Firms' sentiment hit by credit crunch

The credit crunch is denting the confidence of Irish companies, but firms remain more upbeat about their own businesses than they are about the outlook for the wider economy, according to a new report.

The winter business sentiment survey by IIB Bank and the Institute of Chartered Accountants in Ireland suggests that companies do not envisage any dramatic slump in activity next year.

Two out of three companies are now less optimistic about the economy than they were three months ago, but half of all firms anticipate that their own business will expand. IIB's chief economist Austin Hughes said there was a feeling among companies that there was "something horrible out there" lurking in the broader economy.

"There are certainly no great expectations that the economy is going to start roaring again in the new year - quite the reverse."

Turmoil in global financial markets has now overtaken the weakening housing market as the major concern for companies.

The proportion of firms that say the credit crunch will have little or no impact on their business has dropped to 24 per cent, down from 41 per cent when the same question was asked in the autumn survey. Some 16 per cent of firms surveyed say the money market turbulence will have a "substantial" impact on their business, up from 6 per cent, as the cost of wholesale funding, limited availability of credit and the impact of declining equity markets on companies' pension plans continues to take its toll.

Employment growth will be more subdued next year, but the survey suggests that firms will not be forced to dramatically cut their headcount, Mr Hughes said.

"Fewer companies are hiring, rather than more firms firing. It is a much less threatening employment market than we might have expected."

The pace of increase in day-to-day Government spending is a concern for businesses, who worry that pay rises could impact on their costs.

The survey finds that the effects of the slowdown are concentrated in the construction and property-related sectors, while retailers are also feeling "a bit of a squeeze" as consumers are more cautious about spending.

But the outlook reported by manufacturers was positive and negative, with no clear pattern, while business services is performing well in terms of employment numbers.

CSO figures showing that Ireland's population is growing by 2.5 per cent compared to a euro-zone average of 0.4 per cent may explain the resilience of Irish business confidence, he said.