A new report from the Banking & Payments Federation Ireland (BPFI) reveals a concerning decline in labour productivity within critical small and medium-sized enterprise (SME) sectors. The latest SME Monitor indicates a productivity drop of approximately 29% in construction and 14% in accommodation and food services.
Ali Uğur, chief economist at BPFI, pointed out that the decline in productivity is particularly striking when viewed in a European context. “The Irish accommodation and food service sector recorded the second steepest decline in labour productivity since 2015, following the Czech Republic, and the third steepest in construction, behind the Czech Republic and Austria,” he noted. These sectors are significant, with SMEs representing 80% of employment in accommodation and food services and 62% in construction.
Uğur attributed this decline to various pressures facing SMEs in recent years, including increases in the minimum wage, the introduction of statutory sick pay, and the return of the 13.5% VAT rate in the hospitality sector. He also highlighted the burden of debt repayments accumulated during the COVID-19 pandemic. “Moreover, the introduction of higher employer PRSI rates this month and the proposed pension auto-enrolment scheme expected next year are likely to further impact businesses, especially SMEs,” he added.
The report suggests that while some of the productivity challenges faced by individual companies may relate to their scale and size, addressing skill mismatches at both the firm and industry levels, along with enhanced training, could help boost productivity. Uğur emphasized the importance of capital investment, stating, “Improved technology and automation, as well as process enhancements, may be key for some businesses.”
To foster long-term sustainability, Uğur argued that state support for businesses, particularly SMEs, must evolve. “Support needs to move from one-off subsidies for costs to targeted investments,” he asserted.
Despite the challenges highlighted in the report, the SME Monitor shows that the Irish economy has performed well over the past two years, with notable growth in output and employment. “The most recent data from the Central Statistics Office indicates that the Irish economy grew by 5% in real terms in 2023,” Uğur noted. He expressed optimism that this growth is expected to continue, albeit at a slower rate.
As SMEs navigate these difficult circumstances, the findings of the SME Monitor underline the urgent need for both policy support and strategic investment to enhance productivity and ensure the resilience of key sectors in Ireland’s economy.
