The financial market impact of the government’s mini-budget on 23 September, which took place roughly halfway through the survey period, has added to the pressures. Those CFOs who responded after the mini-budget foresaw materially higher interest rates and were more likely to report elevated credit costs than those who responded before.

Tightening credit conditions have resulted in a sharp fall in the attractiveness of debt finance to CFOs - whether bank borrowing or bond issuance - over this year. CFOs now see equity as a more attractive source of finance than corporate bonds, an assessment last seen during the credit crunch in 2009.

On average, CFOs believe inflation will moderate from its current level to 6.2% in a year’s time but expect inflation to stand at 3.8% in two-years’ time, almost double the Bank of England’s 2% target.

Finance leaders expect the Bank of England to continue tightening monetary policy but at a significantly less aggressive pace than markets suggest. CFOs see the Bank’s base rate at 3.75% in a year’s time, well below market expectations.

On average, CFOs attach a 78% probability to the UK falling into recession in the next 12 months.

The latest Deloitte CFO Survey took place between 20th September and 3rd October 2022. 87 CFOs participated, including the CFOs of 23 FTSE 100 and 30 FTSE 250 companies. The combined market value of the 60 UK-listed companies surveyed is £463 billion, or approximately 20% of the UK quoted equity market.

Risk and economic uncertainty

The dampening effect of tighter credit conditions is reinforced by wider concerns. Over three quarters of CFOs (77%) rate the level of external financial and economic uncertainty as high or very high, up sharply from last quarter (Q2: 61%) and at its highest level since the beginning of the pandemic.

Higher energy prices or disruption to its supply, and rising geopolitical risks are the top two concerns among CFOs. The prospect of further interest rate rises and higher inflation closely follow as the next biggest concerns.

Rising costs and shifting strategies

CFOs expect a combination of rising costs and falling revenues to squeeze corporate margins. An overwhelming majority (91%) expect operating margins for UK corporates to decline over the next 12 months - the highest reading on record** except at the beginning of the pandemic.

With rising credit costs and expectations of a margin squeeze, corporates are tilting to defensive strategies. Cost reduction is the top priority for CFOs, with over half (55%) saying it is now a strong priority. They are placing less emphasis on expansionary strategies such as introducing new products or services, increasing capital expenditure and expanding by acquisition.

Ian Stewart, chief economist at Deloitte, said: “A twelve-year period of easy credit conditions is drawing to an end. Corporates are seeing a reset in the cost and availability of credit.

“Not since the credit crunch have CFOs rated debt – whether that’s bank borrowing or corporate bonds - as being less attractive as a source of finance for their businesses than they do today.”

Labour market and supply chains

Just over half of CFOs (53%) expect hiring by UK corporates to decrease over the next 12 months.

Over a third (41%) of finance leaders continue to report that their businesses have faced significant or severe recruitment difficulties over the last three months. CFOs expect labour shortages to ease somewhat as the economy and hiring soften. Nonetheless, CFO expect labour market pressures to persist - one in four CFOs expect to face significant or severe recruitment difficulties in a year’s time and earnings growth is expected to accelerate.

CFOs expect growth in average wage costs for their businesses to accelerate significantly over the next 12 months, from 4.6% to 6%.