The full impact of COVID-19 on the mid-market is finally revealed

The launch of Grant Thornton’s new index into the health of mid-sized companies comes at the most difficult time in a generation for these companies. Our H1 2020 Global business pulse finds that the index has plunged by 12.8 points to a score of minus 9.4. This is the first time in a decade of comparable results that the index has turned negative and reflects the blow that Coronavirus has delivered to business outlooks and operating environments, not to mention human lives. The index results for every region, every sector (bar one) and 26 of the 29 monitored countries also come out negative in H1 2020. The impact has been wide but maybe not as deep as anticipated.

For reference, a score of +50 would represent perfect health with no restrictions and an ideal outlook, and the likelihood of high growth in the future. A score of -50 would represent dire health, with crushing restrictions and an appalling outlook, and the likelihood of decline in the future.

The index score of -9.4 shows the significant impact of the pandemic and is by any measure bad. However, the depth of the fall might have been a lot worse given the circumstances. Indeed the results were a surprise to the experts who work on the index.

 

 

 

Lagerberg_Francesca_round.pngFrancesca Lagerberg, Global leader – network capabilities at Grant Thornton International Ltd, said: “With the collapse in economic activity amid Coronavirus, we expected a more significant deterioration in the results However the index in some ways reinforces what we’re seeing on the ground. When I talk to mid-market businesses around the world, most say they are trading more effectively than they had imagined, handling cash flow very well and looking after their people first. They are showing real resilience and this is hugely encouraging.”

Oxford Economics, our research partners and developers of the Global business pulse agree. Adrian Cooper, CEO of Oxford Economics said: “Reviewing the index, when you consider the severity of the current downturn as large swathes of the global economy were shut down, the impact – whilst sharp — doesn’t appear to have cut these businesses as deeply as we might anticipate given other economic and survey data.”

The research for the index was conducted in May and June and so spans a range of stages, from shutdowns to easing restrictions around the world. As such it is a valuable snapshot amid an evolving situation and one that will play out over some time to come. “We will eagerly be looking to the next results to give us a better sense of whether the mid-market is holding up as well as we hope,” comments Francesca.

Please take a look at our methodology section if you’d like further details about the nature of the index before reading further.

Global snapshot

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There were big falls for both the mid-market outlook and restrictions

The index is made up of two elements: the ‘outlook’ tracks future business conditions (including growth), economic optimism, and future investment intentions, while ‘restrictions’ cover demand and supply constraints and economic uncertainty.

Both elements fell significantly in the last six months. The outlook was down 14.6 points, propelled in part by a large drop in economic optimism. As at H1 2020, just 43% of firms felt slightly or very optimistic for their country’s economy over the next 12 months. This is the lowest level since the eurozone crisis of 2011-2012. There was also a sharp decline in revenue and profit expectations to series lows, highlighting the potentially difficult year ahead as the global economy emerges from lockdown.

Restrictions fell by 10.9 points, pushing this negatively scored element deeper into the red. The current environment has seen escalated concerns among mid-market leaders about falling demand and economic uncertainty. Around two-thirds of leaders now view uncertainty as a business constraint, with nearly 1-in-3 firms seeing it as a major constraint.

Signs of mid-market resilience and opportunity

All three components of outlook – economic optimism, business conditions and investment intentions – fell markedly during the last six months, but there were several signs of strength across these areas. While growth expectations have been hit hard, a remarkable 34% of mid-market firms around the world are still expecting an increase in revenues in the next 12 months. That’s a significant number in the context of other business surveys that have been conducted and reveals a self-belief among mid-market leaders.

Exports are another bright spot. Looking back, the percentage of mid-market companies that managed to increase exports in the last twelve months actually increased in H1 2020, compared with H2 2019. And future expectations for export growth aren’t down as much as other growth measures, with one-quarter of businesses still targeting increases.

Francesca sees this as a timely reminder that, “Globalisation is not dead, it just may look a little different. International trade is such an important part of the mid-market universe.” While the top-line outlook may be holding, the pandemic has brought about an interesting shift in attitudes towards trade opportunities and international supply chains, which we will explore later in the year.

Finally, while investment intentions followed business conditions downwards – in the regular pattern we would expect – we saw an acceleration of the trend towards investments in R&D and technology. 78% of firms intend to maintain or increase their levels of investment in technology in the next 12 months and 69% intend to do the same for R&D. Technology has obviously been a hugely important factor during the pandemic as businesses have moved to remote working, but more fundamentally, it is being used to help optimise business operations and adapt to the future.

Innovation more generally has been key to helping mid-market business through the crisis, says Francesca. “People had to do things differently, and they have done in six weeks what may previously have taken six months or six years. And plenty of businesses are now seeing benefits as a result of the changes, and will keep them and build on them.”

The barriers to growth have become significantly higher

Looking at the three elements of restrictions, we see a sharp deterioration in economic uncertainty and demand constraints. Around the world, 55% of firms identify a shortage of orders (the indicator behind demand constraints) as a barrier to growth, with nearly 1-in-4 firms identifying it as a major constraint. This shows just how much demand has dried up, and is most striking when viewed at a sector level.

Robert Hannah.pngRobert Hannah, global head of strategic growth markets at Grant Thornton International Ltd, stresses the importance of scenario planning in preparing for all these uncertainties. “Mid-market businesses need to work through all the scenarios: assess what they mean, really test them, pilot them and come back to them. It sounds like a long process, but it can be done in a couple of weeks if you have the right mindset and put time and effort into it.” Read more about scenario planning.

By contrast, supply constraints, which encompass labour, access to finance and regulation and infrastructure, have not significantly changed. The crisis has had little impact on red tape and infrastructure and may even help to ease labour market constraints.

The one element which did worsen was access to finance, despite unprecedented levels of fiscal and monetary easing globally. Cash is the lifeblood of businesses at the present time and this finding is very concerning and will be closely watched going forward. In ‘Thriving in 2020: Capitalising on resilience’ we discussed some additional sources of funding for companies and how they could best position themselves to access this.

Regional highlights

Asia Pacific

APAC bouncing back from the pandemic

Read more Asia Pacific

European Union (EU)

Jobs threat as EU businesses reel from impact of Coronavirus

Read more European Union (EU)

Latin America

Latin American mid-market shows resolve

Read more Latin America

North America

North American businesses among the hardest hit

Read more North America

Want to stay informed?

Grant Thornton’s Global business pulse is published bi-annually and brings insights into the health of mid-sized companies.

We will also publish further insights from our research throughout the year.

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You can also visit our ‘Navigating Uncertain Times’ section to see more advice from Grant Thornton, or access our new content on the impact of Covid-19 and mid-market resiliency.