Our future economic health, according to businesses right at its heart
Businesses raise a measured cheer for the New Year
There is cheer among mid-sized companies globally as they look towards 2021. But, this cheer is carefully measured. Grant Thornton’s latest Global business pulse reveals that firms are more hopeful about future growth, but acutely aware of the challenges that they still face due to the pandemic.
Overall, the global index, which measures the health of mid-market firms across the world, is -3.6 for the second half of 2020, a recovery from a low of -9.4 in H1. Although improved, it’s still the second-worst result since the index records began a decade ago. Also in negative territory are two-thirds of the 29 monitored countries, all but one of the G7 countries, most regions, and all but two industries - reflecting the hold that COVID-19 still has on mid-sized companies around the world.
“Mid-market companies do believe the new year will bring more opportunity, but there is sensible pragmatism among leaders. They recognise that the first half of 2021 will still be challenging and conditions are going to be hard,” comments at Grant Thornton International Ltd.
The most recent index result is based on interviews with around 5,000 mid-market leaders between October and December 2020, and the resulting score is a measure of positive or negative business health.[i] This index provides a timely snapshot of business health amid a challenging environment in which COVID-19 dominates the agenda, vaccines are announced and where firms look to the year ahead. The sections below provide the full health report for the mid-market globally, and you can also access regional index write-ups on the ever-resilient Latin America, the rebounding North America and the gradually improving EU and Asia Pacific regions.
Headlines from the latest Global business pulse
Encouraging signs of a recovery in international ambitions
In the first half of 2020, a debate was raging among mid-market leaders about what COVID-19 meant for the internationalisation of their sales and supply chains. At a global level, and by a slim majority, the intention was to prioritise domestic sales and supply chains over international ones. In H2, this trend has reversed, with more mid-market companies now looking to prioritise international over domestic markets and adjusting their strategies and internal resources to achieve this. This trend is confirmed by research from the European Round Table for Industry which, in November, reported that 79% of industrial firms they surveyed had no plans to reshore supply chains. [ii]
There has also been a leap in the numbers of companies expecting to increase exports this year, reaching a series high of 34% (albeit this is coming off a lower base). “This flags the entrepreneurial nature of the mid-market,” notes Francesca. “Mid-sized companies are really tuned into their markets and able to see the trends. They are agile and can adapt to the opportunities. Being able to pivot at speed is so important in this type of environment.”
In upcoming commentary in 2021, we’ll assess the specific impacts of COVID-19 on domestic and international markets, examine how mid-market companies are adjusting their strategies, and highlight the current opportunities.
Rebalancing of investment priorities towards more traditional categories
Over the past year and a half, research and development (R&D) and technology have been a clear investment priority, helped recently by the rise in remote working and the move to digital channels. This accelerated pace of innovation prompted one UK think tank to claim that automation’s growth is now ‘on steroids’. [iii] In this latest research, we see more traditional investment categories outpace these areas. The percentage of mid-market companies looking to increase investment in both new buildings and plant and machinery both increased by 10 percentage points, to 32% and 38% respectively. Investment in staff skills also saw a step up, with 45% of companies looking to increase their investments in this area.
Our experts attribute this to a number of factors. Many companies have put off investment during the course of the pandemic and are catching up. Others are investing to be ready for the expected uptick. Investment in buildings is likely linked to requirements around social distancing, and the need for warehousing to hold more raw materials and finished goods as a buffer against future disruptions.
More generally, Robert Hannah, global head of strategic growth markets at Grant Thornton International Ltd, suggests that the shift back to more traditional investment categories “had to happen” given the “exaggerated” rush to technology and the fact that businesses still need old-fashioned infrastructure like plant, equipment and property. The global retailer Amazon is an example of a digital business which is making considerable new investments in property and transportation to support its growth during the pandemic. [iv]
New rules increase burden on businesses in New Year
Before COVID-19 arrived, our index pointed to growing concerns among mid-market leaders about regulation and red tape. In the COVID-19 era, this has escalated still further as all manner of regulations and incentives are used to manage the disease, support businesses and protect economies. Nearly half (49%) of all mid-market companies now identify this as a barrier to their growth – a record high.
Changing regulation is frustrating for all businesses, but particularly smaller businesses, which have fewer resources and less specialist knowledge. Grant Thornton recently published dedicated guidance to help businesses prepare for regulatory change. This article stresses the importance of keeping up to date with changes and – where possible – getting ahead of them. External help can also be very valuable here in terms of accessing knowledge on red tape as well as best practice on how to deal with it.
Expand the headings below for more insight
Caution is seen in both branches of the index
The mid-market’s measured cheer plays out slightly differently in the two key elements of the Global business pulse. The ‘outlook’ – which tracks growth expectations – produces the clearest sign of health, increasing by 35.8 to 46.2, driven primarily by stronger levels of economic optimism, but supported by improving growth expectations and investment intentions. However, all these elements of health remain below pre-pandemic levels, despite coming off a lower base after the COVID-19 crunch.
The improvement in restrictions, or the barriers to growth, was much less noticeable, improving by just 1pt from six months ago to -53.4. While there were small improvements in demand constraints and economic uncertainty, meaningful progress was held back by a worsening of supply constraints, which will be explored further below.
