SME optimism drops in face of Ukraine war and higher inflation

Business sentiment among Irish SMEs dropped sharply in the first quarter as war in Ukraine and surging inflation made firms more wary about their future prospects.

The latest SME confidence index from Dublin-based fintech firm Linked Finance came in at 61.1, down from 67.9 in the previous quarter.

The headline reading was the lowest since the final quarter of 2020 when the country was struggling to deal with a surge in Covid numbers.

“The positive impact of the Government’s ending of pandemic restrictions on January 21st appears to have been outweighed by the feared slowdown in the economy caused by the war in Ukraine and wider increase in input costs along with cost-of-living factors,” the report said.

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The number of firms reporting a pick-up in business fell from 51 per cent to 35 per cent while those expressing “future optimism” also fell.

The report noted that with inflation hitting 7 per cent in April, firms are looking to recover their higher input costs by increasing prices. Some 39 per cent of respondents said they increased prices in the quarter, up from 31 per cent, which was already at the highest level in 10 years.

“But higher prices don’t appear to be delivering stronger profitability for SMEs, suggesting margins are being squeezed by an increase in input costs in areas like energy, rent, and food,” the report said.

Just 29 per cent of respondents said operational profits were higher this quarter, well below the number that increased prices, it said.

Future outlook

Other trends picked up in the survey indicated that firms in Dublin are trading more strongly than those outside of the capital, while the retail and wholesale trade category appeared to be the weakest of the three industry sector divisions in terms of future outlook.

Some 28 per cent of businesses in this category expect the next quarter to be busier compared to 44 per cent for the services category and 34 per cent for the “other” category.

The weakening sentiment was consistent with other recent economic reports, Linked Finance said, noting the Economic and Social Research Institute (ESRI) and the Central Bank both revised down their forecasts for the economy in April.

“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,” Niall O’Grady, Linked Finance chief executive, said.

“The war in Ukraine is first and foremost a humanitarian tragedy, but it is also having a broader impact on the global economy, particularly through the inflationary pressures of higher energy and input costs,” he said.