Weakened profit outlook amid rising wage pressure

New figures from Grant Thornton’s quarterly business survey of 2,500 businesses in 36 economies, the International Business Report (IBR), reveal that businesses in nine of the world’s ten largest economies have reduced their profitability expectations for the next 12 months.

The deterioration comes amid concern over the growing lack of skilled workers, which reached a record high around the world. In reaction to the shortage, a growing number of firms now plan to increase pay, creating further profitability challenges and possible inflationary pressure in the need to eventually raise product pricing.

The findings show that globally, the proportion of businesses who expect profits to increase over the coming 12 months has fallen, down from net 47% in Q2 2017 to 42% in Q3. Of the world’s ten largest economies, only Japan bucks the trend. Notably, the outlook on profits has weakened in; the US (down 10pp), China (-3pp), Germany (-25pp), the UK (-4pp), France (-2pp) and India (-15pp).

The concerns over profits come as worries about the shortage of skills gain pace. Worldwide, 38% of business leaders say this constraint now weighs on their firms. This is the highest figure ever recorded within the Grant Thornton survey and is a trend visible across most regions. The evidence suggests that a record numbers of businesses, faced with competing for skilled workers, plan to offer pay rises over the next 12 months (78%).

Globally, the overall position for business optimism is remains relatively high at +49%.  This is down 2pp on Q2, and follows five consecutive quarterly increases in business sentiment.

Francesca Lagerberg, Global Leader at Grant Thornton, commented:

“Profits are under pressure. Wage bills are firmly on the rise as businesses try to tackle the skilled worker shortage.  It’s an issue that is becoming acute. In all the years surveying businesses, this is the highest level of concern we have seen about the potentially negative impact of a lack of skilled staff on growth prospects. Companies are having to compete for skills - both to retain those they have and recruit those they need. As a result, we are seeing businesses plan to boost pay. This reflects what we are hearing from companies around the world, and firms paying staff more is almost certainly hitting the outlook on profits.

“Nine in ten of the world’s largest economies have reduced their profit outlook for the coming year. The impact will be significant and are real threat to long term growth. Diverting profits to pay staff is understandable. But it will limit firms’ ability to invest in future long-term growth through R&D or plant and machinery. Furthermore, if profits are depressed, businesses may look to increase the price of their goods and services – which creates inflationary pressure. As businesses plan for the coming months and years, it will be critical to ensure a balance so that other investments are not abandoned altogether.”

The IBR findings show that one of the standout falls in profitability expectations in Q3 was in the UK, where the proportion of firms expecting increased profits dropped to 39% - the lowest figure in over five years. The UK has also suffered a dramatic drop in business optimism, plummeting to its lowest figure since Q1 20013, at just 9%.

Francesca Lagerberg added:

“The trajectory for optimism in the UK is at odds with its G7 counterparts and many EU neighbours. Overall the fundamentals in the UK remain robust. But businesses hate uncertainty and there are signs that concerns over Brexit are weighing heavily on the UK’s business leaders. If clarity over Brexit timings can come soon, there is a chance for the UK to turn things round – especially with revenue and export plans remaining relatively healthy.”

Despite profit expectations dipping in the world’s two biggest economies, the IBR reveals that they are driving overall positive sentiment. Optimism among firms in the US is well above the global average at 70% in Q3, while Chinese business optimism has hit a three-year high of 52%. According to Grant Thornton, this is reflective of a surprise bounce in trade growth so far this year. The World Trade Organisation has revised its forecast for trade expansion in 2017 up to 3.6%.