Brexit keeps CFOs on defensive
DESPITE an easing of some negative effects, risk appetite among chief financial officers of the UK’s largest businesses remains subdued following the EU referendum, latest figures reveal.
According to Deloitte’s latest CFO Survey, which saw 124 CFOs of FTSE 350 and other large private companies participate in the Q3 2016 survey, 88% say the level of uncertainty facing their business is above normal, high or very high, down from 92% in Q2 but still the second highest since Q4 2012.
82% say now is a bad time to take risk onto their balance sheet, down from 95% in Q2 but still the second highest level since Q4 2011. 47% say they are less optimistic about the financial prospects for their company, down from 73% in Q2.
Twenty-four per cent of CFOs say they expect corporate revenues to decrease over the next 12 months, down from 63% in Q2, while 44% expect operating margins to decrease, down from 70%.
Defensive balance sheet measures continue to dominate corporate plans. The top priority is cost reduction, with 47% of CFOs rating reducing costs as a strong priority, unchanged from Q2. Increasing cash flow is rated as the second highest priority, with 42% saying they plan to increase cash flow. 39% plan to introduce new products and services, up from 27% in Q2.
Despite improving over the last quarter, 58% of CFOs expect UK corporates to cut capital spending in the next 12 months, down from 82% in Q2. 51% say hiring will slow, down from 83%, and 64% expect discretionary spending to slow, down from 82%.
CFOs were asked to rate, on a scale of 0-100, what they see as the biggest risks to their business. The effects of Brexit rated highest (57) followed by weak demand in the UK (54, up from 46 in Q2). Concerns about poor productivity in the UK also saw a large increase over the past quarter, 46 up from 36.
Other risks cited by CFOs also included, deflation and economic weakness in the euro area (50), the prospect of tightening monetary conditions (47) and the US presidential election (45).
CFOs were asked how they expect Brexit to impact their spending and hiring decisions over the next three years. 40% say capital expenditure will decrease as a result of Brexit, down from 58% in Q2. 46% expect hiring to slow (down from 66%) and 55% expect discretionary spending to decrease (down from 74%).
Overall, 65% say that he long term business environment will be worse when the UK leaves the EU, down from 68% in Q2.
Ian Stewart, chief economist at Deloitte, said: “The animal spirits of the corporate sector took a battering in the wake of the referendum and, three months on, Brexit continues to loom large for the UK corporate sector.
“Since our last survey we’ve seen the appointment of a new Prime Minister, a strong rally in equity markets and a solid run of UK economic data. But CFOs continue to see significant risks in the economic environment and perceptions of uncertainty remain elevated.
“Brexit tops the list of CFOs’ risks and concerns about UK growth and competitiveness have soared in the past six months. These concerns are weighing on corporate risk appetite with low levels of risk appetite a weaker outlook for investment and hiring.
“CFOs remain concerned about the long-term impact of Brexit and two-thirds believe it will lead to a deterioration in the UK business environment.”
Martin Jenkins, practice senior partner at Deloitte in Yorkshire & the North East, said: “While our survey suggests corporate Britain is in a pessimistic mood, the evidence we have seen so far in the market is somewhat brighter. In the near term we continue to see our clients making investment decisions and strong interest in our services. There is some caution as we look ahead to next year but I also remain a long-term optimist about the UK economy.
“The UK has built an enviable business environment which values enterprise and wealth creation. The UK’s move up the World Economic Forum’s competitiveness league, to seventh place, underscores the strength of our economy. The central challenge for the UK government is to ensure that the Brexit settlement enhances these strengths.”
