Brexit worries weigh on CFOs

As the Easter recess brings a temporary halt to parliamentary discussion about the UK’s plans for leaving the EU, long term levels of concern about Brexit among CFOs has hit an all-time high

The quarterly Deloitte CFO survey found 81% of respondents expect the long-term business environment to be worse as a result of the UK leaving the EU, the highest level since the EU referendum in 2016.

Pessimism about the short-term effects of Brexit remains elevated, with 49% of chief financial officers (CFOs) expecting to reduce their own capital expenditure and 22% cutting mergers and acquisitions as a consequence of Brexit.

Around half (53%) of CFOs also expect to reduce hiring due to Brexit – the highest level in more than two years.

However there has been little change in confidence and risk appetite among CFOs. Of those surveyed, 13% say they are more optimistic about the prospects for their company than they were three months ago, compared to 10% in Q4 2018. In addition, 9% of CFOs now agree it is a good time to be taking greater risk onto their balance sheets, up from 7% last quarter.

Ian Stewart, chief economist at Deloitte, said: ‘Put mildly, it has been a turbulent few weeks and there’s been little change in confidence and risk appetite among CFOs, as many priced in a tougher environment at the start of the year. They went into March braced for tough times and the latest round of Brexit uncertainties have not materially changed that picture. When expectations are already low, it’s harder to be disappointed.’

However, growing economic headwinds mean that CFOs have become markedly more negative on revenue growth over the last year. Half of them (50%) now expect a decline in revenues in the next 12 months, up from 18% in Q1 2018.

Cost pressures also appear to have increased, with a record 79% of CFOs expecting operating costs to rise in the next year. Wages are likely to have impacted this, with official data showing average earnings are growing at close to their fastest pace in 11 years.

In addition, CFOs report that credit pricing and availability have deteriorated in the last two years. Almost a fifth of CFOs (18%) now report that credit is hard to get, up from 4% two years ago. Furthermore, 9% report credit as costly, up from 3% over the same period.

CFOs are placing greater emphasis on cash accumulation than at any time since 2010, with 52% stating that increasing cash flow will be a strong priority over the next 12 months.

David Sproul, senior partner and chief executive of Deloitte North West Europe, said: ‘Large businesses are clearly looking to protect themselves against risk by raising cash levels and bullet-proofing balance sheets. They appear to be battening down hatches for tougher times ahead.

‘While last week’s announcement on a further deferral of the UK’s departure from the EU removes an immediate unknown, the continuation of uncertainty is causing much frustration for UK businesses. As well as stashing cash, many continue to delay investment. Businesses remain in a period of further limbo.’

 The Q1 2019 CFO survey gauges sentiment amongst the UK’s largest businesses in the wake of Parliament’s rejections of Theresa May’s Brexit deal. Eighty nine CFOs participated, including CFOs of 48 FTSE 100 and FTSE 250 companies, from listed companies with a total market value of £377bn.

By Pat Sweet

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