Assessment of the economic performance during the Pandemic
Last year in Ireland, at the height of the COVID-19 pandemic, we were the only country in the European Union to record positive DP growth up by 3.4%. When analysing what’s happening in the Irish economy, GDP grossly exaggerates the real level of economic activity. This is because of a huge multinational presence here due to the intellectual property assets that are held here. As a consequence of that, it is really necessary in the case of Ireland, particularly, to delve beneath the statistics to find out what’s really going on.
The International Environment
- Unexpected huge shock in 2020 & sharp slowdown in activity
- Very aggressive & coordinated policy response > Fiscal &
Monetary policy in perfect harmony
- Rolling Iockdowns inhibiting recovery
- Recovery will clearly be driven by vaccine rollout
- Grounds for optimism> recent IMF & OECD forecasts very upbeat
If you strip out the statistics office and try to do some of this more nebulous stuff, there is a strong interlinking between foreign direct investment and SMEs, with strong linkages to the local economy. The IDA announced in January, a strategy out of 2025 is targeting 800 new investments, 50,000 new jobs, 50% of those jobs going to the regions, and I think it would take a brave individual to argue against the idea of achieving those sorts of targets, given its track record over the last decade. So, the FDI part is an important part of our economy.
The outlook and challenges ahead
SME is a very diverse title as it includes so many different types of companies. However, there is a market out there called foreign direct investment that will continue to provide opportunities for SMEs. One of the challenges on the FDI side is what’s happening on the global corporation tax front. There’s a lot of international pressure building significantly regarding the corporate tax treatment of multinational companies. So, that will inevitably make Ireland’s FDI model more challenging. However, I think we can be optimistic that despite those tax changes, FDI will remain an important part. I do believe that SMEs need proper nurturing and support to make sure they are in a position to stay long. In addition, to exploit those opportunities. Looking at the SME sector and the most recent statistics we have, it is an incredibly diverse sector.
SME Sector in Ireland (2018)
- Very diverse sector
- 270,344 active enterprises> SMEs 269,803 #99.8%
- 67.5% of total persons engaged
- 37.3% of Gross Value Added
- Strong regional footprint
- Low productivity
- Scaling up is major challenge
- Ireland has serious concentration risk & needs to nurture SME economy
According to an OECD study, one of the problems with SMEs is a low level of productivity. Productivity is defined as the output per worker in a business, and ours does not generally perform well in that regard. Another serious issue for the SME sector here is scaling up with it. It is proving very difficult to turn a small business into a medium business and then into a bigger business. There are not too many successful examples of that. But, I do believe that given the significance of SMEs for national and regional economic activity and given the fact that Ireland does have a high concentration risk (what I mean by that is a small number of very large multinationals, making a huge contribution, 40% of our corporate tax).
Where things stand – The Domestic Context
- Statistically Ireland did well in 2020 on GDP basis
- GDP +3.4% but Modified Domestic Demand -5.4%
- GDP needs to be treated with high degree of caution
- Output from MNC sector +18.2%; Non-MNC Sector -9.5%
- Dual economy & workforce
- FDI, Public Sector, Financial Services, Professional Services > doing well
- Tourism, Hospitality, Non-Essential Retail, Personal services, Airline Industry, Arts & Entertainment > very challenged
- Strong overall fiscal response from Government, much more needed
We do have a concentration risk and we need to make sure that we continue to build the SME sector to reduce that concentration risk. This is a breakdown of the SME sector’s: 69,000 SMEs in the economy – employing just over 1m people. But if you look at the breakdown of that by the number of people, 92% of SMEs employed less than 10 people for their micro-businesses, 6.7%, and then just 1.2% of businesses employ between 15, or 49. So we have this massive preponderance of very small companies. And I think the challenge is to make sure that those smaller companies can become larger companies, and significant support will be required to achieve that.
The part played by the SME sector in Irish economic life
SMEs are all over our economy in Ireland. Registered businesses and SMEs accounted for 99.8% of those businesses. So just 0.2% of Irish businesses, employ more than 250 people. That is a pretty staggering statistic, and the SME sector accounts for 67.5% of total employment in the economy. It contributes 37% of gross value added to our economic activity in the economy. It has an incredibly strong regional footprint, SMEs are the lifeblood of many towns, villages, and indeed cities across the country.
SMEs in Ireland
How SMEs can survive and prosper
We need a banking system that supports SMEs. We need to see a greater emphasis on developing the skills for SME owner-managers. In my experience, a lot of SME owner-managers are really good at doing what they do. But, a lot less good than the other skills necessary to make a business successful to scale as well.
Financial management, HR skills, marketing, social media, IT capability, innovation, and strategy – generally these are the areas that I think businesses need to be helped with and support on. This will enable them to stay long, and become successful bigger businesses. In this context, I think the creation of some sort of a QQI like qualification for the SME sector that addresses these really important business skills is essential.
What is required?
