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’
Today’s Briefing summarises the findings of the latest Deloitte Survey of Chief Financial Officers which was released overnight. The full report is available here.
The survey gauges sentiment among the UK’s largest businesses in the wake of Parliament’s rejection of Mrs May’s Brexit deal. The survey ran between 26th March and 7th April, opening just after the announcement of the first delay in Brexit and covering a period that saw the failure of the House of Commons to agree a new plan and the start of Brexit talks between the government and the Labour Party.
Despite such turbulence the latest survey shows that confidence and risk appetite among CFOs are little changed. CFOs seem to have priced in a tougher environment earlier, at the start of the year, and the latest round of Brexit uncertainties has not materially changed that picture. The fact that balance sheets are being readied for turbulence fits with findings by the Bank of England’s agents which show that around 80% of companies judge themselves ready for a no-deal, no transition Brexit.
Corporates face three pressures. First, CFOs have become markedly more negative on the outlook for revenue growth. Second, cost pressures are increasing, with a record 79% of CFOs expecting operating costs to rise in the next year. Third, CFOs report that credit pricing and availability have deteriorated in the last two years.
Large businesses are looking to protect themselves against these risks by bullet-proofing balance sheets. At the heart of this strategy is a drive to raise cash levels. Official data show that at the end of 2018 UK corporates held a record £747 billion in cash. The fact that CFOs are more focussed on accumulating cash than at any time since 2010 suggests cash piles have further to rise.
Since the last CFO survey closed, on 24th January, UK equities have risen 8% buoyed by falling interest rate expectations and hopes of a US – China trade deal. CFOs have been largely untouched by such sentiment. They are battening down hatches for tougher times.
PS: I recently highlighted the risks to global growth posed by high yield corporate debt and the indebtedness of the Italian government. Last week the IMF that said high levels of corporate debt risked amplifying any economic downtown and endangered financial stability. The Fund noted that the world should be able to deal with a moderate slowdown but a “weak tail” of companies could be vulnerable to a more serious downturn. The IMF singled out Italy as one of the greatest risks, highlighting its banking sector’s exposure to sovereign debt. Last week the Italian government slashed its forecast for GDP growth this year to just 0.2%. The lower growth outlook means Italy is likely to breach the budget deficit cap that was agreed with Brussels late last year after months of wrangling.
PPS: there has been much talk that the UK might opt for a customs union with the EU as a way out of the Brexit impasse. A customs union is an agreement between countries to charge common tariffs on goods imported from outside the union and not to charge tariffs on movements of goods in the union. A customs union offers an obvious way of maintaining tariff-free goods trade with the EU. There are also potential drawbacks. It would probably require the UK to follow EU rules in several areas such as product standard over which it would have no influence. A customs union would not remove the need for checks on goods crossing the Irish border. Finally, it would limit the UK’s ability to secure trade deals with non-EU countries.