GT IBR 2012 - focus on Ireland

Focus on: Ireland Changing times

International business report 2012 - Executive summary

Global business confidence is balancing on a knife edge heading into 2012. With the global economic outlook dominated by the crisis in the Eurozone, fears are increasing that business growth will become even more difficult than in 2011.

Grant Thornton’s International Business Report (IBR) shows that the global business optimism balance percentage1 for 2012 stands at a net 0 per cent i.e., those business leaders feeling optimistic (36 per cent) about their economies in 2012 less those feeling pessimistic (36 per cent).

However, Irish businesses expectations for the economy for 2012 have improved significantly climbing eight places from 37th position in 2011 to 29th out of 40 (see Figure 1). 30 per cent of Irish businesses are slightly or very optimistic about the economic outlook for 2012 (2011 20 per cent) with 42 per cent being slightly or very pessimistic (2011 65 per cent), giving a net balance percentage of -12 per cent (2011 -45 per cent) – an improvement of 33 per cent on 2011.

1 Balance percentage of those indicating optimism against those indicating pessimism.

In terms of optimism, Irish businesses are among the most optimistic in Europe, with the ongoing sovereign debt crisis spreading economic uncertainty throughout the continent. The region has seen optimism levels fall from +24 per cent in 2011 to -17 per cent for 2012. This optimism comes after a number of years of turbulence where Irish businesses faced a Darwinian choice of adapt or disappear. Although business failures have been prominent since the downturn began, businesses now appear to be coming through this period with a more fit-for-purpose offering. Critically, the key business drivers appear to have stabilised as: • 72% expect revenue to increase or remain

the same; • 78% expect selling prices to increase or

remain the same; • 79% expect profitability to increase or

remain the same; and • 65% expect investment in research and

development to increase or remain the same.

Figure 2 illustrates the movement on 2011, while Figure 3 looks at the trend in sentiment from 2007 to 2012.

2 International Business Report 2012 - Ireland

However, significant challenges remain ahead. Employment expectations continue to be weak at -17 per cent (2011 -15 per cent). IBR 2012 shows that Irish export expectations have fallen from +31 per cent in 2011 to +25 per cent in 2012.

Europe represents 58 per cent of Irish exports. The region looks set to slip into recession in 2012 and will impact the output of the global economy in the process. The concern for businesses is that a focus on austerity rather than economic growth is damaging their own growth prospects.

According to the Irish Export Association (IEA), exports in 2011 increased by 5 per cent (compared to expectations of 7 per cent at the start of 2011), with exports growth forecast at 3 per cent in 2012.

Globally, the latest IBR reflects a polarisation of business confidence between the more advanced economies (European Union and North America) and emerging economies. Figure 4 illustrates the drop in sentiment across the EU while Figure 5 illustrates sentiment in BRIC nations - the EU appears on a fundamentally different long-term trajectory.

It is becoming increasingly clear that the global economy is at a point of inflection. It is not yet evident whether the future will be more or less stable than the sustained period of growth and stability that has existed since the 1980s or arguably since the end of World War II. It is clear however that the main issues shaping the global economy are not incremental but fundamental. It is not the rules of the game that is changing but the game itself. The critical game changers are: • Europe - at best Europe faces a sustained period of

austerity, low growth and lack of unity. Some believe Europe faces a lost decade similar to Japans lost two decades.

• emerging economies - global growth will be driven by emerging economies with all four BRIC economies forecast to be in the G7 by 2020 - with UK and France exiting. In the short-term the speed of the change will be dictated by the impact of the Eurozone difficulties and in China particularly on the impact of current falling property prices, potential impaired bank loans and potential reduction in export growth. Notably it is only the rate of change, not the underlying change itself that is not clear.

• regulation - light touch regulation and the ‘market knows best’ approach looks to have failed and a long period of high regulation has begun.

• credit – inexpensive and easy access to credit has been a significant factor in the current crisis. As the banking system rebuilds itself, credit will be less available and more expensively priced, thus suppressing growth and asset prices.

• technology – m (mobile)-commerce looks set to drive customer buying behaviour and organisational efficiency in a borderless business environment over the coming years.

It has always been difficult to run a business to

maximise the long-term opportunity while trading through the short-term obstacles and threats.

