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SMEs, especially builders, lead recovery

Tuesday, July 29 12:06:49

Irish SMEs are in recovery, led by a resurgence in the construction sector but still-weak domestic demand continues to act as a drag.

That's according to the latest DKM/IBF SME Market Monitor July 2014, prepared by DKM Economic Consultants (DKM) and published today by the Irish Banking Federation (IBF).

It found that construction SMEs as having a key role to play in driving economic recovery. This is because SMEs account for 95pc of persons employed in construction, generating 88pc of total turnover and 96pc of total value added in the sector.

It found that the balance of evidence suggests that the economic environment for SMEs continued to improve in the first half of the year.

Perhaps one of the most encouraging signs that the recovery has commenced has come from the performance of the labour market, the report said.

The total persons employed increased consistently in the past six quarters to Q1, 2014, with an additional 63,200 persons at work since employment bottomed out in Q1 2012. There has been a significant increase in the number of self-employed over this period with over half of the total increase accounted for by self-employed persons with no paid employees. The data shows that almost 39,000 persons became their own boss in the 6 quarters to end Q1 2014. However, the trend in employment is at odds with the trend in domestic demand, a key driver of the performance of the SME sector, which would normally be expected to recover before employment. Although domestic demand, excluding stocks, declined in Q1 2014, there are high expectations around the performance of domestic demand this year, with the first annual pick-up in volume expected since 2007.

It also noted that demand for funding from SMEs, which despite some positive news on the economic environment, is not increasing to any noticeable extent.

"There is real opportunity to grow turnover in the construction sector and deliver much needed jobs, housing and other infrastructure………….Then, through the various output and employment multipliers, the activities of other SMEs can receive a boost as Irish firms supply these firms back through the supply chain and the additional wages generated are spent on Irish goods and services in the wider economy," said DKM's Annette Hughes, the report's author.

At the same time as profiling the better performing indicators of an improving economic environment for SMEs - including increasing employment and a rebound in the volume of certain categories of retail sales - the Monitor points to the ongoing relative weakness of all-important domestic demand.

Linked to this is the demand for funding from SMEs which, despite some positive news on the economic environment, is not increasing to any noticeable extent.

For Annette Hughes the explanation is clear cut: "As previously highlighted, SMEs require substantial and sustained increases in disposable incomes, consumer spending and domestic demand if there is to be a significant change in their attitudes towards seeking funds for investment and expansion as opposed to working capital purposes."

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