SMEs bearing the weight of the recovery

Small businesses are driving economic growth but are still struggling for talent and investment
(Image: Stockfresh)

7 December 2018

Billy MacInnesThere’s no doubt that SMEs are the foundation of the Irish business landscape. Indeed, dependent on the definition of SME, you could justifiably argue they make up the vast majority of businesses in Ireland.

Elsewhere in these pages, you will find an article addressing the issue of whether a greater sense of optimism among Irish SMEs, identified in a recent survey, is being reinforced by a growing recognition of the central role played by technology in their business priorities and growth strategy.

But another, separate survey, was also released last month which offered additional insight into the major preoccupations of SMEs in Ireland and across the EU. The 2019 Eurochambres Economic Survey gathered responses from more than 45,000 entrepreneurs across 26 European countries. Overall, the outlook was positive but it identified a number of challenges, particularly in terms of labour costs and a lack of skilled workers. The foreword pulls no punches: “Europe’s competitiveness is largely built on human capital. This model is not viable if businesses cannot find staff who match their needs. Europe risks sleepwalking into a skills crisis.”

It calls for pan-European solutions with concrete and ambitious initiatives that are coordinated at a EU level and implemented across member states to “anticipate and prepare for future skills needs”.

Looking at the results in more detail, labour costs were the biggest problem, identified by just over 42% of all respondents. For Irish SMEs, it was the second biggest challenge, with nearly 57% of respondents agreeing that labour costs were a major problem. In terms of the EU overall, Ireland was in the top six of countries where SMEs are concerned about labour costs. Notably, they were well ahead of countries that are traditionally viewed as high taxation, high cost and highly regulated such as Sweden, Denmark and Germany.

The second biggest concern for SMEs in the EU overall was the lack of skilled workers, at just under 42%. However, for Ireland, the issue was not as stark as for many of its European neighbours. Indeed, while nearly 40% of Irish SMEs agreed the lack of skilled workers was a challenge, this was still lower than for most other countries, including the likes of Germany, The Netherlands and Sweden.

Financing is a problem
The survey found that one of the big issues for Irish SMEs compared to their European counterparts was financing. Irish SMEs suffer from rejection rates that are almost double those for their counterparts in other EU countries. In addition, interest rates for loans below €250,000 for non-financial corporations in Ireland is almost double compared to elsewhere in Europe. “Despite a buoyant growth rate projected for next year, this is a problem that deserves further attention and research,” the report notes, “and action should be undertaken to avoid a deceleration in the economy due to difficult and costly access to capital.”

Irish SMEs are also more susceptible to developments on foreign exchange markets given the euro’s appreciation against sterling and the fact that Ireland’s biggest trade deficit is with the UK. While this may be good for importers, it has made life more difficult for exporters.

Brexit is an Irish concern
Brexit is an issue that is of minimal concern to most EU SMEs (7%) but it looms very large for Irish SMEs concerned over its impact (64%). Brexit and its effects “could have potentially negative effects on the Irish economy and entrepreneurs are obviously worried”, the report notes. “It is unquestionable nevertheless that new frictions will arise and this will ultimately add more costs which Irish and British firms will have to bear. This could potentially have heavy effects on GDP and growth in the coming years”, the report states.

It’s worth noting, in the light of Brexit, that nearly 70% of Irish companies are expecting a promising year ahead for export sales. Understandably, however, more than 46% are concerned about the challenges for domestic demand going forward.

This may be why more than 50% of Irish SMEs expect their headcount to remain static in 2019, with just under 40% predicting an increase in their workforce. Close to 50% revealed they planned to increase their level of investment next year while over 40% expected them to remain the same. In terms of business confidence, Irish SMEs were more positive than most of their EU counterparts with close to 60% expecting it to increase and just over 30% predicting it would stay the same.

Overall, there’s a strong sense of optimism in the Irish SME community, despite the potential headwinds that could arise from a messy Brexit. This bodes well for IT partners because so many of their customers are SMEs. As are they.

Optimism is a sentiment, of course, and sentiments can change as circumstances change but, for the present, they seem to be in alignment. Long may it last. Or, to put it another way, hopefully, it lasts longer than May.

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