Business health in Asia Pacific continues to mount a strong recovery, according to Grant Thornton’s Global business pulse. The regional outlook made further positive gains despite a number of third-wave COVID-19 outbreaks. In the Year of the Ox, it is China’s robust economic growth that is shouldering the load, keeping optimism high across the region while growth expectations and investments both returned to pre-pandemic levels. Predictions from the World Bank show that without China the region is expected to grow 4% this year, but with China included the number is 8.5%.[i]
As other regions look to their suppliers in Asia Pacific (APAC), the region’s mid-market exporters expect to benefit from renewed demand. However, they will increasingly come under pressure to meet that demand and are focussing on developing skills and technology to enhance productivity, a trend pre-existing COVID-19 but galvanised by the pandemic.
Asia Pacific index over time
The Global business pulse, which tracks the health of mid-market companies, provides valuable insight as the region emerges from the pandemic. The overall index recovered five points to -1.8, just beneath the global average but accelerating from the previous half’s index rise of 3.5 points, and was among the most significant positive changes across the global regions.
Both developed and emerging APAC saw similar improvements, but it is the emerging countries that are showing the best overall business health. Optimism among business leaders was also strongest among emerging APAC, while the positive sentiment in developed APAC was more muted.
China’s resilience and control of COVID-19 helped see the region through the early waves of the pandemic and continued to propel it over the past six months. In 2020, China was the only major economy to record positive growth, posting 2.3% growth for the year,[ii] and China’s economy grew a notable 12.7% in the first half of 2021.[iii] Looking to the next 12 months, 86% of Chinese mid-market companies are feeling optimistic about their economy, breaking the previous half’s record high by 3 percentage points (pp).
Rodger Flynn, regional head of Asia Pacific at Grant Thornton International Ltd., says: “There is a solid belief in the region. It has the population, it has the know-how, it’s got growth in China, and GDP per person across the region has increased substantially. The pandemic has not dented the region’s long-term cultural belief in its ultimate success.”
The rising index was underpinned by a continued recovery in the outlook, which measures growth expectations, and climbed to 53.1 from 44.5 in H2 2020.
Optimism for the whole region rose to 67% from 62%, broadly in line with the global average but the highest level recorded for Asia Pacific since Q4 2017. Conditions and investment both returned to pre-pandemic levels, while revenue and profit expectations for the next 12 months rose in line with the global average up 11 and 13pp respectively.
The index was further strengthened by a 1% improvement in restrictions to -56.6, with concerns over the shortage of orders receding. Echoing the global average, economic uncertainty in the region also improved slightly, down two percentage points. However, at 63%, uncertainty remains high and above the long-term average.
The uncertainty in the region is multi-faceted, concerns range from future pandemic waves and lockdowns to economies not opening fast enough to support and benefit from a global recovery.
The region initially benefited from a zero-COVID approach, resulting in a shallower recession and more open economies than elsewhere. More recently, slow vaccination programmes, increased COVID-19 cases of the Delta variant, strict local restrictions, and expanded lockdown areas in Australia, South Korea, Thailand, and Malaysia have been disruptive to economic recovery.
JasonLi, associate director, APAC network capabilities, at Grant Thornton International, says: “Because of the uncertainty in the region, in terms of the control of the pandemic, some orders are actually coming back to China.
“The vaccination unevenness has caused some issues in the region, but I think it is overwhelmingly improving in the region. India remains a concern, especially because of the Delta variant. However, overall, people are positive about the recovery and the rollout of vaccinations.”
Indeed, India has remained an outlier in the region, with revenue expectations remaining flat and profitability edging slightly higher by two percentage points but lagging behind the regional and global average.
Trade with APAC neighbours helps to drive recovery
Resurging internationalism is a central theme globally, and export intentions among APAC’s mid-market hit a record high, with 41% of businesses expecting to increase exports. The rise was most pronounced among emerging APAC, with just under half of firms expecting to increase international sales.
China saw the most significant change, with export intentions jumping 17pp since H2 2020. In June, according to customs data, the country’s exports leapt 32% on the previous year.[iv] This underlines the resilience of China during the pandemic and its readiness to support the global recovery in trade. Likewise, China’s appetite for raw materials and parts have held up well, driving intra-regional trade.
However, recent delta variant outbreaks in 17 Chinese provinces are causing construction restrictions which may reduce China’s need for Australian iron ore.
The growth in conditions and investment is a particular bright spot this last six months. Businesses in the region expect to continue investment across all areas but are particularly focusing on technology and staff skills, with 50% of businesses looking to increase investment across both. Recently, Asian tech giant Huawei revealed it will invest USD 150 million in its own technology skills programme over the next five years across the whole region to meet the skills challenge.[v] Technology investment expectations in China jumped 20pp to 59% at comparable pre-pandemic levels, while 46% of South Korean firms expect to increase their tech spend, a rise of 21pp.
On the people side, the number of Chinese businesses expecting to expand investment in staff skills was up 16pp to 56%. The number of Japanese and South Korean firms also anticipating more staff investment rose by nine percentage points.
Skills and wages weigh on growth prospects
With burgeoning exports anticipated, supply constraints also come sharply into focus as the mid-market try to keep up with increasing demand and position themselves as valuable suppliers in the global recovery.
At the start of the year, it was predicted that salaries in APAC would grow faster than any other region,[vi] and midway through the year companies are certainly citing wages as a constraint. The number of businesses mentioning labour costs as a barrier to growth lifted two percentage points to 58%, while 55% of businesses in developed APAC cited the availability of skilled labour as a constraint. Access to finance also remains a concern, and more noted in ASEAN economies. While concern about finance eased slightly in China, it still remains elevated amid Beijing’s increasingly tight credit controls, which is hampering the countries retail sector.[vii]
As the investment trends suggest, investment in technology and staff skills will be key to helping to address these constraints and seizing opportunities in the region.
Robert Hannah, leader of the international business support function at Grant Thornton International, says: “The trend of skills being prioritised was pretty high in the region pre-pandemic. Because the flow of demand, particularly around production, they needed to up-skill in a number of areas; they needed more engineers and manufacturing experts. Technology has also emboldened a lot of countries and given them confidence in their own abilities.”
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i. www.reuters.com - World Bank trims East Asia, Pacific GDP forecast amid COVID-19 concerns - 15.06.2021 ii. www.wsj.com - China Is the Only Major Economy to Report Economic Growth for 2020 - 18.01.2021 iii. www.china-briefing.com - China’s GDP Grows by 12.7% in H1 2021 - 20.07.2021 iv. www.cnbc.com - Hong Kong shares lead gains in Asia-Pacific as China’s June exports beat forecasts - 13.07.2021 v. www.bworldonline.com - Huawei to invest $150 million in developing APAC’s digital talent - 09.07.2021 vi. www.cnbc.com - Salaries in Asia Pacific projected to grow the most globally in 2021 - 19.11.2020 vii. www.ft.com - China tightens credit conditions in bid to balance growth and debt - 25.04.2021
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