Global business pulse

Rebounding outlook drives up mid-market health

At the heart of the recovery in health is a much stronger outlook among mid-market companies. Over two-thirds of these companies are now feeling slightly or very optimistic about their own economies. This is 22 percentage points (pp) higher than levels seen in H2 2020 and now even well above pre-COVID levels. The improved outlook chimes with the World Bank’s forecast of a 5.6% growth in the world economy in 2021 and what it terms ‘its strongest post-recession pace in 80 years’.[i]

Leaders also feel much more bullish about the prospects for their own businesses. Expectations for revenue and profit growth both increased 12 percentage points (pp) in H1 2021 compared with the last wave of research. 57% now expect to increase revenue in the next 12 months and 56% expect to grow profits. Both indicators are approaching levels not seen since 2018, helped to some degree by lower comparisons during the pandemic.

Mike Ward, Global head of advisory at Grant Thornton International Ltd., says this relatively quick recovery offers a first-mover advantage. “Your goal in any recession is to try not to fall too deep into the valley. Find the floor, race across the floor, reach the other side and get out before everybody else does, because you then get first grab of the resources.”

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Looming supply crunch, as access to finance and skills squeezed

The first grab of the resources is particularly important given that the mid-market is facing a looming supply crunch. Our index considers both the outlook and the restrictions to get a rounded picture of business health. On the restrictions side, supply constraints are elevated across a number of areas, including access to finance, availability of skills and regulation and red tape.

The concern about finance is something that we have commented on in the past, but it has become even more problematic with 51% citing it as a key constraint. The mid-market is particularly reliant on bank funding, and in some countries there has been a tightening of credit supply due to bad debts and growing risk aversion. Francesca also points out that “most countries that had a furlough or incentivisation schemes are either withdrawing or reducing them, and those have been a lifeline for many businesses.”

Companies are also now in a war for talent, with nearly 60% of firms highlighting concerns about the availability of skills. This shortage is made worse by the economic recovery and higher competition for workers, and shows its face in other indicators, such as elevated concerns about labour costs and higher expected salary increases.

Grant Thornton has suggested a number of strategies to deal with this issue. Mike says that growing numbers of Grant Thornton’s clients in the US are looking at alternative sources of labour. They are embracing remote hiring and working to widen the talent pool – having successfully done this throughout the pandemic.

To widen this pool still further, Francesca stresses the importance of diversity and inclusive leadership. The changes in working practices and developments in technology forced by the pandemic hold myriad opportunities for businesses. But to maximise the potential of this altered landscape, leaders need to be cross-cultural, connected, and empathetic. We know that in response to COVID-19, 45% of businesses worldwide promoted work-life balance and flexibility to boost employee engagement and inclusion, and 37% instigated new working practices to better engage all employees.

The supply crunch probably won’t drag the index crashing back down to earth, but it will weigh on further improvements and company leaders should tackle these issues now to avoid any slowdown – and get first grab of resources.

“They must take control over the things that they can control,” advises Robert Hannah, leader of the international business support function at Grant Thornton International Ltd and head of large and complex advisory, Grant Thornton UK.

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Advanced warning of inflationary risks

What’s important to also stress here, is that the supply constraints significantly increase the risk of inflation. In the US, for example, June’s inflation figures hit 5.4%, recording its biggest jump since 2008, with supply-chain bottlenecks cited among the causes.[ii] For many businesses, this will be a new foe and it could be a dangerous one.

Inflation can squeeze profitability, and primarily needs to be tackled by increases in selling price (externally) and productivity improvements (internally). But it also brings the prospects of higher interest rates to control the inflation, which can dramatically slow demand and push up costs of borrowing.

“You learn to deal with inflation by being more efficient,” says Robert. “Working out how much you can pass on and how you can become more efficient – use of technology is critical here. Prioritise investments that make you more efficient and be careful about debt levels and perhaps even manage them down.”

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Ready for take off! Companies race to international markets

Grant Thornton has tracked extraordinary shifts in attitudes towards internationalisation during the course of this pandemic. From the withdrawal back to domestic markets during the early days, to the promising return to international markets. Recently we analysed the customer and competitor opportunities internationally and concluded that there is a ‘once in a generation’ opportunity for companies to grow internationally.

In H1 2021 we see what can only be described as a stampede of companies looking to grow internationally, a trend which we will explore further in upcoming insights. Some 45% of all mid-market companies expect to increase exports in the next 12 months; that’s 11pp up on H2 2020 and the highest level in the decade of IBR results. To support this growth, 39% of companies are now dedicating a higher proportion of employees towards servicing international markets than domestic markets.

The expansion in sales abroad is not just about a recovery in existing markets, but also companies expanding into new markets. 43% of businesses are anticipating an increase in the number of countries they sell to in the coming year. This is about double the level seen during the height of the pandemic.

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