International Business Report 2012 – Ireland 3

IBR 2012 has identified greater optimism and spirit in Irish business with turnover, selling prices and profits expected to continue to stabilise in 2012. Businesses which adapt their business model for the enduring impact of Europe, BRIC nations, regulation, credit and technology will be the most successful in the next decade.

Patrick Burke Partner Audit – Dynamic Business


International Business Report results

Contents 05 Ireland results 09 EU results 12 Global results and emerging economies focus

International Business Report 2012 - Ireland 5

Section 1 Ireland results

Business outlook The challenging domestic economy and uncertainty in the Eurozone have clearly had an impact on Irish business expectations for 2012. 42 per cent (2011 65 per cent) of businesses remain slightly or very pessimistic about the economic outlook in 2012 (globally 36 per cent and EU 46 per cent). 30 per cent (2011 21 per cent) of Irish businesses were slightly or very optimistic for the economy for the next twelve months (globally 36 per cent and EU 29 per cent).

Figure 6 highlights how business optimism and Gross Domestic Product (GDP) growth expectations rank on a global scale for 2012.

Irish businesses appear in the lower left quadrant with GDP growth forecast to be 1 per cent in 2012.

Irish businesses are ranked as the 5th most optimistic of the 13 EU countries surveyed in IBR 2012 (2011 12th) and are one percentage point above the EU average of 29 per cent. This may reflect the fact that Irish business leaders have dealt with change and a difficult trading environment for a number of years; whereas other EU countries are only beginning to be affected as the Euro contagion spreads. This may give Irish businesses a competitive advantage as they have been through the period of internal realignment which our EU competitors look to be only beginning.


Exports IBR 2012 shows that global expectations amongst businesses for exports to improve have fallen from 26 per cent in 2011 to 22 per cent in 2012, with only 4 per cent expecting a decrease and 22 per cent expecting it to remain the same. The EU no longer leads the way for export expectations by region with the balance percentage decreasing 9 per cent year-on-year to +20 per cent. The ongoing sovereign debt crisis and expected austerity has seen both the Asia Pacific (excl. Japan)2 and BRIC regions climb above the EU as the leading export trading blocs at +24 per cent in 2012.

Irish businesses export expectations ranking has fallen from 8th in 2011 at +31 per cent to 10th in 2012 at +25 per cent. This represents a marginal decline in expectations with the future of the Euro clearly weighing on the minds of export managers strategies. For 2012, Turkey leads the way with +46 per cent of its businesses expecting exports to increase followed by India +36 per cent and Germany +34 per cent.

Irish exports are expected to grow by 3 per cent in 2012. This level of growth is below the 5 per cent export growth needed to meet Irish economic and recovery levels implicit in the EU/IMF bailout conditions.

The Government’s announcement of a ‘foreign earnings deduction’ for companies spending at least 60 days in BRIC nations signifies a call to action for Irish businesses to shift their attention towards expanding emerging economies.

2 For the purposes of the IBR, APAC (excl. Japan) refers to those Asian Pacific economies covered by our survey - Australia, mainland China, Hong Kong, India, Malaysia, New Zealand, Philippines, Singapore, Taiwan, Thailand and Vietnam.

Figure 7 illustrates Irish businesses exports

of goods to BRIC economies in 2011. This remains low at 3.7 per cent compared to 81 per cent in the mature EU and US economies. Figure 6 highlights the contrast in growth opportunities between advanced and emerging economies over the next 12 months - a trend which is expected to be continued. The latest International Monetary Fund (IMF) forecast show advanced economies growing by just 1.6 per cent in 2011 and 1.9 per cent in 2012. While developing Asia (8 per cent), Latin America and the Caribbean (4 per cent) expect high levels of growth in 2012. It is likely IMF growth prospects for advanced economies will be reduced given the expected impact of the Eurozone crisis on the global economy.

According to the United Kingdom’s Centre for Economics and Business Research (CEBR) latest forecasts, the economic shift from ‘west to east’ looks set to continue over the next decade. Asian countries are predicted to move up the World Economic League Table at the expense of European economies. Germany is expected to fall from 4th in 2011 to 7th in 2020, the UK from 7th to 8th, and France from 5th to 9th. Notably Brazil has moved from 7th to 6th position in 2011 overtaking the UK.


