The US mid-market

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.

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.[iv] However, despite positive early signs, the recovery of the world’s second largest economy has fallen short of expectations.[v,vi]

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.[vii,viii]

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.[ix]

“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.[x] 

“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.

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.[xi] A fall in the value of the yen has also boosted exports, as Japanese-made goods became cheaper for consumers around the world.[xii] 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.