A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. To subscribe and/or view previous editions just google ‘Deloitte Monday Briefing’.
The latest Deloitte survey of Chief Financial Officers released last week provides a snapshot of the thinking and strategies of UK CFOs.
The survey, conducted in the second half of June, shows that the CFOs of the UK’s largest companies are braced for recession. On average, respondents see a 63% chance of the UK going into recession within the next 12 months.
Increases in the Bank of England’s base rate since the start of the year have brought an abrupt end to a long period of easy credit, with CFOs reporting that credit is now more costly than at any time in the last ten years. Respondents think credit conditions will continue to tighten, with interest rates expected to double from 1.25% to 2.5% by July 2023.
Geopolitics features as the greatest risk facing business, with higher interest rates and inflation in second and third place on the CFO risk list.
The Bank of England estimates that inflation is likely to reach about 11% later this year. CFOs believe it will then decline, to 5.0% by mid-2023 and 3.4% by mid-2024. However, CFOs worry that inflation is likely to remain higher for longer. Two in three expect inflation to exceed economists’ expectations. And CFOs think supply chain and recruit difficulties will remain elevated for the next year, only falling significantly on a two-year view.
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This quarter’s survey asked CFOs how they are responding to the highest levels of inflation seen in the UK since the 1980s. The most common approach is to seek to pass on price rises, followed by measures to improve cash flow and reducing margins. (A separate question finds that CFOs’ expectations for margins have dropped sharply and are not far off the all-time lows seen during the pandemic.)
Other widespread responses to inflation include shifting revenues towards higher margin products and services, differentiating products and services from competitors and reducing discretionary spending.
CFOs expect the business environment to get tougher, with growth turning negative, inflation way above target levels and interest rates doubling. Yet perhaps surprisingly, CFOs are not battening down the hatches. Risk appetite is only slightly below average levels, and well above the lows seen in the financial crisis, at the time of the EU referendum and during the pandemic. CFOs are also positive about medium-term prospects for investment. Most expect business productivity, spending on skills and investment in digital technology and assets to speed up in the next three years. For all the risks, CFOs have not given up on growth.