Brexit is once again the biggest risk facing UK businesses, with increasing concern about the effect on the long-term business environment and corporate spending, according to Deloitte’s latest CFO Survey.
103 CFOs of FTSE 350 and other large private companies participated in the Q2 2018 CFO Survey. The combined market capitalisation of the 76 UK-listed companies who participated is £504bn, approximately 19 per cent of the UK quoted equity market. The survey ran from 3 to 14 June 2018.
Optimism and risk appetite increase but revenue expectations slump
Overall, 24 per cent of CFOs say they are more optimistic about the prospects for their company than they were three months ago, up from 20 per cent in Q1.
16 per cent of CFOs say that now is a good time to be taking risk onto their balance sheets, up from 14 per cent in Q1, but remaining below its two-year average.
17 per cent of CFOs say they expect revenues to rise in the coming 12 months, down from 31 per cent in Q1.
Brexit mutes long-term optimism and spending plans
CFO pessimism over the long-term impact of Brexit is at its highest level since the referendum. 75 per cent of CFOs say they expect the long-term business environment to be worse as a result of leaving the EU, up from 68 per cent in Q1. This is the highest reading since the referendum result in Q2 2016.
CFOs are more negative on the effects of Brexit on their hiring and spending decisions. 40 per cent say hiring will slow over the next three years as a result of Brexit, up from 30 per cent in Q1, and 34 per cent say capital expenditure will slow, up from 25 per cent. While increasing on last quarter, neither is as high as they were immediately after the referendum.
Brexit re-emerges as top business risk
Brexit is once again the biggest risk CFOs say their businesses face. Rating risks on a scale of 0 to 100, the effects of Brexit scored at 60 (up from 56 in Q1), followed by weak demand in the UK at 57 (unchanged from in Q1).
Brexit and weak UK demand is followed by the prospect of higher interest rates and tighter monetary conditions in the UK and US (52) and the risk of greater protectionism in the US (from 47 in Q1).
Weakness and volatility in emerging markets (44) and weakness and deflation in the euro area (45, up from 37) were the lowest-ranked risks, though both have risen since Q1.
Cash flow and cost control are highest priorities
Increasing cash flow is the top priority for CFOs over the coming 12 months, with 49 per cent citing it as a strong priority, up from 37 per cent in Q1. Cost control ranks as the second highest priority, with 47 per cent of CFOs citing this as a focus (up from 42 per cent).
Despite an overall focus on defensive strategies, introducing new products and services and expanding into new markets is still the third highest priority with 37 per cent citing this as a strong priority.
Interest rate and inflation expectations fall back
38 per cent of CFOs say they expect the Bank of England’s base rate to be at or above 1 per cent within a year’s time, a decrease from 47 per cent in Q1, and 48 per cent expect the rate to be at 0.75 per cent. 14 per cent expect it to remain unchanged at 0.5%, rising 10% from Q1.
57% of CFOs expect inflation to be between 1.6% and 2.5% within a year (up from 46% in Q1), with 39% forecasting it to be above 2.5% (down from 51%).