A personal view from Ian Stewart, Deloitte’s chief economist in the UK.
Deloitte’s latest UK Chief Financial Officers Survey, released overnight, shines light on the plans of Britain’s largest corporates as the economy reopens. It is a remarkably upbeat survey, the most consistently positive of any since the CFO surveys began in 2007.
Optimism among the Chief Financial Officers (CFOs) has risen to the highest level in the 13-year history of the CFO Survey, far surpassing previous peaks seen after the global financial crisis and in the wake of the December 2019 general election.
The fog of uncertainty that engulfed the economy last March is clearing. CFO perceptions of uncertainty have plummeted from the record levels seen a year ago. CFOs continue to see the pandemic as posing the greatest risk to business, but even here concerns have eased. It is a sign of the times that the only category of macro risk where concerns have risen sharply relates to the side effects of strong growth, in the form of inflation and asset price bubbles.
The successful rollout of vaccines in the UK, the prospective reopening of the economy and a gathering US recovery have all helped sentiment. So, too, has an end to the long Brexit saga.
CFOs continue to think by a wide margin that Brexit will adversely affect the UK business environment. But, with the UK’s departure from the EU, the issue has dropped sharply down CFOs’ worry list, from the first or second place it has occupied since the referendum, to eighth. Brexit has weighed heavily on CFOs hiring, investment and M&A activities since the EU referendum in 2016 but such concerns have fallen away significantly since the end of last year. With the UK’s exit from the EU a dominant source of business uncertainty has become one of many to be monitored and managed.
The profit outlook has been transformed and CFOs’ expectations for margins have returned to the previous high seen in mid-2014 at the top of the economic cycle. The recent strong performance of UK equities, up 5 per cent since the start of March, suggests financial markets are already anticipating a strong rebound in profits.
Corporates responded to the pandemic by building up cash and cutting costs as they sought to strengthen their balance sheets. Cash holdings rose to record levels, with UK corporates’ cash balances rising by 27 per cent in the fourth quarter of last year on a year earlier. Now, with restrictions lifting, CFOs are tilted away from defensive to expansionary strategies. CFOs’ expectations for hiring and investment having reached their highest level in nearly six years. Pent-up demand from the corporate sector, fuelled by high cash balances and rising revenues, points to an acceleration in corporate spending and activity over coming months.
The expectation among CFOs is that the UK will be heading back to work over the summer. Two thirds expect the bulk of their workforce to have returned to working in the office by September.
On the results of the latest CFO Survey, the UK is heading for a strong recovery. Whether it materialises is heavily dependent on the UK decoupling from rising COVID case and deaths rates being seen globally.
