As government pandemic and cost-of-living supports to businesses expire, the services sector, which is mainly made up of SMEs, is likely to need private consumption to increase according to the latest SME Market Monitor published by Banking & Payments Federation Ireland (BPFI).
While consumer costs have increased in the past year due to high inflation, the long-term trend in household income growth is also likely to continue, with CSO figures showing a 67% increase from 2011 to 2021. This means that disposable income is expected to increase gradually once uncertainty around energy prices as well as the general inflationary trend eases.
Significant recovery in the Irish economy reflected in record employment numbers but tempered by key SME sectors still facing output below pre-pandemic levels
The Irish economy grew by 12% in 2022, according to the latest preliminary figures from the Central Statistics Office (CSO), driven mainly by growth in sectors dominated by multinational companies. At the same time, modified domestic demand, a narrower measure of underlying domestic activity grew by 8.2% in 2022. This output growth is also reflected in growth in employment numbers reaching almost 2.6 million at the end of 2022, the highest employment since the data series began in 1998. However, notwithstanding the significant overall recovery in the Irish economy, in some key SME sectors such as accommodation, output is still below the pre-pandemic levels.
Commenting on today’s publication, Brian Hayes, Chief Executive, BPFI said: “Today’s report shows that Ireland’s economy remains robust, with high employment levels and income growth. However, initial increases in energy prices seen in 2022 seem to have spilled over to the wider economy, with services inflation driving average price increases more than goods inflation. This is similar to the trend observed in other eurozone countries where services sector inflation nearly doubled in the past year and now accounts for almost 30% of annual inflation.”
“While costs have increased due to high inflation, average household incomes seem to have kept pace and on average, households slowly increased their post-pandemic spending and maintained high level of savings at rates of around 20% compared to about 10% pre-pandemic. Average inflation is likely to gradually decline over this year, but price levels are expected to remain high unless we see significant declines in average prices across the economy. Nonetheless, household consumption is likely to increase gradually once uncertainty around energy prices as well as the general inflationary trend eases and real disposable incomes should recover. As government supports to businesses expire, many SMEs in the services sector will be relying on increased consumer spending, although higher interest rates are likely to create some further uncertainty for households and may act to further strengthen the savings ratio.”
The BPFI SME Market Monitor April 2023 can be downloaded here.
