Mid-market businesses less optimistic, despite record numbers expecting increased profitability

The challenges of navigating the global economy have been highlighted by a record number of mid-market business leaders expecting an increase in profitability (up one point to 60%) coinciding with a drop in optimism (down two points to 65%), according to Grant Thornton’s latest International Business Report (IBR).

A closer examination of the data offers some explanation of this apparent contradiction.

The record number of businesses expecting an increase in profitability is most likely due to inflation being brought under control. This is highlighted by a five-point drop (down to 50%) in the number of businesses expecting to increase their selling prices over the next 12 months. Every business constraint tracked in the IBR has also eased, indicating less pressure on margins. For example, those citing labour costs as a constraint is down two points to 51%, those citing energy costs as a constraint is down two points to 52%, and those citing a shortage of finance is down four points to 40%.

Elsewhere, concerns over a shortage of orders has dropped five points to 43%; concerns over red tape and regulation is down four points to 47%; and concerns over availability of skilled labour is down three points to 50%.

While these numbers have dropped, most have dropped marginally and still remain well above average since the IBR research began.

However, there is little doubt that the relentless pressure on margins may finally be easing, as seen by a four point drop in the number of businesses expecting to provide real salary increases over the next year (down to just 19%). This may also explain the marginal increase (up one point to 50%) in the number of businesses expecting to increase the number of people they employ.

But there is no escaping the gloomy geopolitical landscape. Despite a marginal drop of one point, economic uncertainty remains the most frequently cited constraint, by 57% of mid-market business leaders.

That uncertainty has spilled over into a less optimistic outlook for international trade. Business leaders expecting to increase exports has dropped four points to 43%. This is driven by a three point drop (down to 40%) in the number of leaders expecting to increase the number of countries they sell to and a two point drop (down to 42%) in those expecting to increase revenue from non-domestic markets. Perhaps the record number of countries voting in elections and the potential regulatory and geopolitical upheaval that may cause might be tempering the international ambitions of business?

And while profit expectations are up, the one point rise is matched by a one point drop in those expecting to see an increase in revenues over the next 12 months – down to 59% of respondents.

This expectation may be flowing through to marginal falls in business investment expectations. However, investment in technology remains top of the list with no change in proportion of leaders (61%) expecting to increase investment in this area. Elsewhere there is a one point drop in investment in staff skills (down to 56%), a two point drop in investment in research and development (down to 52%), no change in investment in plant and machinery at 46%, and a two point drop (down to 36%) in investment in new buildings.

Peter Bodin, CEO of Grant Thornton International commented:

“Our latest IBR highlights the complexity and difficult choices that business leaders face. Does improving profitability mean an opportunity to focus on growing market share through changes in pricing strategy? Do persistent concerns over economic uncertainty and continuing geopolitical challenges signal a need to prepare for more volatility? And does an improving inflation outlook and falling interest rates mean better financing options? As always, it depends. It depends which market you are in. It depends what condition your business is in. It depends on the competitive landscape in your industry.  

Despite lower levels of optimism, it is not all doom and gloom – but neither is it getting any easier to choose a clear path.  With the global economy in a lower growth trajectory, the decisions made by business leaders will have a far bigger impact on whether companies are successful or not. As our data highlights – making the right choices is not getting any easier. Navigating these challenges is something we expect clients will continue to need help with.”