Insight & Analysis

Brexit CFOs see brighter future

Published: Feb 2020

The quarterly UK CFO survey has been published by Deloitte and, despite ongoing Brexit uncertainty, the results are surprising – even to the authors.

Light at the end of the road after a stormy day

The Deloitte UK fourth quarter CFO survey took place in the wake of the country’s general election, with responses being sent in from 13th December to 6th January. Now in its 11th year, the results have seen the most dramatic changes ever.

Ian Stewart, Chief Economist at Deloitte, and one of the authors of the latest survey, says that he has “never seen such a big shift in sentiment in one quarter”. The percentage of respondents who feel ‘somewhat optimistic’ about the financial prospects of their company leapt from 9% in Q319 to 49% in Q419. Meanwhile, the percentage who rated the general level of external financial and economic uncertainty facing their business as ‘very high level’ dropped from 19% in Q319 to just 4% in Q419.

“I suppose the message from the survey is there is probably going to be a greater willingness to think about or contemplate spending in 2020,” says Stewart.

Easier credit

When looking at the results over the past year, the responses to questions around the availability and cost of credit have also become more positive. In Q418 11% of respondents rated the overall cost of new credit for corporates as ‘fairly costly’. A year later in Q419, this figure is only 4%. The overall availability of new credit for corporates was rated as ‘somewhat hard to get’ by 17% and 12% in Q418 and Q419, whilst ‘somewhat available’ rose from 35% to 44% in the same period.

“Their view is that credit has become rather less expensive, it has become cheaper and more available,” says Stewart. The study found that CFOs have brought forward their expectations for higher interest rates. Thirty percent of CFOs now expect the base rate to be higher than the current level of 0.75% in a year’s time, up from 16% in the previous quarter. Only 19% of CFOs expect the base rate to be below its current level in 12 months’ time, down from almost half of CFOs in the third quarter.

The percentage that characterise the current level of short-term market interest rates in the UK as ‘very low’ rose from 30% in Q418 to 38% in Q419. Whilst this isn’t the 53% seen in Q417, the rise is still worth noting, and reflects the recent comments made by Mark Carney, the outgoing Governor of the Bank of England, that the UK economy has been ‘sluggish’ and inflation is below the 2% target.

Uncertainty has fallen

Despite the pessimistic outlook on interest rates, there has been an enormous drop in CFO uncertainty. The slash from 62% to 34% of respondents who rate their level of uncertainty as ‘high’ or ‘very high’ is something that Stewart believes is hugely significant. “If I were a corporate treasurer, I’d be really interested in that,” he says. This is because when a CFO feels a lot of uncertainty, it’s often associated with ’battening down hatches’ which is what the past three years have seen.

“We’ve seen corporate capital spending, and investment, fall away very sharply since the referendum in 2016, and that’s been associated with very high levels of uncertainty. So it’s declining, who knows if it’ll last? But its decline is potentially very significant,” he adds.

Stewart is also quick to point out that one reason economic uncertainty may remain lower than it’s been for several years is a likely effect of the huge Conservative majority in the UK government lowering political uncertainty.

Appetite for risk

CFOs’ appetites for risk has reached a four-year high, with an enormous jump from just 7% in Q319 to 31% in Q419 answering ‘yes’ to the question ‘is it a good time to be taking greater risk onto your balance sheets?’. “As this feeds through to the actual behaviour of corporates, there is likely to be greater need of liquidity to fund corporate spending plans,” says Stewart.

In addition to an increased appetite for risk there is the belief that risks themselves are receding. The effects of Brexit have dropped from first to third on the list of factors posing a risk to business since Q319, now behind ‘weak demand in the UK’ and ‘rising geopolitical risks worldwide’.

Looking ahead

“Our central prospect is still fairly unspectacular growth in 2020,” says Stewart. This is due to the continued uncertainty in the UK around trade with Europe. Treasurers will need to maintain a balance between the brighter picture painted by this survey, and the knowledge that everything is changeable.

“Treasurers are going to have to continue to navigate a fairly low-growth environment where there is this still-looming question about Brexit. Coupled with the fact that the global economy, or the ‘rich’ world economy outside the UK – in America and Japan, for example – is likely to slow somewhat this year,” says Stewart.

“This survey is not telling us that 2020 is going to be a fantastic year. It’s saying that the really extreme pessimism and risk aversion that we saw at the tail end of last year has abated,” he concludes.

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