Global business pulse
For much of the last decade, mid-market companies in North America have shown their peers in other regions what good business health really looks like. That was until the first half of 2020, when Grant Thornton’s Global business pulse, the only index to track the health of mid-market firms worldwide, recorded a collapse of 15.1 points for the region, to minus 8. Fortunately, the results for the second half of 2020 show a recovery that is nearly as dramatic, with the index bouncing back to positive territory, at 1.1.
The fall in the Global business pulse results for H1 was down to a number of factors but economic concerns were at the core. Both economic optimism and economic uncertainty deteriorated sharply as COVID-19 infections escalated in the region. In H2, we see both of these elements improving, but it is economic optimism that rebounds the strongest.
Over two-thirds of North American firms are now optimistic about the economic outlook over the next 12 months, similar levels to those seen pre-pandemic. This rise in optimism is primarily being driven by businesses in the US, where mid-market leaders were cheered by the opening up of the economy in the summer months and the signs of strength seen during the latter part of the year.
Goldman Sachs predicts that the US economy will grow by 5.3% in 2021, making up for a reduction in GDP of around 3.5% in 2020.[i] However, the outlook for Canada is less bright with recent comments from the Governor of the Bank of Canada pointing towards a contraction at the beginning of the year.[ii]
Scott Farber, network capabilities team director at Grant Thornton International Ltd, says a key driver of optimism was the significant job growth seen in the US between May and October last year. Official figures put the US unemployment rate at 6.7% in November, compared with highs of 14.7% in April during the height of the shutdowns.[iii]
Then, of course, there is the election of a new president in the US. Occurring towards the end of the interviewing period for the index results (from October to December this year), the election hasn’t had a material impact on the results.[iv] But the change in administration could be very important for the US and its neighboring countries and regions, as well as the wider world, particularly given the recent loss of a Republican majority in the Senate.
Trade is a central issue here. Although Joe Biden campaigned with the slogan “Buy American”, the expectation is that, as President, he will be a little more willing to trade and a little less ready to impose tariffs.
It is certainly noteworthy that the single largest increase in export expectations across 29 countries was recorded in the USA this period. 47% of US businesses now expect to increase exports in the next 12 months compared with just 28% back in H1 2020. There will be a number of factors behind this, not least a weaker dollar and a lower base, but US businesses are definitely putting more resource into chasing international sales now, which we will explore further in upcoming content.
In neighbouring Latin America, Robert Hannah, global head of strategic growth markets at Grant Thornton International Ltd, believes the change in administration could be “hugely significant” and that the region stands to benefit massively as a resource hub for the US.
When it comes to the trading relationship between China and the USA mired by the bruising trade war, both Scott and Rodger Flynn, regional head – Asia Pacific at Grant Thornton International Ltd, believe that any change in the short term is more likely to be in leaders’ attitudes than public policies.
Globally, we see the growth expectations of mid-market companies improving in H2 2020 but not to the same degree as the uptick in economic optimism. North America bucks this trend, recording improvements in growth expectations in line with the rise in optimism. This explains the sharp pick-up in ‘outlook’, which reflects all of these elements and is one of the two key components that make up the index.
The outlook recovered to 56, in line with levels seen immediately before the pandemic, putting North America right at the top of the regional league table. Businesses in the US were much more positive than business in Canada, reflecting the faster recovery that is expected.[v]
By contrast, the barriers to growth or ‘restrictions’ have improved only marginally after significant deteriorations over the last two periods. This inertia held back the index from rising still further and highlights an important reality. While the future may look brighter for North American businesses, they still face significant immediate hurdles, some of which are tougher than they were at the H1 2020 stage.
As noted, growth expectations in the region have increased at a similar rate as economic optimism. Incredibly, revenue expectations have now surpassed those of H2 2019 (but remain below highs seen in 2018), as half of North American firms expect an increase in revenues over the next 12 months. Profitability expectations have also improved significantly since H1 2020, but remain 4 percentage points below the 2019 average, with 56% of firms anticipating increased profits over the next year.
What is equally significant here is that investment intentions have kept pace with the rises in economic optimism and growth expectations. It is encouraging to see that leaders are following their own convictions and investing for the future. The ‘investment’ element – which captures growth in capacity, productivity and labour - rose from 33.4 in H1 for North America to 49.4 in H2.
One investment area of particular strength was employment expectations, where 47% of firms now expect to increase numbers of staff over the next 12 months – with another 35% planning to maintain present staffing levels. This will be very useful in helping to further reduce the unemployment in both Canada and the US, which reached record levels earlier in 2020.
Another area where there has been some improvement in H2 2020 is expectations for selling prices. Pricing expectations were hit hard in H1 in the face of COVID-19, but have subsequently strengthened to the point where 45% of businesses in North America expect prices to increase in the next 12 months. Some 12% of businesses do, however, expect prices to fall further in 2021, reflecting the excess supply and demand weaknesses that linger in some industries.
The barriers to growth we saw at the H1 2020 stage are still very much in evidence, but they have evolved. Economic uncertainty has shown some improvement, but it still trails the recovery in economic optimism and remains the single biggest obstacle facing North American businesses.
Demand constraints, as measured by shortage of orders for products and services, are little changed from H1 2020, despite the future optimism. While supply constraints are easily the worst on record for the region. One of the key drivers of this is a growing concern about a shortage of finance, mentioned by 47% of mid-market leaders. This must be doubly frustrating for businesses given the all-time low-interest rates [vi] of 0.1% in the US, but is something that we are seeing globally.
Our suggestion to businesses is that they be creative with their funding whilst banks are unforthcoming and explore a number of different areas from which to raise capital, including channels such as private equity and venture capital.
Another issue that North American businesses are having to wrestle with is the availability of skilled labour. This was mentioned by 48% of businesses as being a constraint to growth, and helps to explain why North American businesses plan to offer the most generous real salary increases of any monitored region. Some 28% of companies said they planned to offer above-inflation increases in the next 12 months, and 76% said they would offer a pay rise of some scale.
As the Financial Times notes, throughout the pandemic it is lower skilled jobs that faced the brunt of cuts whilst the overall number of professional jobs rose in many countries.[vii]
Scott believes that companies are trying hard to hold on to highly skilled workers and keep them utilised during this period, and explains the importance of this strategy: “When the economic environment changes and the growth curve accelerates, those highly skilled workers will be critical and won’t be easily replaced or rehired. This will restrict how fast companies will be able to grow.”
Since the start of 2021 the US and Canada have, like much of Europe, seen rates of COVID-19 infection rise. The storming of the Capitol, in Washington DC, by protesters, paired with the worsening of the pandemic, will continue to cast a cloud of economic uncertainty for businesses there. If North America is to be the comeback kid, then it will be in no small amount thanks to the resilience of mid-market firms in the region.
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i. www.cnbc.com - Economic growth will be better than expected thanks to the resilient services sector, Goldman says - 8 December 2020.
ii. www.reuters.com - Bank of Canada governor says COVID-19 puts 'chop' on economic recovery - 15 December 2020.
iii. www.voanews.com - US Unemployment Benefit Claims Jump as Coronavirus Surges - 10 December 2020.
iv. See the methodology section for more details.
v. www.ft.com - UK economists’ survey: recovery will be slower than in peer countries - 3 January 2021
vi. www.reuters.com - Analysis-Investors bet weak dollar will keep risk rally going in 2021 - 23 December 2020
vii. www.ft.com - How the pandemic is worsening inequality - 31 December 2020
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