UK: The Deloitte CFO Survey - Q3 2014

Last Updated: 26 November 2014
Article by Ian Stewart, Debapratim De and Alex Cole

Most Read Contributor in UK, August 2017

Risk appetite at new high

Risk appetite among the UK's largest corporates has reached a seven‑year high in the third quarter as Chief Financial Officers shrugged off the effects of rising uncertainty and a sluggish euro area economy. Risk appetite is being supported by a resurgent US economy, good UK growth and plentiful liquidity. Optimism among big corporates about prospects for the UK and US economies has improved in the last six months even as sentiment about emerging markets and the euro area has declined. Expectations for corporate revenues and margins remain close to the four‑year high reached in the second quarter.

CFOs are also increasingly positive about public policy. We asked CFOs to rate the appropriateness of official policy – from government, regulators and the Bank of England – repeating a question we asked in 2012 at the trough of the UK's double‑dip slowdown. On average, 77% of CFOs rate policy as being appropriate in the 11 areas they judged, up from 67% in 2012. Confidence has risen across all areas with the largest improvements in the approval ratings on public spending, tax policy, immigration policy and financial regulation.

The Bank of England gets the strongest vote of confidence, with 97% of CFOs rating monetary policy, including the availability of credit and inflation, as appropriate.

Large corporates face few obstacles to raising finance, with CFOs reporting that credit is cheaper and more available than at any time in the last seven years. In a reversal of the situation during the credit crunch, CFOs say that financing conditions are a key factor in enabling companies to raise investment spending.

Yet it is not all plain sailing for the corporate sector. CFOs' perceptions of economic and financial uncertainty rose in the third quarter for the first time in two years. While events in the euro area and emerging markets will have played a role, Scotland's independence referendum seems to have been the dominant factor. Perceptions of financial and economic uncertainty among CFOs completing the survey before the result was known were twice as high as those among CFOs who responded after the result.

The Scottish referendum illustrates how political developments can create uncertainty for business. This quarter's survey shows that political risk continues to eclipse worries about the economy as the key concern for CFOs. Next May's general election and a possible referendum on EU membership rate as greater risks to CFOs than interest rate rises or weakness in the euro area.

After several years of economic and financial turbulence CFOs now see political uncertainty as being a central risk for their businesses.

Rise in uncertainty

CFO perceptions of economic uncertainty rose for the first time in two years in the third quarter. Scotland's referendum on independence seems to have had considerable influence on CFO thinking. Among a quarter of the panellists who responded after the result of the referendum was known, 30% rated the level of uncertainty facing their businesses as above normal or higher. The figure before the result was 63%.

This quarter's survey shows a sharp decline in optimism about prospects for the euro area. Sentiment about emerging markets has continued to deteriorate.

By contrast, CFOs remain positive on growth in the UK and the US.

CFOs rate political issues – the general election in May and a possible referendum on the UK's membership of the EU – as the two greatest risks facing their businesses. These rank above economic challenges such as weak growth in Europe and emerging markets or the bursting of asset price bubbles.

Expansion is top priority

Despite softening this year, our optimism index remains above its long‑term average and absolute levels of optimism continue to improve.

Introducing new products/ services or expanding into new markets is the top priority for CFOs.

Compared to the second quarter, CFOs are placing greater emphasis on increasing capital expenditure.

While growth has returned to the UK, CFOs continue to focus on increasing cash flow and reducing costs.

Corporates optimistic about profits

Fixed capital investment has risen by 9.6% in the last year and private sector employment, after excluding the effects of reclassifications of some major employers, has risen by 3.2%.

Corporates remain optimistic about profitability.

CFO expectations for growth in revenues and operating margins remain close to four‑year highs.

On balance, CFOs rate UK corporate balance sheets as underleveraged.

Public policy appropriate

A period of sharply declining lending to corporates seems to be coming to an end.

Official data show that the flow of credit to private non‑financial corporations has turned positive for the first time in five years.

We asked CFOs to rate the appropriateness of official policy across 11 areas, repeating a question we asked in 2012 at the trough of the UK's double‑dip slowdown. On average, 77% of CFOs rate policy as being appropriate across the areas, up from 67% in 2012. Confidence has risen across all areas with the largest improvements in the approval ratings on public spending, tax policy, immigration policy and financial regulation. The Bank of England gets the strongest vote of confidence, with 97% of CFOs rating monetary policy, including the availability of credit and inflation, as appropriate.

CFOs' inflation expectations have fallen since the first quarter. An overwhelming majority, 80%, expect CPI inflation to hover around the Bank of England's 2.0% target in two years' time. The proportion who expect inflation to overshoot its target has almost halved, from 10% to 11%.

To read this Survey in full, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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