
Our falling position in the international competitiveness rankings over recent year should have put the brakes on further pay increases. This did not occur, and we have eroded our competitiveness. We simply cannot continue to pay ourselves more than we earn as a nation. The private and public sectors both need to lay their part.
Patrick Burke is a partner with responsibility for privately-held-business in Grant Thornton.
Click here to download the Focus on Ireland report 2010