A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK.
After the post‑lockdown surge in activity over the summer, CFOs are braced for more challenging times. UK businesses have pushed back the timing for a full recovery, with more than 60% of CFOs expecting demand to remain below pre‑Covid‑19 levels until the second half of next year or beyond. Repairing the hole in corporate revenues created by the pandemic will take longer than previously thought.
Perceptions of external uncertainty remain close to the ten‑year high reached at the start of the pandemic and corporate risk appetite is very weak. Covid-19 dwarfs all other concerns for CFOs. Amid tensions with China, the US election and wider political uncertainty, geopolitical concerns now rank second on CFOs’ worry list, with Brexit in third place.
The survey suggests that even a limited trade agreement with the EU would significantly reduce the shock of Brexit on activity. Twice as many CFOs expect a negative shock to hiring and investment from exiting without a deal than with one.
While exiting the EU even with a deal is seen as a significant negative, Covid‑19 remains, by some way, the greater risk. Three‑quarters of CFOs expect the pandemic to have either a “significant” or “severe” negative effect on their businesses over the next 12 months; less than a quarter see Brexit having such negative effects.
In an uncertain world, investment and expansion are taking a back seat. Business transformation – digitisation, automation and streamlining – are the key priorities for investment in the next 12 months. This points to the possibly transformational effect of the pandemic in reshaping organisations and how they operate (something that is already being seen in relation to the structuring of work and use of office space).
CFO expectations for new hiring are weak, but the survey shows that large businesses overwhelmingly plan to keep formerly furloughed staff on company payrolls. CFOs expect to retain, on average, 82% of furloughed staff after the scheme ends in October.
With rising new cases and tighter social distancing restrictions, the strong summer recovery is likely to fade into an uncertain and weak autumn. British businesses are gearing up to fight a long Covid, one in which activity and demand make a full recovery by next autumn at the earliest.
The third quarter CFO Survey results, along with growing restrictions on activity, have prompted us to cut our UK GDP forecasts for this year and next. The post-lockdown rebound is fading. Month-on-month GDP growth slowed to 2.1% in August, down from 6.4% in July and 9.1% in June. Headwinds from reduced government stimulus, rising insolvencies, unemployment, Brexit and stricter social distancing requirements will hamper activity in the final three months of the year. We’re forecasting a massive 15.3% rebound in GDP in the third quarter but with the growth rate fading to just 1.0% in the fourth. Our full year forecast for the contraction in 2020 GDP growth goes from 10.1% to 10.6%.
We expect the recovery to remain weak in the first quarter of the next year before picking up on more relaxed restrictions, better weather, improvements in testing and the probable availability of a vaccine for at least more vulnerable cohorts of the population. Our 2021 full year forecast drops from growth of 7.5% to 6.0%. That’s a heady rate of growth by normal standards, roughly four times the trend rate, but it would leave UK GDP some way below pre-Covid-19 levels at the end of next year.
