9 minute read 10 Jun 2021
Soyuz Launch Pad is silhouetted by the sunrise

Governments must nurture corporate optimism for a sustained recovery

Supporting businesses in a rapid recovery will boost much-needed tax revenues and help governments deliver on their post-pandemic goals.

In brief
  • Business optimism is good news for governments, provided they take the right steps to support it.
  • Governments need to plan for an economic recovery that may not automatically equate to job recovery.
  • Investments in the right areas can help to stimulate economic growth and maintain international corporate competitiveness.

According to the latest EY Global Capital Confidence Barometer (pdf), businesses appear to be surprisingly upbeat about their future and the prospect of a strong rebound from the current pandemic-induced downturn. Survey results also reveal that most businesses have responded proactively, using the COVID-19 pandemic as an opportunity to undertake full strategy reviews and invest in making changes to improve productivity and promote growth.

This optimism is welcome news for governments that are facing multiple challenges post-pandemic, including restoring economic growth, tackling socioeconomic inequalities and repairing public finances. In particular, it suggests that the stagnation and austerity that followed the 2008 global financial crisis need not be repeated.

Companies are optimistic about a bounce-back in the next year or two and are investing for growth

Around the world, business revenues and profitability have been hit hard by the pandemic. Of the more than 2,400 C-suite and senior executives surveyed, 88% say that their company has experienced a decline in revenue due to the pandemic, while 92% report that the pandemic has impacted their profitability.

However, there is a significant degree of optimism about the ability to bounce back. Nearly half (46%) of respondents expect revenues to return to pre-pandemic levels this year, with a further 33% estimating that revenues will recover by 2022. Respondents expect a return to pre-pandemic profitability to be slower, with only 23% expecting to see pre-pandemic profits this year, whereas 44% think it will be 2022 before their profitability recovers, due to the need for investments and, for some, the increased costs of doing business. Governments, therefore, may need to be prepared for a longer hangover in terms of lower corporate tax revenues.

The pandemic impact

79%

of global respondents expect revenues to return to pre-pandemic levels by 2022 or sooner.

The pandemic has compelled CEOs and the C-suite to examine every aspect of their business. The positive news is they are emboldened to invest across both growth-oriented and operational elements, with digital transformation (63% of respondents plan to increase investment) and customer engagement (57% of executives plan to increase investment) at the forefront.

Government and infrastructure pandemic impact on strategic focus and investment

Many companies are focusing their strategies on identifying opportunities to invest in technology, digital capabilities and talent. Despite ongoing uncertainty, 49% of respondent companies are planning to make acquisitions within the next 12 months. Nearly two-thirds (65%) of those who plan to acquire are looking for assets internationally rather than domestically.

Government and infrastructure main strategic considerations

Governments must nurture and capitalize on this business optimism to achieve sustainable recovery

This business optimism, if sustained, is good news for governments, as a confident business sector and a rapid corporate recovery will boost much-needed tax revenues and help restore public finances. However, the expected prolonged squeeze on profitability, and the potential for industry consolidation through increased M&A activity, may impact jobs in specific sectors and mean that the labor market recovers more slowly.

Supporting corporate optimism to speed up government recovery goals

Governments need to decide what policy steps to take to nurture positive business sentiments and capitalize on corporate optimism to help deliver on their own post-COVID-19 objectives. In EY’s Future of Government series, we explore how governments could approach four key recovery goals:

  1. Regenerating economies
  2. Reshaping public services and revitalizing local communities
  3. Retaining and extending innovative ways of working
  4. Repairing public finances

Eight steps governments can take

At the highest level, this includes prudent macroeconomic policy that balances continued monetary and fiscal support for growth against the risk of inflation and public indebtedness. More specifically, we have identified eight other steps governments can take to nurture these optimistic sentiments.

1. Strengthen social safety nets while incentivizing re-employment

Some of the jobs lost during the pandemic may never return. As some companies look to find operational cost savings to boost profitability, economic growth may not immediately translate into employment growth. At the same time, a buoyant business sector will create new jobs, and governments can help prepare the workforce to take up those new roles. Governments will need to continue to provide social safety nets to support those affected by unemployment, while encouraging people back into work, acting quickly to avoid entrenching long-term unemployment. In addition to financial support, governments can provide practical assistance to transition workers into the newly created jobs.

2. Focus on reskilling the workforce

As jobs in some sectors are lost and new opportunities created in other sectors, a focus on retraining and reskilling the workforce will be key to an inclusive and sustainable recovery. Survey results indicate that companies are focusing on digital transformation and improving customer engagement, particularly through digital channels. This is increasing the need for demand for digital skillsets and innovative solutions. 