As illustrated in Figure 8 the sphere of economic influence is forecast to have changed fundamentally by 2020 with all four BRIC nations being in the top 7.

According to the IEA, exports of goods and services to BRIC countries came to €5.58 billion of total exports of €171.3 billion in 2011. Irish businesses continue to lag behind their European competitors in these high growth markets. In the first 9 months of 2011, the EU 27 countries increased their exports to BRIC markets by 22.5 per cent (France 9 per cent, UK 12 per cent and Germany 14 per cent), whereas Ireland only managed to increase exports by less than 4 per cent. As demand for investment in the emerging economies continues, the opportunities for businesses to get ahead, or to be left behind only increase as competition from domestic and other overseas firms intensifies. Revenue, selling prices, profitability and employment 78 per cent of Irish businesses expect selling prices to increase or remain the same compared to 71 per cent in 2011. The balance percentage increased to +7 per cent this year compared to -7 per cent last year. 18 per cent expect selling prices to reduce.

Ireland’s forecast annual inflation rate for 2011 is under 2 per cent and remains the lowest rate in the Eurozone (average 3 per cent). IBR 2012 sentiment on selling prices would indicate Ireland’s period of deflation has ended.

Irish businesses expectations for revenue to increase or remain the same have reduced marginally from 75 per cent in 2011 to 72 per cent in 2012. While businesses expecting

revenue to decrease has increased 1 per cent to 24 per cent in 2012.

79 per cent of Irish businesses expect profitability to increase or stay the same compared to 74 per cent in 2011. Stability of profitability is becoming increasingly important as an enabler of strategic growth. Future growth looks to be funded primarily out of retained earnings rather than traditional bank debt and equity due to the ongoing scarcity of capital and credit.

Disappointingly, the percentage of Irish businesses which forecast employment to increase in 2012 has fallen 2 per cent to -17 per cent. Overall, 15 per cent of businesses expect employment to increase and 32 per cent expect employment to reduce - indicating the continued reluctance to take on new employees to staff an increase in capacity for which demand is fraught with risk and may not materialise.

Research and development and investment


A continued emphasis on research and development is set to occur in 2012 with Irish businesses expecting R&D to increase or remain the same at 65 per cent (2011 62 per cent). The increasingly competitive market place accentuates the need to develop key points of differentiation in order to maintain and develop market share.

The importance of R&D investment to meet changing consumer demands and realise new growth opportunities cannot be underestimated. Sustained increases in R&D will continue to see both selling prices and profitability improve, as Irish business leaders respond to dynamic shifts in global markets.

Irish businesses need to match and surpass that of their international competitors if they are to be truly competitive on a global scale. Figure 10 indicates the percentage balance of

businesses raising/maintaining R&D spending. This needs to continue to increase if Irish businesses want to get ahead in mature markets and capitalise on the opportunities being presented in emerging economies.

42 per cent of Irish businesses expect investment in new buildings to increase or remain the same in 2012 (2011 47 per cent), 62 per cent expect investment in plant and machinery (2011 60 per cent) to increase or stay the same. 16 per cent (2011 14 per cent) expect a decrease in new buildings and 10 per cent (2011 11 per cent) in plant and machinery for 2012.


Section 2 EU results

Business outlook With a balance percentage of -17 per cent, the EU is the least optimistic region significantly trailing Latin America3 with +61 per cent. The ongoing travails of the Eurozone sovereign debt crisis are well documented, with limited leadership and direction provided by EU leaders - the so called ‘muddle through policy’- resulting in widespread uncertainty over the future of the single currency and economic outlook.

Businesses in Germany and Poland are the most optimistic in the European Union at +46 per cent (2011 +76 per cent), and +12 per cent (2011 +36 per cent) respectively. The continued success of the Germany export machine and the significant capital investment in stadia and transport for the 2012 European Football Championship in Poland and Ukraine has

3 For the purpose of IBR, Latin America refers to those Latin American countries covered by our survey – Argentina, Brazil, Chile, Mexico and Peru.

partially shielded businesses in both economies from the economic uncertainty.

