Brexit blow to business confidence - Deloitte CFO Survey

The survey shows significant downturns in corporate optimism and risk appetite. CFOs are shifting to defensive balance sheet strategies and becoming more cautious of all forms of spending.

132 CFOs of FTSE 350 and other large private companies participated in the Q2 2016 CFO Survey.

Of those listed companies, their combined market capitalisation is £365bn. The survey ran from 28 June to 11 July, capturing business sentiment in the immediate aftermath of the 23 June referendum and during a period of significant political uncertainty.

The survey found 95 per cent of CFOs believe the level of uncertainty facing their business is above normal, high or very high, up from 83 per cent in Q1 and returning to levels last seen in the Euro crisis in 2012.

Some 73 per cent of CFOs said that they are less optimistic about the financial prospects for their company, up from 32 per cent in Q1, the highest level registered since Deloitte’s survey began in 2007 and higher than during the fallout from the Lehman collapse in 2008.

Just 8 per cent of CFOs say now is a good time to take risk onto their balance sheet, down from 25 per cent in the last quarter and its lowest level since Q1 2009.

63 per cent of CFOs say they expect revenues at their firms to decrease in the next year, up from 11 per cent in Q1 and the highest level recorded. However, 23 per cent predict an increase in revenues. 70 per cent expect operating margins to decrease, the highest level on record, and up from 37 per cent in Q1.

82 per cent of CFOs expect their firms to shrink capital spending in the next year, with 83 per cent forecasting a slowdown in hiring. Both are the highest level recorded by Deloitte’s survey and up significantly from 34 per cent and 29 per cent, respectively, in Q1.

The proportion forecasting a cut in discretionary spending (82 per cent) is the highest since Q4 2011.

CFOs were asked what effect they expected the UK’s exit from the EU to have on their spending plans over the next three years.

58 per cent expected capital spending to be somewhat or significantly lower over this period, 66% expected hiring to be lower and 74% saw discretionary spending being lower.

Overall, 68 per cent of CFOs believe that leaving the EU will lead to a deterioration in the UK business environment in the long term. 20 per cent expect little change and 13 per cent expect an improvement.

For the first time since Q1 2015, the top two balance sheet priorities for major UK corporates are defensive. 47 per cent of CFOs say reducing costs is a strong priority for the coming 12 months, up from 40 per cent in Q1, with 41 per cent looking to increase cash flow, up from 37 per cent in Q1.

Strategies involving expenditure or taking risk have dropped sharply down the priority list. 27 per cent are looking to introduce new products or services, down from 43 per cent in Q1, 7 per cent plan to increase capital expenditure (16 per cent in Q1), while 3 per cent plan to increase dividends or share buybacks (12 per cent in Q1).

CFOs were asked what steps they believe the government can take to support economic activity as the UK recasts its relationship with the EU.

Two factors dominated CFOs’ list of demands. 91 per cent said that a strong signal about the government’s aims in the negotiations with the EU should be a priority while 88 per cent said that maintaining the solvency and liquidity of the banking system was essential.

In third place, 25 per cent said that the government should continue with a deficit reduction plan while 16 per cent said that raising public expenditure would help. Just 9% say that tax cuts would help economic activity, 6 per cent call for additional quantitative easing and 3 per cent favour cuts to interest rates.

54 per cent of CFOs say they expect interest rates to be below 0.5% in a year’s time, with 38% forecasting rates staying at 0.5 per cent.

David Sproul, senior partner and chief executive of Deloitte, said: “The outcome of the EU referendum has triggered a sharp, negative response from the corporate sector.

“This survey was conducted immediately after the referendum, against a backdrop of historical political upheaval and financial uncertainty. The faster-than-expected appointment of a new Prime Minister removes one source of uncertainty, now the government must set out its vision for the UK’s future relationship with the EU to provide further stability and reassurance. As companies begin to feel the environment stabilising, we may see confidence improve in next quarter’s survey.

“The UK remains a vibrant, innovative and highly-skilled economy and I continue to believe it can navigate through a time of change, retain its global influence and remain a magnet for international talent and investment. My own conversations with chief executives and chairmen also provide reassurance that some priorities haven’t shifted. Businesses are still looking to take advantage of advances in technology and digital and increasing productivity. The Leave vote and subsequent uncertainty has made these more important to pursue.

“Businesses recognise their important role in forming a positive future for the UK outside of the EU. They must play their part in the coming years, being proactive in finding ways to boost productivity and drive growth, manage the risks Brexit poses, take advantage of the opportunities it creates and make their voices clearly heard in the debates around the UK’s future relationships with Europe and the wider world.”

https://youtu.be/HSK07cBY0pY

Ian Stewart, chief economist at Deloitte, said: “CFOs do not seem to be waiting for growth to slow before adjusting direction. There has been a marked shift to more defensive balance sheet strategies in the wake of the referendum, with a focus on reducing costs, building up cash flow and caution on all forms of spending.

“Corporate willingness to take risk has seen one its largest ever declines while the outlook for capital spending, hiring and discretionary spending is at levels last seen just before the so-called “double dip” slowdown of 2012.

“Perceptions of uncertainty have soared to levels last associated with the euro crisis five years ago. The spike in uncertainty has had a toxic effect on business sentiment with optimism dropping to the lowest level since our survey started in 2007, lower, even, than in the wake of the failure of Lehman in late 2008.

“However, the immediate scale of post referendum shock has not been of the same scale as 2008. Sterling has fallen faster but UK equities have proved more resilient. Consumer confidence in July recorded its sharpest monthly fall in almost 22 years, but it remains much stronger than it was post-Lehman.”