CFOs of the UK’s largest firms are optimistic about prospects
for their own businesses as they enter 2024, according to Deloitte’s latest CFO
survey. Sentiment among finance leaders has risen for the second consecutive
quarter – to well above average levels2 –
with a net 11%3 of CFOs more optimistic about the financial
prospects of their business than they were three months ago.
Ian Stewart, chief economist, said: “These findings may seem at
odds with recent economic news, particularly a contraction in third quarter GDP
and forecasts of sluggish UK growth in 2024. But, while the pace of growth
softened in 2023, activity proved more resilient than expected, with
unemployment at low levels, corporate profitability holding up and an absence
of stress in financial markets. Crucially, inflation has fallen sharply since
the summer, bolstering expectations of earlier interest rate reductions.”
Conducted between 28 November and 12
December 2023, a total of 72 CFOs participated in this quarter’s CFO Survey,
including the CFOs of 12 FTSE 100 and 26 FTSE 250 companies. The combined
market value of the 35 UK-listed companies surveyed is £328bn, or approximately
13% of the UK quoted equity market.
Inflation worries and interest rate expectations ease
The inflation and rate worries that
dominated the CFO Survey for much of the last two years have eased since the
last quarter. The risk of higher inflation has dropped down CFOs’ list of
concerns to a weighted average rating4 of 53, from 58 in the
last survey. This shows that the threat of persistently high inflation and the
prospect of further interest rate rises has weakened, consistent with price
pressures easing faster than expected in recent months.
Finance leaders expect price
and wage pressures to soften over the next two years. They see the Bank of
England’s base rate falling from its current level of 5.25% to 4.75% in a
year’s time.
Geopolitical factors again rated biggest risk
CFOs again see geopolitical factors as the
greatest external risk to their own businesses over the next 12 months, with a
weighted average rating of 63, up from 59 in the previous survey. Reflecting on
the risk that this poses to their businesses, a net 44% of CFOs expect greater
diversification and near-shoring of supply chains in the longer term.
There is also increased anxiety about
productivity and competitiveness in the UK economy, which is now second on the
risk list with a rating of 56, up from 53 last quarter.
Higher energy prices, or disruption to supply, is seen as the
third biggest risk (at 54), but the rating remains well below the levels seen
in the second half of last year. Notably, there is a marked deterioration in
sentiment around the euro area, with an increased risk rating of 42, up from 34
in the last survey.
Anticipated higher labour
costs, but more investment in technology
There is a strong consensus
among finance leaders that the UK has entered a prolonged period of high labour
costs. A net 92% of CFOs expect labour costs to remain elevated in the long
term, relative to 2023. But CFOs are decidedly bullish on investment in new
technology, with a net 63% of CFOs expecting investment in new technology to
increase in the long term.
Finance chiefs also anticipate a greater role for the state in the
economy, with significant proportions expecting an increase in levels of
taxation (net 39%) and regulation (net 42%).
By contrast, CFOs think that levels of flexible or home working
have peaked, with a net 57% expecting home working to decline in the long term.
Defensive strategies dominate
CFOs’ balance sheet strategies remain
largely defensive. Cost reduction is their top priority, with 51% of CFOs rated
reducing costs as a strong priority for their business over the next 12 months.
Increasing cashflow follows, with 47% of CFOs rating it as a strong priority. A
sharp fall in the priority assigned to introducing new products and services or
entering new markets (only 15% of CFOs say it’s a strong priority now) has
driven expansionary strategies further out of favour.
Ian Stewart, added: “Whilst finance chiefs
are starting 2024 in positive spirits, this is tempered by high levels of
uncertainty, concerns around geopolitics, and low UK productivity. CFOs foresee
growth ahead but – based on their defensive balance sheet stance – not
imminently.
“For now, corporates are
focused on cutting costs and building up cash rather than hiring, capital
spending or M&A. But unlike in previous periods of uncertainty the
financial system is operating and larger corporates can access debt, albeit at
higher rates. Scale matters as the large corporates represented in the survey
panel are generally better able to manage periods of stress and are less
vulnerable to tightening credit conditions than smaller and medium sized
companies.”