Company outlooks remain negative despite positive recovery signs

The expectations of small and midsize enterprises (SMEs) have improved since last spring, according to the new SME Barometer published by the Ministry of Economic Affairs and Employment on Thursday.

Company expectations have recovered from the exceptionally negative spring to the same levels as a year ago as the effects of the energy crisis and the war in Ukraine have stabilized, said the ministry in a press release, quoting the Barometer.

However, expectations remain negative. The state of the economy is expected to deteriorate slightly over the next year. SMEs’ willingness to invest remains modest.

The exceptional past few years and uncertainties in the current economic situation have a direct impact on the outlook of SMEs.

Nevertheless, the SME Barometer’s figures describing companies’ economic expectations and investment plans recovered moderately from the strongly negative readings of the spring. Slightly more than half of SMEs estimate that the economic outlook will remain unchanged from the spring.

“The recent news about Finland’s economy has been lacklustre. During such challenging times, it is particularly important that companies have sufficient incentives for renewal and development. This is in the interest of companies and the country as a whole,” said Minister of Economic Affairs Wille Rydman on the occasion of the publication of the autumn SME Barometer in Helsinki.

SMEs’ willingness to invest remains modest. In all main sectors, companies planning to reduce their investments outnumber those planning to increase them. On the other hand, expectations on turnover and solvency have improved from the spring survey.

“The economic outlook among SMEs remains subdued. However, it is important to note a slight turn for the better, as the effects of Russia’s aggression against Ukraine and the energy crisis have stabilised. It is also positive that SMEs try to hold on to their current staff,” said Juhana Brotherus, Director and Chief Economist at the Federation of Finnish Enterprises.

Of all SMEs, 14 per cent intend to increase the number of staff, while more than every tenth company expects the number of staff to decrease. However, most SMEs (74 per cent) plan to maintain the current number of employees.

The growth orientation of SMEs has decreased for a long time, but the decline has now halted, at least momentarily. However, the proportion of companies seeking strong growth is modest, and the longer-term downward trend raises concerns. This trend is visible in the numbers of both companies looking for growth according to possibilities and those looking for strong growth.

“Companies seeking growth invest more, so hopefully the halt in the decline in the growth willingness will also be reflected in stronger investment plans for the future. Growth companies act as drivers of growth for other companies. That is why the willingness to grow is clearly linked with the willingness to invest,” added Brotherus.

Companies’ expectations of rising production costs, such as raw material prices, have fallen from the last year’s peak this autumn. At the same time, the growth in the price-setting margins of SMEs’ products and services has slowed down slightly.

The prices of intermediate products, such as parts and raw materials, which companies use in their own production, are expected to rise almost one-and-a-half times faster than the prices of end products. However, the difference between production costs and the prices of end products is narrowing.

“The decline in the rate of price increases is reflected not only in consumer prices but also in the costs of SMEs. The worst inflation seems to be subsiding, which is positive news for both consumers and SMEs,” Brotherus said.

Finland’s success and growth are based on skills, new knowledge and innovations. Research and development (R&D) refers to creative and systematic activities to increase knowledge and to use the knowledge for new applications. A large proportion of SMEs, more than one-fifth, said they engaged in research and development activities. However, there are differences between industries in the R&D activity. R&D activities are most common in SMEs in industry and knowledge-intensive services.

About 13 per cent of SMEs consider increasing their R&D activities in 2023 compared to the previous year. Meanwhile, nearly one-third of SMEs did not comment on the issue. The most common sources of public funding for research and development are local and regional authorities, such as ELY Centres and Business Finland.

“It is positive that SMEs are willing to increase their R&D activities. The Government must make every effort to ensure that more and more companies make additional investments. We are committed to the 4 per cent R&D target by 2030. One-third of this will be achieved through an increase in public funding and the rest through companies’ own additional investments,” said Rydman.

Strict banking regulation and weaker creditworthiness of SMEs are reflected in their use of external financing. Finnvera has remained a significant financial operator and its role as an alternative and supplement to bank loans has grown slightly.

Finnvera’s guarantee also plays a key role in obtaining funding. It is noteworthy that growth-oriented companies in particular are interested in Finnvera’s funding.

“As a whole, there have been no significant changes in the availability of funding, which remains at a reasonably good level. It is especially important to ensure available funding for projects that respond to the ongoing major changes, such as the energy transition and the restructuring of global supply chains. Finnvera takes an active role in these too. We are prepared to use our diverse instruments, such as guarantees, loans and junior loans, to enable this,” said Finnvera’s Executive Vice President Juuso Heinilä.

The SME Barometer is published twice a year by the Federation of Finnish Enterprises, Finnvera and the Ministry of Economic Affairs and Employment.

This time, about 4,600 companies responded to the survey, which was conducted from mid-June 2023 to mid-July 2023.