Deloitte’s quarterly CFO Survey finds that despite the spectre of Brexit looming large, CFOs at some of the largest UK businesses are optimistic about the future.
This year is set to be very interesting for UK corporations. On one hand, UK Inc. is having to deal with the uncertainty created as the Brexit countdown clock ticks ever closer to zero. On the other hand, beyond the UK’s borders, there is a lot of opportunity for growth emerging that businesses are keen to take advantage of.
The contradictory position that UK businesses find themselves in is highlighted in the latest Deloitte CFO survey, which quizzed 112 CFOs between 3rd and 15th December 2017. The headline findings are that the largest UK businesses are more focused on controlling costs than at any time in the previous eight years. However, at the same time, there is lots of optimism, with CFOs citing that their appetite for both organic and non-organic growth over the next 12 months is at its highest level since Deloitte first asked the question in 2009.
So why is this? The survey notes that UK businesses are seeing cost control as a “counter of the risk from weaker UK growth”. Beyond the UK, though, activity is accelerating and opportunities are increasing. Indeed, the survey cites that 2017-2018 is set to be the best two-year period for growth in the EU, Britain’s core export market, in the past ten years”.
Brexit looms large
Whilst broadly speaking UK Inc’s. optimism is growing, Brexit and the negative impacts it might have are an increasing concern. Indeed, around three-quarters of CFOs said that they expect Brexit will lead to a worsening of conditions overall. This is up from 60% earlier in 2017 and may be down to the continued confusion surrounding Brexit and the risk of a no-deal Brexit.
Because of this, CFO’s perceptions of uncertainty are on the rise. Thirty-eight percent of CFOs rate the level of external financial and economic uncertainty facing their businesses as high or very high. Given the uncertainty, CFOs have also said that they are planning to scale down discretionary spending, capital investment and hiring plans.
Risks: Brexit and beyond
Unsurprisingly, the effect of Brexit is cited as the biggest risk UK businesses face today. Beyond Brexit, CFOs have cited other concerns around the UK economy including weak demand and poor productivity/weak competitiveness, as other major risks.
Elsewhere, the tightening of monetary policy and the prospect of higher interest rates in the UK and US remains a concern. The actions and rhetoric of the US President in the second half of 2017 have increased fears around US policy uncertainty and risk of greater protectionism.
As aforementioned, despite UK Inc’s. focus on costs, growth is still on the agenda. It is therefore good news that funding conditions remain favourable (cheap and available) should corporates need to tap the debt markets to fund this growth. As a result, debt trumps equity issuance as the most attractive form of funding by some margin.
That being said, the cost of debt funding is likely to increase in 2018. Following the rate rise from the Bank of England in November 2017, most CFOs expect to see more rate rises this year. Indeed, 85% of the CFOs surveyed expect the base rate of interest to be 0.75% or above by year end.
The survey notes that the most interesting theme to watch this year will be how UK businesses achieve growth in an environment of stringent cost-control.
It is also likely that the hopes and fears of many UK business leaders will ebb and flow on the rhetoric coming from the European Union and UK government as Brexit talks continue.
Brexit in focus
With one year to go, Treasury Today will assess what Brexit means for corporates around the world in the March/April edition of Treasury Today.