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Profits set to fall, say analysts, as low optimism reflects bleak economic outlook

PROFIT EXPECTATIONS are falling, with almost one in three firms bracing themselves for a decrease over the next six months, says new research from professional services firm Grant Thornton.

Its latest Business Outlook Tracker, which monitors mid-market business sentiment, says that optimism is reduced and organisations are holding lower investment expectations.

“Throughout most of 2023, businesses have remained relatively optimistic about the economy and their ability to weather the many challenges,” said James Brown, Grant Thornton’s practice leader in the Central and East region. “This latest set of business outlook data suggests that businesses are now starting to come face to face with hard realities resulting from a combination of poor economic performance, biting covenants, higher interest rates, relatively high levels of inflation, energy cost increases, political uncertainty, and decreased investment expectations.”

James Brown.

Key findings in the Business Outlook Tracker include:

  • Profit expectations have plummeted 20 percentage points since October to 46%. This is 9pp below the rolling average.
  • 32% expect a decrease in profits.
  • Optimism about economic growth stayed flat since October at 58% – 11 percentage points below the rolling average (69%) and just 1pp higher than the lowest recorded level.
  • Revenue growth expectations fell 12pp below the rolling average to 58%.
  • 18% of respondents were pessimistic about revenue growth – the highest level recorded in three years.
  • Pessimism levels were also at a record high for funding positions (17%).
  • Investment expectations continue to slow. The biggest deceleration is in technology, recruitment, skills development and international markets.

Mr Brown said: “The only way to get the economy on to a high-growth, low-inflation path which leads to economic prosperity and welfare gains is to invest in areas that improve productivity, close the productivity gap, and enhance skills.

“Currently there are decreased investment expectations across the board, including in these key areas. The government has put some measures in place such as the Apprenticeship Levy, green grants, R&D tax credits and while businesses should take advantage of these, they currently do not seem to be sufficient to ward off all the pressures faced.

“Businesses will know that investing in these areas is critical to their long-term competitive success so the fact that they are cutting back in these areas paints a clear picture of the pressure they are under.”

It is understandable that optimism is at an all-time low and businesses in the thick of the storm are trying to find a way through. However, more than half of respondents remain optimistic about the economic outlook, suggesting that businesses can still see light at the end of the tunnel, Mr Brown added.

“The economy is predicted to improve from 2026 onwards, by which point government policies such as childcare and pension reform will hopefully have kicked in and started loosening the labour market.”

At Grant Thornton’s recent Planning for Success in 2024 webinar Schellion Horn, head of economics consulting at Grant Thornton, outlined five actions businesses can take to meet their goals in a challenging economic climate next year:

Making full use of the Apprenticeship Levy;
Looking into green grants and government grants;
Taking advantage of investment zones;
Reviewing your workforce strategy;
Partnering with industry associations to lobby government.

Read more about the panelists’ tips for success at Navigating 2024: four tips for success | Grant Thornton


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