Notably, economic uncertainty has yet to fall to levels that might have been expected, given the change in optimism. Our analysis of a decade’s worth of proprietary data reveals that economic uncertainty and economic optimism are inversely correlated: when economic optimism rises, uncertainty falls, and vice versa.
Commenting on the inertia of economic uncertainty, Adrian Cooper, CEO at Oxford Economics, notes that: “Recent positive news on a COVID-19 vaccine provides reasons for the optimism seen in the economic outlook in 2021, and the balance of risks is becoming more favourable after being skewed to the downside for much of 2020. But the current environment remains challenging, particularly with restrictions being tightened across Europe and North America amid a surge in new cases, while significant uncertainties remain around the speed and logistics of vaccine deployment. These contrasting developments are reflected in the responses in the latest Global business pulse.”
Vaccine proves a shot in the arm for outlook
Of all the components of outlook, it was economic optimism that rallied strongest thanks to positive developments like the arrival of a vaccine, clarity on the US presidential elections and the resilience in China. The recovery in conditions, a catch-all for various business growth expectations, was less marked, reflecting the caution that still exists among mid-market businesses. The percentage of companies expecting to grow their revenue in the next 12 months increased 11 percentage points to 45%, and the percentage expecting to grow profitability rose 12 percentage points to 44%. The improved outlook is reflected in financial markets, where the MSCI world index hit new highs in December, climbing over 15% since the start of the previous month.[v]
The challenges of 2020 mean that many companies are coming off a lower base and, relative to this, the future looks brighter. Our own data shows that 44% of the global mid-market expect their revenues to decline in 2020 after factoring in the impact of COVID-19. The quest for revenue and profit growth will not, however, be helped by the excess capacity that now exists in many sectors and geographies, which in turn will put pressure on pricing.
This squeeze on selling prices is seen in our data, with just 37% of companies globally expecting prices to increase in the coming year, 17% expecting them to decrease, and 42% expecting them to remain the same. In a couple of sectors – including travel, tourism and leisure – there are more companies expecting prices to decrease than increase.
Companies are investing for the future and prioritising sustainability
It is significant that investment intentions in the mid-market have kept pace with improved conditions in H2. Historically there has always been a strong correlation between these two areas, with investment intentions led primarily by internal growth expectations rather than external economic optimism. It is very encouraging that leaders are following their own convictions and investing for the future.
Another key trend is the growing importance of sustainability. Recent research by Grant Thornton, shows that companies are alive to the opportunities, finding that 43% of mid-market companies globally see financial success and sustainability as equally important, and that nearly half (47%) expect a sustainable approach to lead to improved operational efficiency and lower costs. Even if sustainability isn’t the main driver of new investment decisions, it is likely to be a consideration.
Paul English, Global leader - markets & clients at Grant Thornton International Ltd, observes, “I think it is now far more likely that economies will be re-built and re-shaped based on more sustainable business principles and practices. There is likely to be greatly reduced tolerance for old ways of thinking and old business models.”
Paul stresses the positive benefits of sustainability for exploiting emergent opportunities in markets, evidencing the right credentials to customers, meeting the sustainability criteria of investors, and attracting the best talent. Indeed, our research finds record numbers of companies now complaining of a shortage of skilled workers – despite the job losses due to the pandemic.
Shortage of finance likely to continue into 2021
The three components of restrictions are not all pulling in the same direction. Economic uncertainty and demand constraints both record marginal improvements, but they remain significant barriers to growth for most mid-market companies. Economic uncertainty is still felt by 62% of companies, and concerns about shortages of orders is noted by 52%.
The element that worsened in H2 was supply constraints, which fell from -45.1pts to -47.1. In addition to worries about regulation and red tape, there is continued concern about shortage of finance, which rose to new highs in a number of regions, including emerging APAC and North America.
Prolonged challenges always test company finances, and the interminable pandemic has been particularly cruel. The situation has also been exacerbated by the gradual withdrawal of cheap loans, grants, and incentives by governments in many countries. The mid-market has always been particularly dependent on banks for financing, and here again, bad debt or the threat of bad debt may be hindering the willingness of banks to lend. The great hope is that the arrival of vaccines and the prospect of a recovery will encourage more debt and equity funding in the near future.
In the meantime, Francesca suggests that companies will have to be creative about where they find their funding. “I think we are going to see this issue run through 2021. Chances are businesses will have to explore a number of different areas, rather than rely on one single route.”
ii. FT.com - Europe on way to recovery, say leading industrialists - 25.11.2020
iii. FT.com - UK jobs could disappear as Covid puts automation on ‘steroids’ - 15.12.2020
iv. FT.com - Investors ‘back with a vengeance’ as warehouse demand surges - 12.08.2020
v.Reuters - GLOBAL MARKETS-Stocks peak on vaccine, U.S. stimulus and Brexit deal hopes; dollar slumps - 16.12.20 and City A.M. - FTSE 100 slips but global markets hit fresh highs on vaccines and stimulus - 17.12.20
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Grant Thornton’s Global business pulse is published bi-annually and brings insights into the health of mid-sized companies.
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