A new survey shows that Irish business activity strengthened in the final months of this year and employment growth has returned.

But the latest KBC Bank Ireland/Chartered Accountants Ireland business sentiment survey shows that firms remain cautious about the broader economic outlook.

They are reluctant to increase spending and hiring next year, it added.

Austin Slattery, the president of the Chartered Accountants in Ireland, said that the most notable finding in the survey is that the balance between those companies reporting increased business and those reporting weaker conditions in the past three months remains positive.

The balance is now actually at its highest level in five years.

''It should be emphasised that the survey isn't suggesting any dramatic pick up in business conditions but it does seem that a gradual recovery is taking hold,'' he added.

The survey noted that companies are only filling new positions on the basis of clear needs rather than on expectations of stronger future activity.

''These results and the relatively modest gains in activity anticipated in early 2013 imply recovery is still quite hesitant but that is probably as much as can be expected in the current environment,'' commented KBC Bank Ireland's chief economist Austin Hughes

The survey also reveals that Irish business sees Budget 2013 as posing some threats for the year ahead. It revealed that three times as many companies felt the Budget erred in an excessive focus on reducing the deficit as thought it was too focused on avoiding damage to short term growth.

When asked to identify the most important measure as part of the tax reform plan for the SME sector in the Budget, businesses chose the extension to the three year relief for start-up companies.