Global business pulse

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.”

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.

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.

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.”

Consult our content for more guidance on the importance of looking at alternative sources of financing and cash management in stressed conditions. It’s paramount to be investment-ready to ensure your business is in a strong position to take full advantage of the financing opportunities available.