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.
The United States middle market speeds ahead
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
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. 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.
US: Drivers of personal income, during and post-pandemic
“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 extra spending power 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 the effects of 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.
Martin Shanahan, Partner and head of industry, Grant Thornton Ireland
“There are deep-seated historic ties between the United States and Ireland. The impact of these ties has been felt for centuries, but it has been particularly important for Irish businesses over the last few years. Investment by US firms in Ireland has helped drive the Irish economy and has helped it to consistently punch above its weight when compared to other countries in the European Union.
“The cultural and linguistic links between Ireland and the United States undoubtedly help to make it so attractive to inward investment from across the Atlantic, but there are a number of other benefits too. Not least, the stability of the tax regime, our highly skilled workforce and the generally business friendly environment help to make this the ideal place for US firms to establish a foothold within the wider European or EMEA market.”
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. 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
Comparison with European Union
As in other regions, mid-market firms in the European Union are more confident than they have been in the past year about the prospect of increasing profits in the coming months. However, it’s from a much lower base. Although up four percentage points compared to last year, the latest data shows there are still fewer than one in every two European Union firms (45%) expecting to raise profits. This lags behind the global figure of 59% and is far outstripped by the United States, where 70% of firms expect an increase in profits.
Caution among firms in the European Union is understandable, given the bloc’s reliance on imported energy and its proximity to the Russian war in Ukraine. Despite this though, more than half (54%) of mid-market firms in the European Union do expect increases in revenue in the next year, up from 49% in the second half of 2022. This will partly be a knock-on effect of inflation, but increases in revenue and profitability figures do offer reasons to be confident about business prospects in the region, and suggests firms feel they have successfully navigated the risk of slowdown.
“Mid-market firms have had to become incredibly resilient over recent years. We have seen firms learn to deal with significant disruption, particularly in their supply chains. In many cases supply chains which were developed over decades have been forced to adjust sourcing and trading partners remarkably quickly. I expect this shift to continue. Firms know they don’t operate in a bubble, and business leaders are much more attuned to potential risks and geopolitical concerns than they have ever been.” - Mike Ward, Global head of advisory, Grant Thornton International
Comparison with Asia-Pacific
Profitability expectations in China
There had been tentative hopes that, after the easing of the zero-Covid policy in China, the country’s business community would benefit from a boost in demand. However, despite positive early signs, the recovery of the world’s second largest economy has fallen short of expectations.,
Expectations of increased profits rose slightly at the end of 2022, but have levelled off in the latest data from the first half of this year. Just over half (55%) of mid-market Chinese firms now expect to raise profits in the year ahead, four percentage points below the global average.
Issues in the country’s real estate sector are proving an obstacle to recovery, while slow domestic consumption, high youth unemployment and a decline in exports are also hampering growth. China briefly slipped into deflation in July for the first time in more than two years, but deflation concerns have since eased and while lower Chinese prices may reduce cost of imports, it is unlikely to have dramatic impact elsewhere.,  Meanwhile, business leaders in China may be waiting to see what the impact of Government measures to support companies will be before they revise their plans. At the same time, the economy is finding new strengths. Investment in advanced manufacturing is helping Chinese businesses for long-term growth. The country is already leading in new technologies such as electric vehicles, with Chinese brands accounting for about half of all electric cars sold globally.
“Deflation in China poses both opportunities and challenges for mid-market businesses in the Asia- Pacific region. It could well benefit some mid-market businesses that rely on Chinese suppliers, by making these products and services cheaper. However, for those businesses that compete directly with Chinese products, or who sell to Chinese consumers, deflation in the market could have a negative impact too.
“As the Chinese government attempts to respond to the deflationary environment, they will be expected to implement stimulus packages. Regulatory changes, exchange rate fluctuations or changes in the trade environment will cause uncertainty but also may present opportunities for mid-market businesses to grow and expand in unexpected ways. Firms will need to be prepared to adapt to a changing environment in order to mitigate risk and make the most of any opportunities.” - Christine Cornish, Partner, Grant Thornton Australia
Profitability expectations in other Asia-Pacific countries
Mid-market firms elsewhere in Asia-Pacific are looking to increase profits in the year ahead. Expectations for profitability among business leaders in Australia are in line with the global average, at 59%. Meanwhile, expectations for profitability are well above the regional average in Indonesia (74%), Thailand (82%) and Vietnam (82%). In India more than three in every four (76%) mid-market firms are expecting to raise profits in the next 12 months. The positive outlook of Indian business leaders reflects wider economic developments in the country, as its economy overtook the UK last year to become the fifth largest in the world, and is anticipated to keep moving up the table.
“During the pandemic, governments across the Asia-Pacific region implemented various stimulus measures during Covid-19 to support both their economies and people. These packages were largely successful in stimulating consumer demand and supporting the economy as the impacts of COVID were being felt.
“Now that many of these packages have ceased, firms in countries across the region are facing new challenges. Currently, the Australian government is demonstrating a hesitancy to continue to implement stimulus due to its inflationary impact. A reduction in consumer demand in Australia is consistent with the increase of interest rates which are being imposed to curb inflation. Whereas in China, we are seeing the introduction of more stimulus packages to support the economy as it goes through some challenging times.” - Christine Cornish, Partner, Grant Thornton Australia.
High expectations among business leaders in Japan
Business optimism among Japanese firms has seen a major spike in the last six months. At the end of 2022, just 17% of Japanese mid-market business leaders were optimistic about their prospects for the year ahead. But since then there has been a major turnaround. Six months on and the latest data shows that more than half of Japanese firms (52%) are optimistic about growth. At the same time, there’s also been a jump in the number of Japanese firms expecting to increase profits. Expectations for increased profits have gone up by 13 percentage points to 45%, the highest the country has seen in more than five years.
The world’s third largest economy has been plagued by decades of flat or falling prices, but since the end of the pandemic inflation has been manageably above the Bank of Japan’s target of 2 per cent for over a year. A fall in the value of the yen has also boosted exports, as Japanese-made goods became cheaper for consumers around the world. In this environment, mid-market firms in the country have reasons for optimism, and as they plan for the year ahead, can be looking for new opportunities to capitalise on growth.
Confidence in the mid-market: A beacon for global recovery
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.
Top three takeaways for business leaders
· Mid-market firms don’t operate in a bubble. Business leaders must be attuned to potential risks and geopolitical concerns and adapt their business plans as needed.
· Resilience and dynamism are crucial. Businesses that have the agility and freedom to explore new opportunities will benefit most from economic recovery.
· Changing tides bring fresh opportunities. Business leaders must challenge their preconceptions and be open to new ideas if they are to flourish.