The sovereign debt crisis has resulted in businesses in the remaining EU countries surveyed being neutral or pessimistic about the coming 12 months. Denmark +0 per cent (2011 +40 per cent), Sweden -8 per cent (2011 +76 per cent) and Finland -48 per cent (2011 +60 per cent) traditionally seen as some of the most dynamic and wealthy economies in the EU have seen optimism plummet.

Business outlook in the EU countries constitutes 7 out of the bottom 10 of Grant Thornton’s 2012 Global Business Optimism Index (see Figure 1). Optimism in Spain remains the lowest in Europe at -62 per cent (2011 -47 per cent), exacerbated by unemployment levels which are the highest rate in Europe at 23 per cent and youth unemployment over 40 percent.


Huge drops have been reported across the ‘core’ of the continent including in France (+9 per cent to -46 per cent) - which may lose its AAA credit rating endangering the effectiveness of the European Financial Stability Fund - Belgium (+44 per cent to -46 per cent) and the Netherlands (+21 per cent to -44 per cent).

Optimism in the United Kingdom has fallen 45 per cent in 2012 to -35 per cent. Slower economic growth at home, as well as the crisis in the Eurozone has led to expectations across a wide number of economic indicators declining year-on-year.

Unlike the EU were quantitative easing has been frowned upon, the Bank of England has to date pumped £275 billion into the British economy through a series of quantitative easing rounds. A further £100 million is expected in the first half of 2012 to boost the economy.

Italy, where optimism stands at -20 per cent (2011 +17 per cent), must issue over €100 billion of government bonds in the first quarter of 2012 alone. Unlike its counterparts in the UK and US, the European Central Bank (ECB) hasn’t officially printed money in order to purchase bonds off countries with high sovereign interest rates such as Italy. Instead, it has offered liquidity to troubled European financial markets by cutting interest rates. Recently it has offered the regions banks unlimited liquidity of up to three years, with the hope that the banks will provide money to troubled economies such as Italy, as well as businesses and consumers. A hope which now looks unlikely to materialise.

Increased pessimism in the EU is part reflective of ongoing economic uncertainty caused by the ‘muddle through policy’, as well as various programs of austerity in the EU, as compared to the emerging economies where access to credit and government intervention, has proven positive for business. Exports Export expectations across businesses in the world’s largest trading bloc have decreased significantly. The protracted nature of the debt crisis, rising levels of unemployment in many EU countries and muted wage growth has dampened confidence across the region.

Businesses within the EU have revised their expectations downward for 2012 as consumer sentiment declines. German businesses are ranked first in Europe at +34 per cent (2011 +41 per cent), followed by Greece +32 per cent (2011 +24 per cent), Denmark +30 per cent (2011 +34 per cent) and Ireland +25 per cent (2011 +31 per cent).

The differing dynamic within the EU is demonstrated in Figure 12 based on IMF growth rates. It is clear that what was up to recently called a ‘peripheral issue’ is now at the heart of Europe and will require resolution rather than further muddle through and divisive politics.


Revenue, selling price, profitability and employment The EU significantly lags behind emerging regions when it comes to expectations of business performance. Economic indicators including revenue, selling price and profitability are at the lowest level in the EU since the financial crisis began in 2008. In emerging economies, these economic indicators are expected to be more than double that of the EU average over the next 12 months.

Businesses across the continent are finding the trading environment a challenge, as lower business performance outlook has spread from the periphery. Revenue expectations have fallen by 27 per cent to +25 per cent over the next 12 months. European businesses expect selling prices to remain weak at +11 per cent (2011 +20) in 2012. Businesses profitability expectations are set to remain low at +13 per cent, a drop of 25 per cent year-on-year.

Businesses in Europe could be facing a more permanent and lasting decline in growth, with business performance indicators and growth remaining weak throughout the EU.

European business views on employment remain cautious with 60 per cent of businesses expecting employment levels to remain the same (2011 59 per cent), 23 per cent (2011 29 per cent) expecting an increase and 16 per cent (2011 12 per cent) expecting a decrease. Research and development and investment A lack of investment in R&D is a concern for the long-term prospects of Europe. With emerging economies heavily investing in R&D, Europe may be unable to compete in the medium to long-term without a change in their priorities. Europe provides a huge export market for emerging nations, with businesses from these economies increasingly threatening the domestic base of Europe’s businesses.

