North American companies recorded the second worst deterioration in business health of any region in the first half of 2020, as measured by the Grant Thornton’s new Global business pulse. The index, a health check of mid-market firms around the world, fell by 15.1 points to minus 8 for the period, and warns of consequences for the region’s future economic growth
The aggregate view provided by the index was dragged down by a number of factors but concern about the overall economy was central. The two related indicators of ‘economic optimism’ and ‘economic uncertainty’ both deteriorated sharply in May and June when the survey was conducted as COVID-19 infections escalated in the region.
The number of mid-market leaders citing economic uncertainty as a constraint to growth rose by 23 percentage points (ppt) to 71% in H1 2020. These levels are much higher than the global and G7 averages and are dramatically up on the 10% level seen at the beginning of 2018, before the start of the US-China trade war. While economic optimism declined by 21ppt from H2 2019 and is now at its lowest level since Q4 2012.
Despite the severe impact, North America’s overall index score remains above the global average. It is higher than Asia Pacific and the EU, which speaks to the enduring strength of this region and the resilience of the North American mid-market. And looking into the individual indicators below we see some other reasons for encouragement.
The mid-market has the growth genes of smaller businesses, and many of the resources of larger companies which will very prove useful in this crisis. Scott Farber, network capabilities team director at Grant Thornton International Ltd, also argues that there is a real sense of family in family-owned mid-market companies and a connection between employees and owners/leaders which means that employees will go the extra mile to support the company during this difficult time.
Please take a look at our methodology section if you’d like further details about the nature of the index before reading further.
The Index focuses on two main elements for businesses: their ‘outlook’ for the future and their view on the ‘restrictions’ they face. In the first half of this year, it is the ‘outlook’ that has been impacted most, falling by around 17 points during the period. Each of the underlying components tumbled during the period but the fall in economic optimism was particularly sharp, at 21ppt.
The impact on restrictions was less severe, dropping just 13 points compared with H2 2019. It was pulled down primarily by economic uncertainty and to a lesser extent by demand constraints, due to concerns about shortages of orders in the next 12 months. Access our advice on building resilience during this difficult time.
Despite a sharp contraction in the overall outlook, North America’s mid-market remains relatively optimistic compared with other regions., having gone into the period with higher levels of confidence than most. Half of all firms are still slightly or very optimistic about the economic outlook, with the US being more optimistic than Canada.
The index shows business conditions and investment intentions moving in tandem downwards. Our analysis of historic results has shown that these elements are strongly positively correlated and this is shown perfectly here. Revenue and profit expectations, both constituents of business conditions, plunged to record series lows. Only one-third of firms expect to increase profits over the next 12 months, while 37% expect profits to fall.
An area of relative strength is exports, where expectations for the next 12 months were down just 7ppt from H2 2019 and remain well above the 2016-2018 average. This may be linked to final ratification by all three countries of the United States Mexico Canada Agreement, which has now replaced North American Free Trade Agreement.
In line with global patterns, the falls in the components of restrictions are concentrated on demand constraints and economic uncertainty. Supply constraints – encompassing access to finance, labour and regulation and infrastructure – held up well. Similar to Europe, despite widespread fiscal and monetary stimulus measures easing financial conditions in the region, a shortage of finance was stated as a constraint by 45% of firms in North America. This compares with an historical average of just 14%, and is a real concern. Finance is so important to businesses as they trade through this difficult period, or even start-up again after shutdown, and it will be monitored closely in future results.
Scott notes, “There is still a lot of money available to businesses, but valuations have softened and there are concerns about forecasts and uncertainty as to when revenue strength will return and what it will look like. As a result, this has a big impact on securing new financing, especially from independent third-parties.”
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.
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.
