International Business Report

The index is made up of two elements: the ‘outlook’ tracks future business conditions (including growth), economic optimism, and future investment intentions, while ‘restrictions’ cover demand and supply constraints and economic uncertainty.

Both elements fell significantly in the last six months. The outlook was down 14.6 points, propelled in part by a large drop in economic optimism. As at H1 2020, just 43% of firms felt slightly or very optimistic for their country’s economy over the next 12 months. This is the lowest level since the eurozone crisis of 2011-2012. There was also a sharp decline in revenue and profit expectations to series lows, highlighting the potentially difficult year ahead as the global economy emerges from lockdown.

Restrictions fell by 10.9 points, pushing this negatively scored element deeper into the red. The current environment has seen escalated concerns among mid-market leaders about falling demand and economic uncertainty. Around two-thirds of leaders now view uncertainty as a business constraint, with nearly 1-in-3 firms seeing it as a major constraint.

All three components of outlook – economic optimism, business conditions and investment intentions – fell markedly during the last six months, but there were several signs of strength across these areas. While growth expectations have been hit hard, a remarkable 34% of mid-market firms around the world are still expecting an increase in revenues in the next 12 months. That’s a significant number in the context of other business surveys that have been conducted and reveals a self-belief among mid-market leaders.

Exports are another bright spot. Looking back, the percentage of mid-market companies that managed to increase exports in the last twelve months actually increased in H1 2020, compared with H2 2019. And future expectations for export growth aren’t down as much as other growth measures, with one-quarter of businesses still targeting increases.

Francesca sees this as a timely reminder that, “Globalisation is not dead, it just may look a little different. International trade is such an important part of the mid-market universe.” While the top-line outlook may be holding, the pandemic has brought about an interesting shift in attitudes towards trade opportunities and international supply chains, which we will explore later in the year.

Finally, while investment intentions followed business conditions downwards – in the regular pattern we would expect – we saw an acceleration of the trend towards investments in R&D and technology. 78% of firms intend to maintain or increase their levels of investment in technology in the next 12 months and 69% intend to do the same for R&D. Technology has obviously been a hugely important factor during the pandemic as businesses have moved to remote working, but more fundamentally, it is being used to help optimise business operations and adapt to the future.

Innovation more generally has been key to helping mid-market business through the crisis, says Francesca. “People had to do things differently, and they have done in six weeks what may previously have taken six months or six years. And plenty of businesses are now seeing benefits as a result of the changes, and will keep them and build on them.”

Looking at the three elements of restrictions, we see a sharp deterioration in economic uncertainty and demand constraints. Around the world, 55% of firms identify a shortage of orders (the indicator behind demand constraints) as a barrier to growth, with nearly 1-in-4 firms identifying it as a major constraint. This shows just how much demand has dried up, and is most striking when viewed at a sector level.

Robert Hannah, global head of strategic growth markets at Grant Thornton International Ltd, stresses the importance of scenario planning in preparing for all these uncertainties. “Mid-market businesses need to work through all the scenarios: assess what they mean, really test them, pilot them and come back to them. It sounds like a long process, but it can be done in a couple of weeks if you have the right mindset and put time and effort into it.” Read more about scenario planning.

By contrast, supply constraints, which encompass labour, access to finance and regulation and infrastructure, have not significantly changed. The crisis has had little impact on red tape and infrastructure and may even help to ease labour market constraints.

The one element which did worsen was access to finance, despite unprecedented levels of fiscal and monetary easing globally. Cash is the lifeblood of businesses at the present time and this finding is very concerning and will be closely watched going forward. In ‘Thriving in 2020: Capitalising on resilience’ we discussed some additional sources of funding for companies and how they could best position themselves to access this.