Two thirds of CFOs are concerned that the UK will go into recession as pressure on business grows with labour shortages, rising inflation and supply chain issues
The latest Deloitte quarterly survey of chief financial officers and group finance directors of major companies in the UK took place in June and found that 63% of CFOs expect the UK to go into recession, although they still expect to continue ongoing investment programmes.
They were concerned that the UK economy is stalling with higher inflation than previously forecast. Increases in the Bank of England’s base rate since the start of the year was having a profound effect, with credit being more costly than at any time in the last decade.
With the likelihood of credit conditions tightening, interest rates are expected to increase from 1.25% to 2.5% by July 2023.
Higher interest rates and inflation were marked on the CFO risk list; over two-thirds (68%) believe that inflation would continue – with 86% expecting it to exceed 2.5% in the next two years.
Current inflation rates are at their highest levels since the 1980s.
The survey results reflect growing concern about the risks of a global recession.
Pierre-Olivier Gourinchas, economic counsellor at the International Monetary Fund (IMF), warned: ‘The world may soon be teetering on the edge of a global recession, only two years after the last one.’
The IMF stated that the likelihood of a global recession is rising – a projection that targets a clear risk in advanced economies. This year, inflation is anticipated to reach 6.6% in advanced economies and 9.5% in emerging markets and developing economies.
When asked how CFOs were responding to the rising rates, the majority said they were reducing discretionary spending, including expenditure on training and travel, while they were trying to differentiate their products and services from their competitors.
Chief economist at Deloitte, Ian Stewart, said: ‘The chief financial officers of the UK’s largest companies are braced for a recession. Finance leaders have edged towards more defensive balance sheet strategies, particularly cost control and building up cash.’
Geopolitical risks remained at the top of the risk list, with the implications of the war in Ukraine seen as a continued weight on economic growth. If Russian gas flows to Europe are halted, inflation will continue to rise, and global growth will decelerate further to about 2.6% this year and 2% in 2023. Other factors include supply chain disruption and further rate rises. Over a third (40%) reported that their businesses struggled with labour shortages and recruitment.
The majority of CFOs (61%) said that the economic uncertainty facing their business remained high or very high, weakening overall focus on expansionary strategies like introducing new products and expanding into new markets.
However, some CFOs were optimistic. Medium-term prospects for investment, with an increase in capital spending remained a strong priority for 19% of CFOs. Investments in digital technology, skills, and assets are still a focus for the next three years.
Senior partner and CEO of Deloitte, Richard Houston, said: ‘It’s interesting that CFOs remain optimistic on investment - despite rising inflation and recessionary risks. They remain convinced that growth and resilience will only come through increased spending on digital technology – and the skills to use it.’
Three quarters (74%) of CFOs expect investment in IT and software to increase over the next three years, relative to pre-pandemic rates.
In total, 77 CFOs participated in the Deloitte survey, including CFOs of 15 FTSE 100 and 32 FTSE 250 companies.