- Some semblance of certainty > NPHET does not provide evidence base or conduct proper risk assessment
- Banks will have to give much greater forbearance
- Parked debts will cripple many businesses > will have to be addressed
- Affordable working capital will be required for some time
- Business supports will be required into 2022
FDI in Ireland
- Very successful model
- 257,000 employed +205,000 indirect jobs (many SMEs)
- Strong linkages to local economy
- Strategy to 2025> 800 new investments, 50,000 new jobs, 50% in regions
- FDI provides strong opportunity for SMEs
- FDI model under pressure from global tax agenda
- Need to nurture & support SME sector
The role of Government supports for the SME sector
I think banks will really have to work with those pressured SMEs to make sure they come out the other end of this, and it’s the question about the current debts that really have to be addressed. I think affordable working capital from whatever source it comes will be essential for the survival of those businesses. I think business support will be required into 2022. They have to keep going because it is going to take some time for many of those affected sectors to recover fully.
What is Required for Success
- Specific State agency for SMEs
- Banking system that supports SMEs > big issue in Ireland
- Focus on development of skills for SME owner-managers
- Financial management
- HR skills
- Marketing/ Social Media
Some Points from our Speaker & Panellists
1. What challenges did you face last year as a business owner?
Ciara Troy: For me, the challenges have been on a few fronts, I would say we’ve had staff challenges, business challenges, and then personal challenges as well. Before COVID-19, we would have done a lot of events and provided sushi to foodservice as well. So, when COVID-19 came, the vans were off the road, we couldn’t get into the stores and the product was going to waste because nobody was going in physically.
I knew that in order to survive, we would have to pivot the business to a less wasteful model. I finally had an opportunity to take a more strategic approach. It allowed us to look very closely at how we were using our time and our resources, both of which are very precious.
We put an emphasis on new product developments around innovation, and also market research. And we have just renegotiated a young contract with Lidl. In 2018, we lost the business to the UK, and it was too cost-competitive we just couldn’t compete with the price they were coming in. But I reestablished connections and relationships with key accounts, built up those relationships, and trusted again. And thankfully we’ve just taken back the Tesco contract for the Republic, which is great.
Andy Mackin: We were in a slightly fortunate position in that one company within the group was doing extremely well. The challenge was trying to juggle those two and you will kind of get inundated with the positivity, we say, on the one side the recruitment element of it was still going on in the US. We’re very fortunate to have a number of the top 20 IT companies in the US on our books, and we’re hiring as if nothing had changed. I can use the analogy that they were more or less just wax on the surfboard and sitting on the water, no waiting for the next wave one this time next year, people would be looking for new talent, and they just snap them up. When they have massive deep pockets, it’s very easy to do that. And then you’re weighing it up against the other side where they hadn’t.
We pivoted, there was compliance training that had to be done for COVID officers within companies, and we started an online virtual assessment and innovative way to get those requirements done. We needed to get our finger out here now and basically get our employees set up as best as possible at home.
Ultimately if you’re sending desks and monitors and keyboards and mouse and chairs into their home environment. You then have to treat them exactly as if they’re in the office. No, slight deviation and that was that the deputy authority hadn’t actually been the first Nordea for seeing the dynamic so they had many clear guidelines, other than a duty of care, which was, you must look after your employees, and give them a safe place to work. Another way that kind of helped us manage the situation was we had experience already managing remote teams in the US and Canada. We also introduced a break time banter to maintain good communication with all members of the team that was non-work related.
2. How do you feel we are faring up here in Ireland? Have you noticed any other policies or incentives in other jurisdictions as an SME business owner that we could look at adopting here?
Andy Mackin: Ireland has been erroneously over the top in terms of the lockdown scenario compared to a lot of other countries but I noticed a lot of stuff started definitely in the States. We had a lot of feedback from our days underground over there. It was up and down like a roller coaster in terms of opening up, closing down, but they did try to be fair to them to push the economic evidence and get people back to work in some remnants of normality again.
I do think that we got a lot of things right. But I mean, by and large, we’ve done okay, compared to our international preference, and it’s just a hard one to call because it’s such an unusual and unique circumstance nobody had ever foreseen coming. But I think when we look back, it’s the best of a bad situation and no one country has done it absolutely brilliantly or got it absolutely spot on. They probably made as many mistakes as they had successes.
3. What is your first important KPI of the day?
Ciara Troy: My first KPI of the day is getting two out of three children to school on time. Then, I would have earned my cup of tea when I get back to the kitchen table.
Insights from our Q&A
1. What do you see as being the role of alternative funders and invoice financing playing in assisting SMEs to recover from the pandemic?
Jim Power: I think they will have an absolutely essential role to play because our banking system is just becoming functional at this stage. I feel there has to be a major effort made to encourage the alternative providers to become more involved in the markets to encourage us. I remember a couple of years ago looking at a European Central Bank survey, which shows the dependence of the SME sector on the banking system across different countries and Irish SMEs had one of the largest dependence on the banking sector for finance.
So we’ve never developed an alternative to banking, so we really do need to push that agenda. I also do believe that part of the solution has got to be an SME-focused banking sector. But, if you look at the Sparkhouse model in Germany, it does appear to work very well for its community banking system, with a strong focus on SMEs. We do need to become a lot more innovative and think outside the box in terms of this because access to capital is just going to be such a huge issue for SMEs.
2. When do you see the comeback?
Jim Power: The real rebound is going to be 2022 rather than 2021. I think now is probably the time to start wrapping up for that. The real caveat here in all of this is the epidemiological bit, assuming the vaccine rollout proceeds, assuming we start to return to some semblance of normality from September onwards, but 2022 should be the year when we see this massive rebound inactivity for businesses.