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A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to & view previous editions at: http://blogs.deloitte.co.uk/
The latest Deloitte survey of UK Chief Financial Officers (CFOs) released this morning shows that business confidence has edged up and is running not far off its long-term average. CFOs seem to have shrugged off weakness in equity markets and concerns about trade with perceptions of uncertainty dropping to the lowest levels since the spring of 2016, before the EU referendum. This finding fits with our own “Worry Index” which tracks newspaper references to terms relating to uncertainty and risk. It dropped to a ten-year low in the first quarter.
The announcement of the Brexit transition on 19th March seems to have had a positive effect on the corporate mood. 84 CFOs responded to the CFO survey before the deal was announced, 22 after. Those who answered in the wake of the announcement showed significantly higher levels of optimism and risk appetite than earlier respondents. Latter respondents were also less negative about the long-term effects of Brexit.
For the first time in two years CFOs do not rate Brexit as the main risk facing their businesses. Brexit has dropped to second place, with concerns about slower UK growth now at the top of the risk league.
Such uncertainties about prospects for activity in the UK are reflected in the balance sheet strategies being pursued by large businesses. CFOs in businesses that derive most of their revenues abroad report a clear focus on expansion, especially introducing new products or services and moving into new markets. Their counterparts in businesses deriving most of their revenues from the UK are operating more defensively, with cost control as their top priority.
With the unemployment rate at a 43-year low, labour shortages are emerging in the UK economy. 31% of CFOs report that recruitment difficulties or skills shortages have increased in the last three months, with none reporting a decline. CFOs have also brought forward their estimates for the timing of interest rate rises, with 96% expecting rates to be higher in a year’s time.
The effect of the transition announcement on this quarter’s survey results underscores the sensitivity of sentiment to developments in the Brexit negotiations. The moment of truth on Brexit is approaching. The UK government hopes to strike a deal with the EU and have it endorsed by Parliament this year. Whether it succeeds in doing so seems likely to be a major driver of business confidence through the rest of this year.
To read the full report and download the survey data please click on the link below: www.deloitte.co.uk/cfosurvey