Firms eye profits as global outlook improves
As the year has progressed, business leaders have grown increasingly confident about their prospects. According to data from the latest International Business Report (IBR), Grant Thornton’s global survey of mid-market companies, optimism among business leaders has risen during 2023. Figures show that 67% of global business leaders are optimistic about their firms’ prospects, up from 59% at the end of 2022.
This outlook has been echoed in business leaders’ prospects for revenues and profits. As concerns about a possible global recession have receded, leaders’ expectations for increases in their profits are at an all-time high, with 59% of mid-market companies anticipating an increase in profitability over the next 12 months. This is two percentage points higher than in 2021, the last time firms were so upbeat about their prospects. Hopes have rebounded following the dip caused by the Russian invasion of Ukraine in February 2022, and global concerns about volatile energy prices and the risk of inflation becoming entrenched.
The mid-market’s record expectations for increased profitability may have been impacted by energy and input costs appearing to level off in some regions, but it is also evidence of business leaders’ ambitions to increase sales volumes, make efficiencies, and expand into new markets. However, while the global figure for profitability is high, it masks an underlying trend. The reality is that mid-market firms in the US are surging ahead of other countries in terms of their predicted profit increases and broader business optimism.
Leaders of mid-market firms in the US are among the most likely to be bullish on profits, with 70% of them anticipating an increase over the next year. This makes them more upbeat than their counterparts in Latin America, where 63% of firms expect an increase in profits, and well ahead of business leaders in Asia-Pacific (56%) or EMEA (58%). The most pronounced difference is with the European Union, where only 45% of mid-market companies foresee an increase in profits.
Percentage of mid-market firms expecting an increase in profits over the next 12 months by region
The high hopes of business leaders in the United States demonstrate how the largest economy in the world has experienced an economic recovery far stronger than elsewhere. In 2020 and 2021 Government stimulus bills amounted to the largest injection of federal money into the United States economy in recorded history, roughly $5 trillion.[i] Consumer demand has been boosted as the United States was one of the few major economic powers to offer direct cash payments as a response to the pandemic, while most other large economies instead fell back on preexisting social safety nets.[ii]
“Businesses in the United States have benefitted from a sustained period of strong consumer demand. In part this is due to people now being able to spend the savings they accrued during Covid-19, when they couldn’t go out and had few opportunities to spend their cash. Added to this, consumer demand has undoubtedly been boosted by the Government’s stimulus measures, and the tail of this is continuing to prop up demand despite increased interest rates.
“Unfortunately, the boost to consumer demand came at a time of added supply chain constraints caused by the aftereffects of Covid-19 and the Russian invasion of Ukraine. The imbalance between the restrictions on supply and the increased demand has likely exacerbated inflation, and while it has come down more recently it is still above target levels set by the Federal Reserve. As these shocks work their way through the system, business leaders are facing a number of challenges which are forcing firms to adapt.” - Mike Ward, Global head of advisory, Grant Thornton International
The resurgence of the United States economy and the positive outlook of American mid-market firms offer good signs for global growth. As the largest global economy, it has a major impact on other regions and can lead the way, helping to stimulate growth elsewhere. For example, the Irish economy has been one of the fastest growing economies in Europe for several years, making it attractive to, and a beneficiary of, partnerships with major corporations based in the United States. Ireland’s close business ties with the United States, and its position as an English-speaking gateway to the European Union, have helped Ireland to outperform European Union averages in terms of mid-market businesses’ optimism and expectations for increased profits and revenue.
Ireland's optimism, revenue and profit figures compared with the EU average - click for more information
Amid lessened concerns about an imminent United States recession, the strong business optimism figures in the United States demonstrate the underlying resilience of mid-market firms in the United States.[iii] The data also provides more evidence for how the country’s energy security has protected businesses from the worst impacts of international economic sanctions, and how the decisive monetary policy action by the Federal Reserve to tackle inflation, has given confidence to firms.
“The IBR clearly indicates that mid-market businesses within the US are currently more optimistic about their short-term prospects compared to their peer group around the rest of the world.
“In part, this follows growing momentum insofar as optimism is concerned. But it also reflects the huge fiscal stimulus, and various other trading policies introduced over the last 12 months or so, within the US economy.
“There is no doubt that the mid-market in the US has responded really strongly within this particular environment, and is expecting increased sales activity, increased profitability, and increase in investment, and indeed, a much stronger focus on international markets going forwards. Furthermore, given the sheer scale of the US economy, it's also clear that those mid-market businesses in countries with a strong trading relationship with the US are also experiencing a positive ripple effect and are benefiting directly from an increase in business optimism.”
-David Munton, Global leader, International capabilities and support, Grant Thornton International
With mid-market firms around the world increasingly optimistic, and expectations for rising profits following suit, there are strong signs that business leaders have weathered the worst of the recent period of economic and geopolitical uncertainty. Although the confidence of American business leaders is perhaps not replicated to the same degree in every region, the fact that the largest economy in the world is experiencing a run of good form also offers opportunities for mid-market firms elsewhere. The United States is leading the way and is likely to pull up other regions with it.
Of course, this doesn’t mean that market turbulence is over, and a large proportion of firms continue to see economic uncertainty as a constraint on growth. Likewise, concerns about the progression of China’s economy will weigh on the minds of business leaders. However, mid-market firms can begin to plan for a more stable outlook. The shocks to the energy market caused by Russia’s invasion of Ukraine have eased, and action taken by governments around the world to price spikes are seeming to take effect, reducing concerns about entrenched inflation.
“The recovery, resilience and confidence of the mid-market really does stand out and has done so consistently now for a number of years. Whilst it is difficult to pinpoint a specific reason, I do think it reflects both the mid-market's ability to respond quickly to changing consumer needs, whilst also responding to a dynamic and unpredictable macroeconomic and geopolitical landscape.
“By definition, mid-market businesses are smaller and less anchored to a certain strategic direction compared to some of their larger peers. Meaning that they have the agility and freedom to explore new opportunities. This – coupled with the vast experience, talent and entrepreneurial spirit within the mid-market – really does set the mid-market up to be the leader within the global economic recovery.” - David Munton, Global leader, International capabilities and support, Grant Thornton International
While circumstances continue to fluctuate, it’s little surprise that firms are feeling more positive about the future. Business leaders will be keen to make sure they have the people, processes and plans in place to capitalise on the improved business outlook.
i. www.nytimes.com - Where $5 Trillion in pandemic stimulus money went - 11.03.2022
ii. www.washingtonpost.com - How the $1.9 trillion U.S. stimulus package compares with other countries’ coronavirus spending - 05.04.2021
iii. www.reuters.com - Fed, economists make course correction on US recession predictions - 17.08.2023
iv. www.ft.com - What China’s reopening means for markets - 30.01.2023
v. www.theguardian.com - China’s economy rebounds faster than expected after Covid reopening - 18.04.2023
vi. www.ft.com - China’s economic recovery in doubt as industrial output falls short - 16.05.2023
vii. www.ft.com - China’s deflation pressures ease as consumer prices rise - 09.09.2023
viii. www.ft.com - Will the rest of the world feel China’s deflation pain? - 17.08.2023
ix. www.bloomberg.com - China’s Boom Is Over, But It’s Not a Bust - 14.09.2023
x. thediplomat.com - Modi Says India’s Economy Will be Among Top 3 in the World in 5 Years - 15.08.2023
xi. www.ft.com - How Japan got its swagger back - 19.05.2023
xii. www.bbc.co.uk - Japan economy gets major boost from weak currency - 15.08.2023