Irish SMEs show resilience with profit improvement despite inflation and Ukraine pressures
Irish SMEs remain resilient in the face of inflation stress and the impact of the war in Ukraine, according to the latest Linked Finance SME Confidence Index, based on research conducted by Behaviours & Attitudes.
82% of businesses felt they performed better or line with expectations in the first half of the year: 44% cited performance better or much better than expected, 38% the same, and just 18% of SMEs say performance is worse than expected. Looking out to the second half of the year, 62% expect performance to be better than the first half, and 66% of businesses report higher or same operating profits in Q2 2022 compared to the same period last year.
Overall the Business Optimism Index score was up slightly to 62 (out of 100) in the quarter, having dipped by 7 points from 68 to 61 between Q4 2021 and Q1 2022.
Price pressures do pose a challenge, with 42% of companies charging higher prices in Q2 2022, an increase from 39% of respondents in Q1 2022, and up from 23% in Q2 2021. Inflation hit 9.1% in July according to the CSO and SMEs in Ireland are looking to recover their higher input costs by increasing prices, with only one in three (30%) of SMEs reporting lower profits. This suggests an ability to maintain margins and pass on input cost increases to customers.
Price inflation is increasingly expected by consumers, with the Central Bank of Ireland publishing research last month showing that households anticipate average inflation of 10% over the next year.
Similar to previous results, the latest Index findings suggest recovery is coming slower to micro-SMEs (those with 1-3 employees). These businesses report the lowest level of increase in operational profits compared to peers. 25% of micro-SME report higher profits, compared to 38% for transitional SMEs (4 to 9 employees) and 48% for mid/large SMEs (10+ employees). Micro businesses also report significantly lower future optimism, with just 38% anticipating a higher performance in Q3 versus 47% for large SMEs.
From a sectoral perspective the Retail & Wholesale sector has been slowest to recover, with just 31% of businesses reporting stronger performance in Q2. Retailers also appear to be trying the hardest to recovery higher input costs, with 64% increasing prices in the quarter versus 42% for all businesses.
Looking at the export versus indigenous sector there are indications that exporters are under increasing pressure, reporting a declining score of 58 on the overall Confidence Index, versus a higher score of 62 for indigenous businesses. Increasing shipping costs and growing Brexit-related bureaucracy are possible reasons for this divergence.
Niall O’Grady, CEO of Linked Finance, said: “Irish SMEs have shown themselves to be resilient in the face of the ongoing challenges of rising inflation and the economic ramifications of the war in Ukraine. The survey shows SMEs demonstrating a strong ability to weather the current storm with improving levels of activity, increasing operational profits, and a positive outlook for the rest of the year.
The major challenge for businesses, in particular the micro-SMEs and those operating in the retail sector is to find ways to manage the bite of surging input costs, a problem that is likely to get harder during the winter period when use of expensive energy will rise. We’re also seeing some divergence between the experience of SMEs selling within Ireland and those focussed on export, with exporters less optimistic about the outlook and starting to find the pressures of Brexit and rocketing shipping costs potentially outweighing buoyant demand.”