CFO concerns over Brexit outcome deepens

Brexit uncertainties and concerns about developments in geopolitics mean CFOs at the UK’s largest companies are battening down the hatches

According to research from Deloitte, confidence levels among CFOs are at their lowest since the financial crisis.

The firm’s quarterly survey of 79 CFOs, over half from FTSE 350 companies, found that 83% expect the long-term business environment to deteriorate as a result of the UK leaving the EU. This is the highest reading since the referendum in June 2016.

Meanwhile, the percentage of CFOs who think that now is a good time to take greater risk onto their balance sheets has fallen to 4%, the lowest since the failure of Lehman Brothers in 2008.

Ian Stewart, chief economist at Deloitte, said: ‘Brexit has not happened, but it is acting as a drag on corporate sentiment and spending. Almost two thirds (62%) of CFOs expect to reduce hiring in the next three years as a result of Brexit and almost half (47%) expect to reduce capital spending, suggesting a cautious approach from businesses.

‘Ironically, risk appetite in the corporate sector has slumped just as it has taken off in the equity market. Measures of financial market volatility have declined, even though a majority of CFOs rate uncertainty as being at high or very high levels.’

Brexit remains the largest risk business face, rated at 65 (on a scale of 0 to 100) compared to 62 in the previous quarter’s survey. However, rising geopolitical risks are now the second largest concern for business, increasing to 60 from 55 last quarter. The risk of greater protectionism in the US is also rated at 60, up from 49 in Q1.

Concerns about weakness in emerging markets and the eurozone were at the bottom of the CFO risk list.

Separately, the CBI warns that Brexit uncertainty continues to bite hard on business investment, which the employers’ organisations says remains very weak for this stage of the economic cycle.

The CBI expects business investment to fall for much of the rest of this year (-1.3% in 2019, 0.9% in 2020).

However, if a Brexit deal is ratified, firms are expected to gradually resume capital spending projects, in particular on new technology such as artificial intelligence and automation. Nonetheless, growth in business investment is expected to remain modest, weighed down by uncertainty around the end state of the UK-EU relationship.

Rain Newton-Smith, CBI chief economist, said: ‘It’s certainly positive that household spending has more punch, thanks to an improvement in living standards.

‘But set against this, Brexit uncertainty is crippling business investment, which we expect to fall at the fastest pace since the financial crisis this year. It’s crystal clear that without a Brexit deal by October, we’re at risk of falling further behind our G7 competitors.

‘Our forecast represents what could be in the event of an orderly Brexit – a decent foundation upon which we can take the reins and re-focus on vital domestic priorities that have been neglected.

‘For example, pressing ahead with essential infrastructure projects such as HS2 and Heathrow expansion will enable the UK to better connect with and enter new global markets. These priorities will shift down the list in a no deal scenario, against the backdrop of damage to the UK economy, jobs and livelihoods.’

Deloitte’s CFO survey is here:  www.deloitte.co.uk/cfosurvey.

Pat Sweet

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