As they entered 2023, most business leaders in the mid-market kept had their focus on three top-of-mind threats: inflation, cyber-attack and the economic slowdown.

According to Grant Thornton’s International Business Report (IBR), a global survey of mid-market companies, at the beginning of 2023, 51% of business leaders saw inflation as a threat while 47% cited cyber-attack and 50% cited the economic slowdown as top threats. However, as spring emerged, so did turbulence in parts of the banking sector. Though not reported as a major concern when the year commenced, bank bailouts and mergers have added to the climate of uncertainty for many businesses.

The approaches firms take—both in Ireland and elsewhere—when responding to these events will directly affect their capacity to reap long-term rewards as the current economic headwinds subside.  By delivering the basics well and being innovative when faced with these short-term threats, firms can protect value and, more importantly, set themselves up for long-term success.

Cautious Optimism Emerges Despite Lingering Inflation Concerns

More than half of mid-market businesses globally reference inflation as a real concern; however, in Ireland, business leaders are beginning to see reasons for measured positivity.

“Inflation continues to dominate the economic picture, but in Ireland, there is cautious optimism that inflation may be loosening its grip and that the economy is moving into a more settled phase,” explains Andrew Webb, chief economist at Grant Thornton Ireland. “Much of that optimism is being delivered thanks to a labour market that has powered through all the recent uncertainties to achieve an unemployment rate below 4%—a remarkable performance. Ireland’s public sector finances are also in a strong position, adding to the consensus view that the economy will post growth this year and next, albeit at a lower level than in the recent past.”

However, Webb notes that despite this cautious optimism, inflation still makes Irish business leaders wary. He continues, “While inflation rates finally appear to be reducing, it remains a concern for businesses. Sixty-five percent of Irish respondents to the IBR saw inflation as a threat to their business. That’s much higher than the global average of 51%. Connected to this concern, 69% of Irish businesses identified energy costs as a threat, making it the highest ranked threat by Irish business leaders and underscoring that a sense of caution still accompanies any economic optimism.” 

Although the global economy has shown resilience through recent challenges, the cost of living, increased energy bills and rising interest rates continue to affect both businesses and consumers.

Inflation threat for different regions 

Consumers will likely become increasingly cost-conscious as the year progresses amid prevailing inflationary pressures and continued economic uncertainty.

Many businesses have tried to absorb some of the rising costs; however, in isolation, this response is not sustainable, and 51% of mid-market businesses expect to increase selling prices over the coming year, which will directly affect consumers. However, this number is down from 53% in H1 2022, demonstrating that businesses are working hard to preserve consumer loyalty and protect their customers from the worst of the price rises.

“Firms know it’s a tough time for everyone, and while they’re finding it hard, their customers will be too, says Dianne Neurauter, principal at Grant Thornton US. “There’s a real drive to be responsible—not to seek aggressive growth but to be good corporate citizens and build long-term relationships with their customers.”

Despite rising costs, 55% of businesses expect an increase in profitability in the next year. However, they will need to seek out operational efficiency, identify new markets and scenario plan carefully for achieving these returns without alienating existing customers. Globally, 37% of firms say they have a pricing strategy to improve margin, and 49% have one to protect it, increasing prices in line with costs.

Pricing strategy intentions in different sectors

Cyber-attack: “Many Irish organisations remain unprepared”

According to Cybersecurity Ventures, the cost of cybercrime is expected to hit $8 trillion this year, and by 2025 online fraud and scams are anticipated to cost firms $10.5 trillion as hackers grow more sophisticated. With these statistics, it’s little wonder that Grant Thornton's research found that 47% of mid-market business leaders list cyber-attack as a threat to their business in 2023.

Across Ireland, organisations of all sizes need to recognise these potential attacks as a significant business risk and prepare accordingly.

“Cyber threats have escalated significantly in recent years and will continue to do so,” says Mike Harris, cyber and forensics partner at Grant Thornton Ireland. “Coupled with increasing digitalisation, this rise means that organisations are more likely than ever to deal with a major cyber-attack. Unfortunately, many Irish organisations remain unprepared: They see cyber as a purely technological issue and not as a business risk that demands senior management and board attention.”

Businesses can and should take steps to protect themselves.

Harris continues, “Understand the cyber risk, implement basic cyber hygiene and culture across the business, manage suppliers’ security and practice the response to a cyber-attack. If senior management drives these steps, it will go a long way towards protecting the organisation. And remember, you’re not just protecting yourself: you’re also protecting your customers and business partners.

To manage the constantly evolving threat of cyber-attacks, business leaders need to work hard to understand the risk and respond in innovative ways. They need to speak to experts and plan for the worst. If firms become complacent, or consider cyber threats a problem only for the IT team, they risk leaving themselves open to major issues. With the correct planning and good cyber hygiene, 80% of all cyber-attacks could potentially be avoided.

“Since the pandemic, we’ve seen fraud activity increase threefold,” says Grant Thornton US’s Neurauter.  “Mid-market firms are a tempting target for fraudsters. They’re a lucrative target but often won’t have the resources and the security of larger companies. But, worryingly, many firms are responding to this with their eyes closed. Cyber should be a flaming red risk on every business leader’s risk assessment. On a scale of one to five, it’s a six on the risk register. If firms take the right steps now, they can significantly reduce the risk and limit exposure.”

Banking Troubles Add to the Economic Uncertainty

Economic uncertainty is an ongoing concern for the mid-market, with the IMF reporting that elevated levels of uncertainty are holding back growth. The World Bank projects that this year global growth will slow to its third-weakest pace in nearly three decades. However, many major markets may avoid a recession, with the World Economic Forum suggesting that the economic headwinds will be temporary.

In the spring this year, as a result of high inflation and monetary policy response, a new threat emerged to the global economy: turbulence in the banking sector. Before these events, just 12% of business leaders considered interest rates or access to funding a significant threat. However, the upheaval at Silicon Valley Bank, First Republic and Credit Suisse shows how quickly shockwaves can travel through the market. However, firms that plan ahead will be best placed to manage change when it comes. Likewise, the situation of financial institutions varies from organisation to organisation, and individual banks have responded differently to recent turbulence. 

Dwayne Price, financial services advisory partner at Grant Thornton Ireland, comments, “While there has been some recent turbulence in certain sub-sectors of the banking market, for example regional banks in the U.S., swift public sector inventions have largely contained these issues. Other idiosyncratic bank issues have also been contained with resolution and rescue through sale to larger competitors—as in the cases of SVB and Credit Suisse. While there is definitely a heightened focus on the banking sector globally, at this stage it seems that the changed interest rate environment has had an impact in isolated sub-sectors. The reforms to banking supervision following the Global Financial Crisis have certainly resulted in less leveraged, more liquid and better capitalised banks, but those institutions with better risk management and business models are surely best placed to weather any future storms.”

When it comes to the Irish banking sector, Price notes that the banks “have fared well in the recent turbulence, given their significant growth of capital, liquidity and resources. From an earnings perspective, they are also well placed to benefit from a more favourable interest rate environment. As such, all banking institutions should continue to invest in their people, technology, underwriting, and investment and business model capabilities to unlock their competitive advantages.”

In a period of economic uncertainty with long-term threats and short-term shocks causing turbulence, mid-market firms are potentially vulnerable, but with the right strategy and the right team in place, they can also be well positioned to adapt.