It has long been the case that it is difficult to run a business to maximise the long-term opportunity while trading through the short-term obstacles and threats. In the short-term businesses can survive by squeezing the most out of existing products and services, but this cannot continue into the long-term without damaging future growth prospects. Those

businesses with the foresight to boost activity in this area look set to reap the richest rewards. Figure 14 highlights the large disparity between mature markets and the BRIC and Latin America regions with regard to investment in research and development.

Expectations for investment in new buildings are lowest in the EU (+5 per cent). In terms of plant and machinery, investment prospects are weak across the advanced regions, with the EU (+24 per cent), and G74 countries (+31 per cent) all below the global average (+35 per cent). The situation in Europe is particularly difficult. Government austerity measures have dried up lucrative public sector contracts and increased taxation is undermining business confidence and investment potential.

In the European Union, prospects for growth remain extremely low. Businesses have to work harder than ever to maintain margins and competitiveness in the face of powerful economic headwinds. Vital to the situation improving or deteriorating is the fate of the Eurozone.

The resolution of the crisis, therefore, remains top of governments and businesses across Europe wishes for 2012.

For Irish businesses this signals an export environment set to remain challenging over the next 12 months with Ireland’s major Eurozone partner economies set to contract or stagnate. Irish businesses increasingly need to look outward to non-traditional export markets to circumvent flagging growth in our main European trading partners’ economies. 4 G7 countries: Canada, France, Germany, Italy, Japan, UK, United States


Section 3 Global results and emerging economies focus

Business outlook The latest research shows that global business optimism for the next 12 months stands at a net 0 per cent, i.e., those business leaders feeling optimistic (36 per cent) about their economies in 2012 less those feeling pessimistic (36 per cent).

The regional picture, is however, more accentuated with optimism levels in developing regions significantly higher than advanced regions.

The US is expected to see a marginal increase in both order books and revenues in 2012 as business leaders expect to see a strengthening of consumer spending and a pick-up in residential fixed investment. Businesses in the US, however, remain vulnerable with ongoing discussions to balance the budget in

Congress, as well as the turmoil in Europe limiting business optimism to +1 per cent for 2012 (2011 +22 per cent). Overall the prospects of a US recession in 2012 appear low which is very good news for the global economy.

Australian businesses expect demand and revenues to increase in 2012. Optimism amongst Australian businesses remain well above the global average at +24 per cent (2011 +38 per cent) for 2012.

The medium term outlook in Australia continues to be characterised by aggressive investments in the mining industry and by strong growth in resources export. While the unwinding of the fiscal stimulus, cautious behaviour of households, and the higher exchange rate remains a concern impacting business sentiment outside of mining and related industries.

In New Zealand, 2011 was far from smooth. Three massive earthquakes caused huge disruption to businesses and their employees. Optimism has bucked the trend of almost all advanced economies increasing by 3 per cent for 2012 to +36 per cent. Order books and revenue expectations are also expected to remain resilient in 2012.

The importance of emerging economies has been brought into sharper focus as the world economy struggles to recover. With the global economy forecast to expand by around 4 per cent in 2012, growth will be driven by emerging economies.

Latin America for the second consecutive year leads the way regionally at +61 per cent (2011 +75 per cent). Growth expectations in this region, albeit slower than last year, remain

13

resilient, driven by Brazil’s expanding economy, which has boomed on the back of exports to China and eastern Asia. This success has led Brazil to overtake the UK to become the world’s sixth-largest economy (see Figure 8).

The success of Brazil (+74 per cent) has had a positive impact on its closest trading partners with Peru (+78 per cent), Chile (+52 per cent), Mexico (+50 per cent) and Argentina (+24 per cent) all expecting business to remain strong into 2012.

The BRIC nations outlook for 2012 remains collectively positive at +34 per cent (2011 +54 per cent). However, aside from Brazil which has seen optimism fall marginally by 4 per cent year-on-year, the other economies have seen business expectations decrease significantly. Business outlook in Russia -4 per cent (2011 +35 per cent), India +58 per cent (2011 +93 per cent), and mainland China +22 per cent (2011 +41 per cent) demonstrate increased cautiousness amongst business managers in these economies as they become increasingly exposed to strong global economic headwinds.

