Company advertising budgets are often subject to slash-and-
burn when the economy deteriorates, but what happens when conditions improve?

The Association of Advertisers in Ireland's barometer of advertising expenditure, a new quarterly study compiled by economist Jim Power, tracks how the rate of decline in expenditure on advertising has exceeded the decline in the overall economy in recent years and is lagging behind trends in business confidence.

Between 2007 and 2012, nominal gross domestic product (GDP) declined by 13.6 per cent, while it is estimated that total advertising expenditure on both traditional and online media declined by 15.5 per cent (with spending on traditional media down 24.2 per cent).

The AAI barometer adjusts advertising expenditure for seasonal factors and compares it to seasonally adjusted economic trends. GDP peaked in the final quarter of 2007, but advertising spend expanded out to the second quarter of 2008.

“Then the realisation hit those in charge of the advertising budget that economic circumstances had changed in a significant way and there followed a very sharp decline in advertising expenditure,” the report notes.

Optimism in 2010 and early 2011 that the economy was on the brink of a decent recovery soon faded, and a modest improvement in expenditure gave way to another cycle of weakening until the end of last year, while the cautious second quarter of 2013 also marked a fresh setback on the more hopeful first three months.

When year-on-year growth rates in GDP and advertising expenditure are considered, it can be seen clearly that growth in advertising plunged more sharply than GDP in 2009, outperformed it during 2010, then fell again in 2011 and 2012.

"The first half of 2013 has seen a closure of the gap, which is suggesting that business confidence in the value of advertising may be starting to turn for the better," the report states. But Power adds that the advertising market "remains very fragile, reflecting the fragile nature of the overall economy". The AAI barometer also seeks to monitor the relationship between spend and business confidence as measured by KBC and Chartered Accountants Ireland (CAI). Confidence has trended upwards since 2012, but this has not yet been reflected in advertising budgets.

Power forecasts “gradual improvement” in spending if confidence continues to rise, but adds that an ongoing lag is likely.

The report concludes that spending on advertising remains “pretty depressed” and argues that this could both limit the potential for economic recovery and damage individual companies’ prospects for gaining the upper hand in their markets.