SME confidence dips as inflation eats away at profits

Business confidence among Irish SMEs slipped again in the third quarter of the year, a survey by Linked Finance has suggested, as soaring inflation continued to eat away at profits.

The firm’s latest SME Confidence Index, based on a survey of more than 350 businesses, indicated that sentiment remained optimistic in the three months between July and September despite a sharp pickup in price inflation over the summer months.

Some 31 per cent of survey respondents said they had begun charging higher prices over the period. Despite this, 68 per cent of SMEs reported similar or lower profitability in the third quarter compared with the same three-month stretch in 2021.

Overall, the business confidence index score for the quarter came in at 59.7 out of 100, still in positive territory but down from 61.6 in the second quarter of the year. The decline was “particularly notable” in the micro-SME sector, Linked Finance said, businesses employing between one and three people.

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Rising prices also appeared to affect the rate of business growth in the quarter, the firm said, with 36 per cent of respondents indicating higher levels of activity. This compared with 51 per cent in the same period in 2021.

On a sectoral basis, the steepest decline in reported third-quarter activity was in the retail and wholesale sector, which is “grappling with the impact of wider inflationary challenges”, the company said. SMEs in the sector said they expected this trend to continue into the final quarter of the year despite the annual Christmas rush with 31 per cent of firms indicating that they expected lower levels of activity.

Meanwhile, more than one in three businesses said they planned to invest in energy efficiency measures to combat rising energy costs over the next 12 months.

Of those planning to invest, Linked Finance said 52 per cent of micro-SMEs and 38 per cent of larger SMEs were planning to make upgrades over the next three months.

“As inflationary pressures hit businesses with an increase in input costs in areas such as materials, rent and food, it is the rise in energy costs that is proving the real pinch-point,” said Niall O’Grady, chief executive of Linked Finance. “To address climbing energy bills, SMEs are taking a proactive approach by improving their energy efficiency. A secondary consideration is also energy storage and security of supply. The Government recently opened the Temporary Business Energy Support Scheme to support businesses and create some relief.”

Mr O’Grady said Linked Finance had already observed “a notable increase” in the number of businesses borrowing to address energy concerns including backup generators, solar panels installations and hydro turbines.

“Businesses are looking to get ahead of rising costs, and this has resulted in a positive outlook for the rest of the year,” he said.