Nevertheless, a gradual shift in wealth from ‘west to east’, as well as the global demand placed on vital commodities such as energy and food is driving a rebalance of the world economy with many Asian and Latin American

businesses in both regions set to profit directly in 2012. Revenue and demand

At a global level, some 40 per cent of output comes from emerging economies, coupled with a much greater share of global growth. As a consequence businesses in many emerging economies look well placed for increased demand and higher revenues. Figure 16 illustrates the relationship between revenue and demand in the 40 countries surveyed. Improved prospects for both economic indicators reflect strong business confidence in many emerging economies for 2012 - the top right hand quadrant.

Businesses in the lower right quadrant are confident about revenue growth, but less so about orders. They include some of the large, rapidly expanding emerging economies such as China, India and Turkey. Further and faster integration into the world economy has exposed businesses in these economies to the slowdown in mature markets - where decision making is now month to month due to low visibility of the future global economy.

In mainland China, uncertainty about rising inflation, higher commodity prices, decreasing exports, falling property prices and lower


factory production, is weighing on the minds of Chinese business leaders. The EU is China’s biggest export market with 2010 exports being one third up on 2009. The threat of a further reduction in orders for Chinese products in Europe will continue to impact business sentiment in this high growth market. Profitability Expectations for profitability have remained strong for the next 12 months. This continues the trend from IBR 2011 and is extremely positive given the dramatic fall in 2009 when profitability prospects turned negative for the first time in IBR history. Once again businesses in emerging economies dominate the top spots for profitability expectations, with Vietnam (+90 per cent) followed by Georgia (+78 per cent), and then China (+61 per cent), Brazil (+60 per cent) and India (+57 per cent). On a purchasing power basis, China could overtake the United States in 2016 as the world’s largest economy, although it will remain markedly less well off on a per capita basis. This is interesting to note for Irish businesses whose key trading partners by value remains the United States and the EU.

Similar to global business optimism where seven out of the bottom ten most pessimistic countries were from the EU, four of five of the most pessimistic countries regarding profitability are also from the EU.

Research and development and investment While many businesses in mature markets are being forced to focus on cost savings and the bottom line, investment sentiment remains strong in emerging economies. In Latin America, 33 per cent of businesses expect to

increase investment in new buildings in 2012, 57 per cent new plant and machinery and 40 per cent in R&D. Similarly businesses in mainland China are expecting to increase investment in R&D by 58 per cent and plant and machinery by 41 per cent.

Innovation is one of the main pillars of mainland China’s new five year plan with expenditure on research and development to account for 2.2 per cent of GDP per annum by 2015.

In emerging economies, business growth

does not necessarily require high prioritisation of investment in R&D. However, businesses are increasingly investing in R&D as they face a very tough competitive environment with many foreign companies starting operations locally and bringing their own production techniques and processes.

To remain competitive, businesses in emerging economies are increasingly developing their own product and services to counteract the threat of overseas companies. Figure 18 illustrates the increase in expenditure by business leaders in emerging economies to create sophisticated ‘new’ products and services rather than ‘imitate’ western products as they did in the past.

While optimism has reduced somewhat in emerging economies, the outlook remains extremely positive in comparison to the US and EU. As these emerging economies expand, households become increasingly wealthy, resulting in increased consumer demand, particularly for the middle class in these economies which are expected to explode in size over the next decade.

The Grant Thornton International Business Report (IBR) is a quarterly survey of around 2,800 senior executives in privately-held and listed businesses all over the world. Launched in 1992 in nine European countries the report now surveys more than 11,500 businesses leaders in 40 economies on an annual basis providing insights on the economic and commercial issues affecting companies globally.

To find out more about IBR and to obtain copies of reports and summaries please visit: www.internationalbusinessreport.com. The site also allows users to complete the survey and benchmark their results against all other respondents by territory, industry type and size of business.

Participating economies Argentina Malaysia Armenia Mexico Australia Netherlands Belgium New Zealand Botswana Philippines Brazil Poland Canada Peru Chile Russia Mainland China Singapore Denmark South Africa Finland Spain France Sweden Germany Switzerland Georgia Taiwan Greece Thailand Hong Kong Turkey India United Arab Emirates Ireland United Kingdom Italy United States Japan Vietnam

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GT IBR 2012 - focus on Ireland

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