UK CFOs more optimistic in spite of low growth

THE UK’s leading finance directors enter 2013 more optimistic than a year ago – but weak growth is curtailing plans to expand, according to a survey by Deloitte.

Concerns about low growth and economic uncertainty, rather than access to capital, are deterring chief financial officers from spending cash. Instead, their immediate priorities are cutting costs and increasing cash flow.

The survey of CFOs from 112 leading companies, including 36 in the FTSE 100 and 38 FTSE 250 businesses, found fears of a return to recession or a euro breakup have eased and company-specific worries such as margins, cash flow and credit availability have receded.

Indeed, large companies enter 2013 with healthy balance sheets and benefiting from benign financing conditions. Not only that, but in the fourth quarter of 2012, CFOs reported a sharp decline in credit costs and now rate credit as being cheaper than at any time in the last five years.

“The emerging picture is of businesses which are constrained by low growth and uncertainty, rather than weakness in business models or access to capital,” explains Ian Stewart, chief UK economist at Deloitte.

“Despite confidence fluctuating with the ups and downs in economic prospects, we have seen a long-term drift to greater defensiveness by corporates, not for want of capital, but rather for scarcity of opportunity.”

The majority of finance directors – 81% – think the Bank of England is doing a good job and are also positive about the UK’s labour market policies. In contrast, areas of greatest concern relate to micro issues, such as regulation, infrastructure, energy and immigration policy, and not to macro-economic policy.

Stewart adds: “While CFO sentiment yo-yoed in 2012, largely in response to the ups and down of the eurozone, corporate strategies have become steadily more defensive over the last year. By and large, big corporates do have the firepower to hire and invest. However, five years on from the onset of the financial crisis, the missing ingredient, and the one which holds the key to corporate behaviour, is confidence about future growth.”

Fears over the integrity of the eurozone have dropped markedly over the course of the last 12 months, down to 22% from 37%, but while those concerns have eased and confidence returned to many boardrooms, a significant proportion of FDs – 34% – are still predicting negligible growth in 2013.

Times of opportunity

That said, CFOs have not completely discounted the possibility of growth this year – at least for their own companies – with about half noting that troubled times allow for opportunities to increase market share and expand capacity, or to instigate belated change within the business.

Larger businesses, too, have a greater appetite for capital expenditure than they did a year ago, although they have to be more considered than in the past, simply because growth cannot be relied upon to augment revenues.

“The dominant concern of UK businesses for 2013 is the economy, just as it has been at the start of each of the last four years. Confidence has returned, but perceptions of economic and financial uncertainty remain high and the greatest worries for CFOs are still the weakness of the euro area and UK economies,” explains Stewart.

In spite of those worries over wider growth, there is hope that the coming 12 months could see it return, with the EU economics commissioner Olli Rehn telling BBC News the “foundations for sustained growth” had been laid in Europe.

Despite the disparity between Europe and more buoyant markets, economics reforms, he said, have reassured investors and could bear fruit in the wider economy, including the UK.

But CFOs still harbour some suspicion over the eurozone, with 22% assigning some probability to the possibility of a nation leaving the currency over the next 12 months, although this is the lowest reading Deloitte has taken yet, dropping from 37% a year ago.

Ultimately, however, 2013 has the makings of a more stable year than 2012, despite the weak growth the UK is currently experiencing.

The most threatening anxieties have been allayed, and as such, the most immediate issues are more positive, with CFOs more likely to ask “how can we grow?” instead of acting defensively.

The current tentative optimism could become more established if CFOs take the opportunities they have identified in implementing overdue change, increasing presence and capacity, and acquiring companies and assets over the course of 2013, but at present, wariness still exists.