SMEs Must Avoid Feeding Dangerous 1980s Inflationary Spiral

According to the latest Linked Finance SME Confidence Index, nearly a third of Irish SMEs charged customers higher prices in the most recent quarter, based on research conducted by Behaviours & Attitudes.

SMEs Confidence Index

Inflationary pressures were particularly notable in larger SMEs (those with 10+ employees), where 41% charged higher prices, and businesses in the retail and wholesale sector, where 58% increased prices. 30% of companies charged higher prices in Q3 compared to the prior year, which is at a record level in a data series going back to 2011.

The findings are consistent with the most recent CSO consumer price index for October, which showed an inflation rate of 5.1%, the highest level since 2007 due to higher energy costs.

Niall O’Grady, CEO of Linked Finance, said:
“This quarter’s index shows that economic trends for the SME sector are positive, with strong current trading sentiment and future expectations improving. The biggest cause for concern is the accelerating pace of inflation, which is shown both in our survey and the CSO data.

I’m old enough to remember the horrors of double-digit inflation in the 1980s, notwithstanding the need businesses have to protect margins as input costs rise. It’s also vital they don’t douse the rising consumer sentiment that is evident by feeding a dangerous inflationary spiral.”

On climate change, the Linked Finance survey found that almost one third (31%) of Irish SMEs are uncertain of the necessary requirements to take action on climate change or their potential impact on their business. The COP26 Climate Action Plan lists emissions reduction targets for multiple sectors to reduce overall greenhouse gas emissions by 51% for 2030.

28% of businesses surveyed said that understanding the regulations was one of the main challenges to accelerating their shift to being a more sustainable business. 25% fear regulations will cause a significant increase in production costs that will have to be passed on to the customer through higher prices.

Niall O’Grady also said:
“We all know that the threat of climate change is real, but when it comes to adapting your business to new regulations, it’s not straightforward. SMEs clearly need help and practical guidance as to how they can make their contribution to the new targets the Government has put in place. We must be mindful that there will likely be a cost burden for businesses in reducing their carbon footprint.”

Attitudes towards the Government’s COP26 plans are mixed, with two-in-five (42%) businesses concerned that they will pose challenges for their business. However, an identical proportion is not concerned. The trend of improvement in business sentiment like the SME sector has continued with the Business Optimism Index score at 68.5 in Q3 (out of 100). Well ahead of the level of 52.8 a year ago and close to the all-time high, it reached 69.1 in Q3 2018.

Employment trends are also positive, with expectations of hiring staff at their highest level since 2014. 51% of businesses said current trading activity was higher, compared to just 16% a year ago, at 41% in Q2. The improving employment story is borne out by Linked Finance’s own loan data, which shows that hiring more staff being identified as the purpose of a loan is double the number of applications a year to date compared to the same period last year.

On October 1, unemployment rates were at 7.9%, down from 20.3% a year ago. The issue now is the challenge of labour shortages and wage inflation, with the CSO reporting a 3.9% increase in labour costs in its most recent quarterly update.

Linked Finance has issued over €30m in loans, compared to €19.9m for the whole of 2020, with strong growth in lending across all sectors, in particular among those reopening their operations following the easing of Covid restrictions, such as retail (+23%), construction (+41%) and transport & logistics (+133%).

Since its establishment in 2013, LinkedIn Finance has grown rapidly to deliver over €170m to over 2,900 ambitious local businesses in every country. Companies that have availed of lending through Linked Finance include Skingredients, Tara Slevin, The Agile Executive, and Schoolbooks.ie.

To view the full findings from Linked Finance SME Confidence Index, visit www.linkedfinance.com