Irish SMEs are feeling less optimistic about the future, according to a new report by peer-to-peer lender Linked Finance.
Its latest SME Confidence Index for the first quarter of this year, shows that companies are more wary about current business conditions amid the war in Ukraine and rising inflation.
The index, which is based on research conducted by Behaviours & Attitudes, came in at 61.1 in the first quarter, down from 67.9 in the previous quarter, and 65.1 a year ago.
This is the lowest index level recorded since the final quarter of 2020, in the middle of the Covid-19 pandemic.
"61% of SMEs are confirming that they are optimistic about the future, so that is down quite considerably on last year," said Niall O'Grady, CEO of Linked Finance.
Speaking on Morning Ireland he said SMEs are showing resilience, despite the many factors out of their control.
With inflation hitting 7.4% in April according to CSO data, the survey reveals that almost 40% of SMEs are charging higher prices, but this doesn't seem to be delivering stronger profitability.
"The first impact on inflation will be that SMEs will try to absorb the input costs and not pass them on to customers because they want to stay as competitive as they can," Mr O'Grady said.
"That happened in January, February and March - but we would expect in the second quarter that an increasing number of SMEs will be passing that on to customers because there is only so long they can go on absorbing the input costs, without passing them on - because ultimately they have to make a profit.
"In the short-term you can absorb the higher costs of things like rent, food, energy prices etc, ultimately to be a viable business you have got to get the revenue in," he added.
The index suggests that smaller SMEs are struggling most, which echoes the findings of previous research.
Just 33% of so-called 'micro-SMEs’, or those with 1-3 employees, are more optimistic about their future prospects compared to 68% of mid to large SMEs with over 10 employees.
This trend is also reflected in employment, with only 4% of micro-SMEs increasing headcount in the quarter, compared to 34% of mid to large SMEs.
Overall, sentiment on hiring has fallen slightly this quarter, with 10% of companies increasing headcount, compared to 15% in the final quarter of last year.
"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," Mr O’Grady said.
"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," he added.
The weakening economic sentiment shown in the index is consistent with other recent economic reports.
In March the ESRI revised downwards its growth forecast, and in April the Central Bank of Ireland followed suit.