Companies need to invest in training their employees in digital technologies and new ways of working. Governments can support this through incentive schemes (e.g., tying subsidies or tax incentives to the provision of training programs) or providing free or subsidized learning programs.

However, in the short term, the ability to access innovation and talent from overseas may be crucial. Governments might also want to consider whether current immigration policies present a barrier to innovation and growth.

3. Target investment toward hardest-hit regions or segments of society

Inevitably, some geographic regions have been impacted by the pandemic more than others, whether due to the severity of local outbreaks and government response or due to a reliance on the most severely affected industries. In addition, certain socioeconomic segments have been impacted more negatively than others. Governments can address these inequalities by investing and incentivizing private investment in these regions. They can also encourage employers to participate in programs to improve the employment prospects of people from disadvantaged socioeconomic groups.

4. Invest in infrastructure

Investment in infrastructure is a proven lever for stimulating economic growth, creating immediate employment and economic activity while contributing to future business productivity and competitiveness. To create an environment where businesses can meet their potential while achieving sustainability targets, governments should incentivize investment in green infrastructure, as well as the infrastructure required to enable the digital economy.

For example, local governments can contribute to a greener recovery by constructing more sustainable public transport infrastructure and cycle lanes, incentivizing the rollout of electric vehicle (EV) charging infrastructure and investing in energy efficiency retrofits in public buildings. They can boost the digital competitiveness of their city or region by incentivizing and removing barriers to the build-out of ultra-fast broadband or 5G networks.

5. Support innovation and the transition to a digital economy

Investment in R&D, innovative technologies and, in particular, digital and green technologies will be vital to international competitiveness and long-term, sustainable economic growth. As well as public sector investment and support for innovation, such as university funding, financial and practical support for start-ups and high-growth SMEs, governments have an opportunity to capitalize on the private sector’s obvious appetite for investment. It can use tax incentives, matched funding and favorable finance options to channel private sector investment in these critical future growth sectors.

The shift toward digitization of product and service delivery is creating whole new digital business models and increasing the importance of digital-platform players in the economy. As a result, governments will want to confirm that their regulations, and worker and consumer protections and tax regimes, adequately cover the shift to a more digitized economy.

6. Avoid relying on onerous tax increases to repair public finances

The unprecedented fiscal response to supporting and stimulating the economy throughout the pandemic has led to high levels of public debt. Governments will eventually need to tackle this debt, and taxation will have to play its part. However, governments should avoid the temptation to introduce heavy-handed tax rises that risk disincentivizing investment and dampening business activity. Instead, they should recognize that strong economic growth is the best route to addressing the debt issue and revise tax regimes to support investment, R&D and upskilling the workforce.

7. Encourage inward investment

Countries, regions and cities can boost their economic growth by increasing their attractiveness for foreign direct investment (FDI). This might involve, for example, offering tax breaks to companies relocating their operations, or accelerating approvals for building a new plant.

As the survey shows, many companies are looking to overseas acquisitions for growth and access to innovation. This could be very welcome, with M&A rescuing struggling companies that may otherwise fail, safeguarding jobs and leading to new growth opportunities.

Clearly, encouraging overseas investment is not without risks. Governments may fear the loss of key assets or innovation capacity to foreign acquirors, or that economic recovery gains will go to the investing country. Governments approving significant M&A deals need to verify they will not negatively impact market competitiveness, national security, critical infrastructure, data privacy or security, or long-term competitiveness in high-tech industries. Rather than impose a block on inbound M&A, governments can attach conditions to the approval of deals, such as commitments to safeguarding jobs or investing in reskilling or in the local community.

8. Strive for geopolitical stability to de-risk strategic investments

In addition to the global public health crisis, political risk and uncertainty around political decisions, events or conditions at the geopolitical, country, regulatory or societal level have impacted the investment decisions of many companies. With greater clarity comes greater confidence to invest. As the new UK-EU trading arrangements become clearer, as the US Biden Administration’s foreign policy emerges and as international trade flows begin to normalize, we can expect to see an increase in strategic investments, which in turn will accelerate the recovery.

Government and infrastructure geopolitical challenges altering strategic investment

Conclusion

These survey results offer governments a cause for hope as well as a springboard for action. Taking the right steps now will help them overcome their post-pandemic challenges and set a positive course for the future.

Summary

The EY Global Capital Confidence Barometer (pdf) gauges corporate confidence in the economic outlook and identifies boardroom trends and practices in the way companies manage their Capital Agendas.