EU’s mid-market is among the hardest hit globally
Grant Thornton’s new Global business pulse shows that businesses in the region have been badly hit by the effects of COVID-19. The index, a health check of mid-market firms around the world, shows that the EU fell from 0.6 in H2 2019 to minus 11.9 in H2 2020, highlighting that the region’s mid-market companies are among the world’s most severely affected.
The impact of the pandemic in Southern Europe has been particularly bad, with the index recording a dramatic fall of 14.2 points to -16.1.
The long economic shutdowns were at the centre of this collapse, as evidenced by the sharp fall in economic optimism in the EU to levels only seen during the eurozone sovereign debt crisis in 2011/12.
Only 29% of firms have a positive economic outlook for the next 12 months, down from 45% in H2 2019 and nine percentage points (ppt) lower than the average for G7 economies. European businesses have felt the full force of the pandemic.
However, the impacts are not uniform. As Larissa Keijzer, regional head – EMEA for Grant Thornton International Ltd’s network capabilities team explains, “The speed of response to the crisis has had a real impact on business optimism in this region. Those countries that have responded quickly to the pandemic situation and have been resilient in the past are likely to see a fairly good recovery coming out of the lockdown.”
The dire economic conditions have impacted employment expectations among mid-market businesses, with one in three firms planning to make staff cuts in the next 12 months. This is due, in part, to the complexity of government programmes. “Government initiatives – including furloughing schemes – often aren’t well utilized by businesses as they are quite complex, and firms will be listed for taking up the support”, says Larissa.
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The Global business pulse focuses on two main elements of business leaders’ sentiment: their ‘outlook’ for the future and the ‘restrictions’ their companies face. Outlook saw the sharpest fall in H1 2020, dropping by nearly 15 points. Along with optimism, the growth expectations of mid-market businesses in the EU took a severe hit. There are now many more EU firms (42%) expecting to see a decrease in revenue in the next 12 months than expecting to see an increase (27%).
All three components of outlook moved downwards in near perfect synchronisation in H1 2020. Among the more worrying aspects for a region so reliant on trade, is a decline in export expectations. Only one in five EU firms expect exports to increase, dropping substantially from one in three in H2 2019.
As Larissa explains, given the pandemic and resulting economic uncertainty, “I believe there is a real mismatch between companies’ ambition to export and their ability to do so in the current climate – although some businesses in Eastern Europe may benefit from far-flung supply chains moving closer to home. There is certainly more focus on domestic markets as businesses look ahead to the next 12 months.”
While investment intentions also follow a downward trajectory, analysis shows that investment in R&D and technology remain high in the region compared with other investment categories. Some 70% of EU businesses plan to increase or maintain their investment in technology in the year ahead. As Larissa explains, “technology is key to scenario planning across the board. There will be a lot to do to develop new logistics for retailers who are taking their services online. Companies are also looking to utilize automation where they can to boost productivity and with one eye on resilience. Robots don’t get sick.”
And the pandemic may encourage more outside collaboration when it comes to innovation. “There will be real collaboration in response to this crisis, particularly in technology and healthcare,” says Larissa. “We have seen this already as countries such as Germany, Netherlands, Denmark and Sweden come together to research a vaccine for COVID-19. This is a positive outcome for businesses.”
estrictions for the EU registered at minus 50 for the first half of 2020, a notable drop from 39.9 in H2 2019. Reflecting the fall in demand conditions, over half of all mid-market firms in the EU are concerned about a shortage of orders in the next 12 months, a factor that will weigh heavily on growth in the region.
40% of EU businesses report shortage of finance as a major concern over the next 12 months. Though rising by 10 ppt, this is the lowest level reported among the highlighted regions. This certainly speaks to the sophistication of the financial system in the EU and the bank borrowing schemes in place for businesses. However, it may also reveal something about the mid-market.
As Larissa explains: “Mid-market businesses often make investments using their own profits and do not need to access the banks. One of the learnings from the financial crisis is if you don’t borrow money, you are more financially resilient.”
While many of the restrictions have become more severe during the crisis, the availability of skills is not one of them and this may prove useful for some sectors. As Larissa explains: “There aren’t enough healthcare staff to handle the ongoing impact of this crisis. There will be a lot more money going into this sector and people may look to retrain and work in different industries in the shorter-term.”