Business sentiment has fallen to its lowest level in three and a half years, according to the latest sentiment index from KBC Bank and Chartered Accountants Ireland.

The fall in sentiment registered in the most recent three-month period was the sharpest quarterly drop since late 2010 and brought the index back to its lowest level in three and a half years.

The index dropped to 99.9 in the past three months, from 117.7 in the spring quarter.

However, the difference between now and then is that this time the fall in sentiment has not been accompanied by a fall off in activity, rather it has increased in all the main business areas.

On the basis of the past relationship between the business sentiment index and Irish GDP, the most recent survey still seems to be pointing towards reasonably solid economic growth this year.

The survey signals a clear easing in the pace of growth, with the latest sentiment reading consistent with GDP growth of around 3.5%-4%.

The uncertainty over Brexit was the principle concern among businesses as four out of five surveyed saying they expected some implications for their companies – with sterling weakness the main concern.

Broader uncertainties about global economic prospects also caused a marked downgrading of the general business climate which, in turn, prompted companies to take a more cautious approach in terms of their own future output and hiring.

The KBC/CAI study also found a strong continuing attachment by firms to domestic political uncertainty, which was cited by 20% of respondents.

Commenting on the figures, Chief Economist with BC Bank Ireland Austin Hughes said: “The summer survey shows firms reporting continuing strength in their business volumes and hiring of late and forward-looking responses suggest this should continue, albeit at a more modest pace.

“It is scarcely surprising that Sterling weakness was flagged as the main concern and, with poorer UK economic conditions also featuring prominently, it is clear that near term risks predominate.

“While 50% of the companies surveyed were focused on the threats posed by Brexit to their business, 20% indicated they were primarily focused on opportunities it might present.

“In some instances, this may reflect the necessity to adapt in order to survive but these results emphasise the need to consider the many dimensions to the impact of Brexit on Irish business, some of which may be positive,” Mr Hughes added.