As growth slows and uncertainty persists, Chief Financial Officers (CFOs) of the UK’s largest businesses have prioritised cost reduction as their top strategy, according to Deloitte’s Q3 CFO survey.
The research found that a record 58% of CFOs rated cost reduction as the highest priority, a rate higher than when the economy was recovering from recession in 2009.
Brexit ranked as the biggest risk (66%), holding its position from Q2, and CFOs have become significantly more concerned about the risks posed by a growth slowdown in both the UK and the euro area.
Ian Stewart, Chief Economist at Deloitte, said: “Perceptions of uncertainty are elevated and corporate risk appetite is vanishingly low. The priority appears to be curbing costs, not expansion. With Brexit cited as the biggest risk businesses face, the last quarter has also seen heightened concern over slowing growth in the UK and Eurozone and CFOs are tightening their purse strings in response.”
According to the Bank of England’s analysis of anonymised CFO data, UK CFOs are experiencing a period of persistently high uncertainty in the economy. Almost a third of CFOs have rated uncertainty as high or very high for four quarters, the highest level in eight years.
CFOs who reported higher levels of uncertainty expect slower growth in investment and hiring by corporates, and those who reported uncertainty as high or very high expect investment to decrease on average.
Despite pessimism over the long-term impact of Brexit falling slightly in Q3, an overwhelming majority of CFOs, more than three-quarters, continue to expect a deterioration in the overall business environment in the long term due to Brexit.
Brexit remained as the biggest risk among CFOs (66%), with weak demand in the UK coming in at a close second (62%). This was given its highest ranking in five years on the list of factors CFOs feel pose a risk to business in the UK. Poor productivity and weak competitiveness in UK economy also increased significantly in the last three months.
The continuing US-China trade dispute and tensions in the Middle East following the attack of Saudi Arabia’s oil production resulted in concerns in geopolitical risks and greater protectionism ranking in joint-third place, with 59%.
Deflation and weakness in the euro area were also on the list, likely caused by weaker growth in the euro-zone and a slowdown in Germany. In contrast, concerns about growth in emerging markets featured at the bottom of the risk list.
The appetite for risk among CFOs slightly rose in Q3, but remains close to its lowest rate in a decade.
Tim Vine, Head of European Finance & Risk Solutions at Dun & Bradstreet and who have released their own industry report, said: “Given the current environment, a growing lack of confidence among UK CFOs is not surprising. Continued uncertainty around Brexit, the snap election and other economic factors such as the US-China trade wars are likely to be weighing on the minds of finance leaders, given their responsibilities for risk management.
“Forecasts in Dun & Bradstreet’s latest Quarterly Industry Report suggest that, while the UK has narrowly avoided falling into a recession in Q3, real GDP growth is likely to expand by only 1.3% in 2020. These would be the lowest growth figures since the financial crisis in 2008 and it’s a challenging time for CFOs who are under increasing pressures to identify opportunities for growth in addition to managing financial risk.
“Our Q3 data for the UK shows that there were over 4,000 corporate liquidations reported during the quarter with the number rising across several sectors including services, retail and manufacturing. However, more positively, our analysis shows an improvement in payment performance for the third consecutive quarter based on the sample of data analysed – 44.7% of payments were made on time in Q3, compared to 37.2% at the beginning of 2019.”
Cost reduction is in favour, Capex and hiring is not
Cost reduction came out as the highest priority among CFOs, with 58% of respondents saying this was at the top of their list. Increasing cash flow (48%) was the second highest priority, while introducing new products or services, or expanding into new markets, came in as the third-highest priority, with 30%, the same as Q2.
In contrast, 70% of CFOs responding to the survey expect to reduce hiring over the next 12 months, with only 3% saying they expect to raise it. Appetite for capital expenditure has also fallen further from Q2.
There has been a small shift in where CFOs see Brexit influencing their business plans. Of those asked, 28% say that Brexit will restrict M&A activity, rising from 25% in Q2. However, 45% said that capital expenditure will slow (down from 47% in Q2).
Richard Houston, senior partner and Chief Executive of Deloitte North and South Europe, said: “Corporate risk appetite is being suppressed both by Brexit and macro-economic uncertainty, but there are some positives: unemployment has fallen and earnings are rising at the fastest rate in more than a decade.
“While it’s unclear whether these trends will be sustainable, I do take confidence from the fact that businesses in the UK have long shown themselves to be adaptable and resilient to change. We now need clarity on what that change looks like.”
Overall, 76% of CFOs believe that the long term business environment in the UK will be worse as a result of leaving the EU, a decrease from 83% in Q2.