A net 17% of CFOs are more positive about the financial prospects of their companies compared to three months ago, marking the third consecutive quarter of improved sentiment.

The proportion of CFOs reporting high or very high levels of uncertainty facing their businesses has fallen to 36% this quarter, less than half the peak seen in mid-2022 (77%). This takes uncertainty back to levels last seen in the summer of 2021 (35%), a time when national lockdown restrictions were ending.

Ian Stewart, chief economist, said: “Optimism among the UK’s largest businesses is running at well above average levels, suggesting that the worst of the economic downturn is behind us, with current sentiment at levels that preceded periods of good growth in 2010, 2014 and 2021.

“Uncertainties driven by Brexit, the pandemic and inflation that have clouded the business scene for much of the last eight years seem to be clearing. For the first time in three years, CFOs expect margins to increase over the next 12 months.”

Conducted between 12 March and 25 March 2024, a total of 64 CFOs participated in the latest quarterly survey, including the CFOs of eight FTSE 100 and 23 FTSE 250 companies. The combined market value of the 37 UK-listed companies surveyed is £201 billion, or approximately 8% of the UK quoted equity market.

Inflation and rate expectations on the decline

Inflationary concerns are easing and CFOs’ expectations for inflation have continued to fall. Finance chiefs expect inflation to be at 2.9% in a year’s time, down from 3.5% last quarter. In two years’ time, CFOs expect inflation to be at 2.3%, down from 2.9% in the previous edition of the survey.

With inflation worries in retreat, finance chiefs believe that the UK is on the verge of significant easing of monetary policy, expecting the Bank of England to cut the UK base rate from the current level of 5.25% to 4.25% over the next 12 months.

Corporate risk appetite versus defensive strategies

The percentage of CFOs who see this as a good time to take greater risk onto their balance sheets has risen slightly from last quarter (by one percentage point) to 20%. However, finance leaders maintain their defensive strategy stance, with 56% rating reducing costs as a strong priority, and 43% rating increasing cashflow as a strong priority.

Mr Stewart commented: “Risk appetite and optimism are rising, credit conditions have improved, but CFOs remain focussed on controlling costs and building up cash.

“For now, expansionary strategies, such as capital spending and bringing in new products or services, are on the backburner. Given the challenges of recent years it is perhaps unsurprising that, for all the good news, a degree of caution persists.”

Geopolitics seen as top risk to business

CFOs still see geopolitics as posing the greatest risk to their businesses over the next 12 months, with a weighted average rating of 65. It has been rated as the top risk for the last three consecutive surveys.

However, concerns over UK productivity and competitiveness have risen. This ranks second on the risk list this quarter, with finance chiefs assigning it its joint-highest risk rating (57) in ten years. Inflation, energy supply problems and labour shortages have dropped down CFOs’ list of concerns, now rated sixth, fifth and fourth respectively.

Concerns around geopolitical developments

This quarter the survey also asked CFOs to assess the channels through which adverse geopolitical events could damage their own businesses. By far the greatest concern – at a weighted average rating of 72 – was that geopolitical developments could trigger cyber-attacks. This was followed by a general fall in demand across the economy, and disruption to energy supplies or higher energy prices.

Meanwhile, when asked about the outlook on geopolitical risk facing their business, 51% of CFOs expect the level of risk to increase over the next three years, with only 3% expecting it to decrease over this time.

Mr Stewart added: “While CFOs are more optimistic about the general outlook, and uncertainty has decreased, that does not apply to geopolitics.

“The overwhelming majority of CFOs expect geopolitical risk to increase or stay the same in the next three years. On this front at least, CFOs are anticipating further uncertainty.”