Insight & Analysis

UK firms eye capital expenditure and growth

Published: Jul 2021

UK businesses are increasingly pondering capital expenditure, putting aside defensive strategies seen during the pandemic like increasing cash flows and reducing costs and leverage.

Small green plant growing from the soil

Spending by UK businesses is set to spike in the coming months, according to the latest Deloitte UK CFO Survey measuring sentiment at the UK’s largest companies. With the economy reopening, CFOs’ perceptions of external uncertainty have dropped, and businesses are increasingly moving away from the defensive strategies that helped them through the downturn.

“The pandemic, like all major shocks, will reshape the economy and we are likely to see years of normal growth compressed into just a few months. Indeed, eight in ten CFOs believe that productivity will run higher in the wake of the pandemic. That offers the hope of a more comprehensive recovery than after the global financial crisis,” says Ian Stewart, Chief Economist at Deloitte.

Cost reduction was by far the top corporate priority last year. Now growth heads the priority list with 76% of CFOs expecting an increase in hiring and 71% expecting increased investment in the next 12 months. Investment in technology features as a strong priority while M&A seems set to play an outsized role in reshaping the business landscape, with CFOs rating expansion through acquisition a higher priority than at any time in the last ten years.

Elsewhere, after years of Brexit dominating the risk landscape, followed by COVID, new risks have emerged. Rising inflation and climate change are ranked as almost equal risks to COVID. The bounce back from the recession has fuelled commodity prices and supply bottlenecks, pushing inflation in the US, UK and euro area higher. CFOs believe this has further to run and anticipate that over the next 12 months their own operating costs will rise at the fastest rate in ten years.

CFOs have also sharpened their focus on expansionary strategies – introducing new products or services, expanding by acquisition, and increasing capital expenditure – and are now placing the greatest emphasis on acquisitions since 2009. This has coincided with a fall in popularity for defensive strategies – increasing cash flow, reducing costs and reducing leverage. The emphasis on cost reduction, which has been a key priority since the pandemic began, is now the lowest in seven years.

The five years before the pandemic were characterised by disappointing productivity growth and weak business investment, despite apparent gains in technology. In a post-pandemic recovery featuring low rates, rising demand and the government’s super deduction, the overwhelming majority of CFOs expect to increase investment in digital technology and realise gains in business performance and productivity.

With vaccinations enabling a gradual reopening of the economy and a strong rebound in activity, 41% of CFOs report that demand for their businesses’ goods and services has already returned to pre-pandemic levels, up from 27% in the first quarter. A majority, 57%, have either reported a full recovery in demand or expect to do so by the end of this year, the survey finds. Moreover, CFO expectations for an increase in corporate revenues have hit their highest level in more than six years. But rising raw material prices and recruitment difficulties mean that expectations for an increase in operating costs have also risen sharply, to the highest level on record.

CFOs report a challenging environment for sourcing labour, as corporates respond to rapidly rising demand. More than three-quarters of businesses represented on the survey panel have experienced a rise in recruitment difficulties or skills shortages over the last three months.

CFOs’ perceptions of external uncertainty continued to fall in the second quarter - and CFO risk appetite continues to rise. 40% of CFOs think now is a good time to take greater risk onto their balance sheets, the highest level for almost six years. CFO expectations for an increase in hiring and capital expenditure are at their highest levels in almost seven years. Expectations for discretionary spending also remain close to a seven-year high.

Lastly Deloitte finds that CFOs continue to rate debt finance – bank borrowing and corporate bonds – as the most attractive source of external funding. With risk assets rallying, equities have risen in popularity and are now the most attractive they have been in more than seven years. CFOs report a continued improvement in credit conditions for their, predominantly large, businesses. They continue to rate credit as cheap and easily available. CFOs’ inflation expectations have risen in the second quarter. A third of CFOs expect inflation to be above 2.5% in two-years’ time, up sharply from 13% in the first quarter.

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