SMEs must avoid feeding dangerous 1980s inflationary spiral
Nearly a third of Irish SMEs charged customers higher prices in the most recent quarter, according to the latest Linked Finance SME Confidence Index, based on research conducted by Behaviours & Attitudes. 30% of companies charged higher prices in Q3 compared to the prior year, more than treble the level of companies hiking prices a year ago, and at a record level in a data series going back to 2011.
Inflationary pressures were particularly notable in larger SMEs (those with 10+ employees) where 41% charged higher prices, and also businesses in the retail and wholesale sector where 58% increased prices. The findings are consistent with the most recent CSO consumer price index for October which showed an inflation rate of 5.1%, the highest level since 2007 due particularly to higher energy costs.
Linked Finance CEO Niall O’Grady has warned that whilst SMEs face challenges from their own rising input costs, they must be careful not to feed an inflationary spiral that could damage their own competitiveness and the emerging economic recovery post lockdown.
On climate change, notwithstanding the intense focus at COP26 and the publication of the government’s Climate Action Plan targets, the Linked Finance survey found that almost one third (31%) of Irish SMEs are uncertain of the necessary requirements to take action on climate change or their potential impact on their business.
The Climate Action Plan lists emissions reduction targets for multiple sectors to reduce overall greenhouse gas emissions by 51% by the year 2030. 28% of businesses surveyed said that the difficulty of understanding the regulations was one of the main challenges to accelerating their shift to being a more sustainable business; 25% fear regulations will cause a significant increase in production costs that will have to be passed on to the customer through higher prices.
Attitudes towards the government’s plans are mixed, with two-in-five (42%) of businesses concerned that they will pose challenges for their business, however an identical proportion are not concerned.
The trend of an overall improvement in business sentiment in the SME sector has continued, with the Business Optimism Index score at a level of 68.5 in Q3 (out of 100), well ahead of the level of 52.8 a year ago, and close to the all-time high it reached of 69.1 in Q3 2018
51% of businesses said current trading activity was higher, compared to just 16% a year ago, at 41% in Q2. Employment trends are also positive, with expectations of hiring staff at their highest level since 2014. The improving employment story is borne out by Linked Finance’s own loan data which shows that hiring more staff being identified as the purpose of a loan in double the number of applications year to date compared to the same period last year.
With the Covid adjusted rate of unemployment at 7.9% in October, down from 20.3% a year ago, the issue now is the challenge of labour shortages and wage inflation, with the CSO reporting a 3.9% increase in labour costs in its most recent quarterly update.
The overall positive indicators from the survey tally with Linked Finance’s own loan trends. Year to date Linked Finance has issued over €30m in loans, compared to €19.9m for the whole of 2020, with strong growth in lending across all sectors, in particular among those reopening their operations following the easing of Covid restrictions, such as retail (+23%), construction (+41%) and transport & logistics (+133%).
Niall O’Grady, CEO of Linked Finance, said: “This quarter’s index shows that economic trends for the SME sector are positive, with strong current trading sentiment and future expectations improving. The biggest cause for concern is the accelerating pace of inflation, which is shown both in our survey and the CSO data. I’m old enough to remember the horrors of double-digit inflation in the 1980s and notwithstanding the need businesses have to protect margins as input costs rise, it’s also vital they don’t also not douse the rising consumer sentiment that is evident by feeding a dangerous inflationary spiral”
We all know that the threat of climate change is real, but when it comes to adapting your business to new regulations it’s not straightforward. SMEs clearly need help and practical guidance as to how they can make their contribution to the new targets the Government has put in place. We must be mindful that there will likely be a cost burden for businesses in reducing their carbon footprint.”
Since its establishment in 2013 Linked Finance has grown rapidly to deliver over €170m to over 2,900 ambitious local businesses in every county in the country. Companies that have availed of lending through Linked Finance include Skingredients, Tara Slevin, The Agile Executive, and Schoolbooks.ie.
To view the full findings from Linked Finance SME Confidence Index, visit www.linkedfinance.com