While global business optimism falls, the recession that businesses expect to hit this year might last only shortly, said Grant Thornton recently when releasing its International Business Report.
Faced with high levels of economic uncertainty, business optimism among mid-market businesses has fallen a further five percentage points to 59% (down from 64% in the first half of 2021), according to the report,
But the good news is that business optimism remains above the historic average, indicating business’s hope for a return to normality may lie ahead, Grant Thornton noted.
The unusual recession that might hit this year is characterised by conditions usually associated with a boom, such as low levels of unemployment (instead of increasing levels) and central banks raising interest rates (instead of cutting them), the firm pointed out.
These unusual characteristics combined with what many commentators expect to be a shallow and short recession, could mean the ‘usual’ response to a recession may not be the right course of action for businesses, the firm added.
For example, now may not be the right time to reduce headcount in search of cost savings, Grant Thornton pointed out.
With a record number of businesses citing availability of skilled workers as a key constraint to growing their business (57%) – if any recession is short-lived, layoffs could leave businesses short-staffed when demand picks up again, the firm said.
- Economic uncertainty and energy costs remain the top concerns globally with 60% of businesses citing them as a constraint to growing their business.
- This is followed closely by the availability of skilled workers (57%) and labour costs (55%).
- Concerns over a shortage of finance have eased somewhat, down to 47% citing it as a constraint compared to 50% in the second half of last year.
- However, the true impact of rising interest rates can be seen when comparing historic data as this is more than double the pre-pandemic average of 22%.
- This is also true for energy costs (60% citing it today compared to 29% on average pre-pandemic) and quality transport infrastructure (49% today compared to just 16% on average pre-pandemic). Shortage of orders was another constraint cited by 53% of mid-market businesses.
- Inflation and a tight labour market has led to 82% of businesses saying they expect to increase salaries in the next 12 months.
- However, there is a clear limit to what businesses can afford, with only 24% of businesses indicating they intend to offer ‘real increases’ over the next 12 months.
- Despite these constraints to business growth, the desire among mid-market businesses to expand internationally remains high.
- The percentage of businesses expecting to increase exports over the next 12 months sees a slight increase to 45%, while 40% expect an increase in revenue from non-domestic markets and 41% expect an increase in the number of countries sold to over the next 12 months.
- While 55% of businesses expect an increase in profitability over the next 12 months, up one percentage point from H1 2022, future business investment intentions are slightly down across the board.
- Technology investment is the top area businesses are focused on, cited by 57% of businesses (down from 60% in the first half of last year), followed by increased investment in staff skills at 53% (down from 55%), while investment in new buildings remains at the bottom of the list, cited by 36% of businesses (down from 40%).
Cost cutting is not the solution
When it comes to how businesses should respond to a possible recession, Peter Bodin, CEO of Grant Thornton International Ltd said: “Businesses need to carefully consider how best to respond – scenario planning will be key. ’If we cut staff, will we be able to meet demand when it returns? If we need short-term finance to see us through, will we be able to access it and at what cost?’ Almost all responses carry consequences which must be weighed up.”
With uncertainty about the only certainty right now – focusing on resilience will be key for all business leaders, he noted.
“The focus on expanding internationally is a sensible hedge against domestic uncertainty – as long as it is properly planned and carefully executed, Bodin said. “Hopefully the more significant shocks are now behind us and, as conditions normalise, which they show signs of doing – we all hope 2023 will be the year global markets finally return to some sense of normality.”