Linked Finance SME Confidence Index: Optimism Drops

Linked Finance SME Confidence Index,  based on research conducted by Behaviours & Attitudes, is the bearer of bad news but insight that should not be unexpected. The Index indicates that business optimism has declined – impacted by geopolitical concerns and rising inflation

The Index is published by Linked Finance, a Fintech lender that operates in Ireland.

According to the Index, business optimism amongst Irish SMEs fell in the first quarter of the year as war as concern about the future in a challenging environment is rising.  For Q1, the Index came in at 61.1, down from 67.9 in the prior quarter, and 65.1 a year ago. It’s the lowest index level since Q4 2020, during the midst of the Covid-19 health crisis.

Businesses are worried about rising input costs as well as the increase in the cost of living.

The Index shares that 35% of respondents said business activity in Q1 was better than the previous quarter – down from a high of 51% in Q3 2021. Future optimism also fell, with 38% of companies saying they expect future activity to improve down from 48% in Q4 2021.

With inflation hitting 7.4% in April, SMEs in Ireland are looking to recover their higher input costs by increasing prices with 39% of respondents saying they increased prices in the quarter, up from 31% in Q4 2021.

On top of the above, higher prices are not translating into more profits as margins are being squeezed with just 29% of respondents stating that operational profits were higher in Q1.

Linked Finance notes that the Central Bank of Ireland (CBI) recently said access to credit for the SME sector was resilient, but in its April note the CBI said that future challenges may emerge for SMEs due to inflationary pressures and the tapering of the Government’s Covid support program.

Only 33% of micro-SMEs (those with 1-3 employees) are more optimistic about their future prospects compared to 68% of mid/large SMEs (with 10+ employees).

Only 4% of micro-SMEs are increasing headcount in the quarter, compared to 34% of mid/large SMEs.

Niall O’Grady, CEO of Linked Finance, commented on the economic environment:

“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. 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.

Irish SMEs have been looking to recover pricing power and improve profitability, but with their own input costs also rising, margins are still being squeezed even where customers are facing higher prices. We should not be overly gloomy though, as the Index is still much higher than the levels it fell to during the pandemic, and whilst we’ve seen a pull back this quarter on most metrics it may only be temporary.”

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