CFOs more upbeat about business environment and Brexit impact

CFOs across the UK have become slightly more upbeat about the future prospects of the UK business environment, with 60% of respondents indicating it will be worse as the result of Brexit, compared to 68% surveyed during Q2 2016. Most respondents are more positive about M&A activity, capital expenditure, hiring and discretionary spending.

Theresa May recently triggered Article 50, formally beginning the UK’s departure negotiations with the EU. The decision to leave has since the referendum created a sense of uncertainty across the business environment, with many companies entering into a ‘wait-and-see’ mode as the consequences of the decision on their business outlook was digested.

In Deloitte's latest 'CFO Survey’, the outlook of CFOs from some of the country’s largest companies is plumbed in relation to current and future financial prospects for their company, as well as the effects from Brexit still to come. 130 CFOs from FTSE 350 and other large companies responded to the survey, including 91 of listed companies – with combined total value of £376 billion.

Business confidence about the financial prospects of companies has, since the referendum result to leave, ticked up significantly. The net of companies that are more optimistic about the financial prospect of their company than three months ago has increased from a net -70% midway through last year to a net almost 20%. The net turnaround in business confidence is relatively stark, following the deepest dip in the past decade.

The respondents were also asked about the effect of Brexit on four key financial decisions within the business environment, M&A, capital expenditure, hiring and discretionary spending.

Brexit is increasingly unlikely to affect M&A decision making, at 11% of respondents indicating the decision will result in a decreased spending over the coming three years, down from 40% in Q2 2016. Respondents are also increasingly less pessimistic about capital expenditure, with 26% of respondents indicating the decision will result in a decrease over the coming three years, down from 58% in Q2 2016.

CFOs are also considerably less pessimistic about hiring and discretionary spending, with 30% and 50% respectively indicating that a decrease is on the cards in the coming three years, down from 66% and 74% respectively in Q2 2016.

Respondents also tend to be more optimistic about the future in light of the Brexit decision. The % of CFOs who think the overall environment for business in the long-term will be better/worse if the UK leaves the EU has ticked down steadily since Q2 2016, when 68% thought the UK would be worse off and 13% better off. Those that believed the UK business environment would be worse off in the long-term fell to 65% in Q3 2016, 66% in Q4 2016 and 60% in the latest survey.

David Sproul, Senior Partner and chief executive at Deloitte, remarks, “The UK’s exit from the EU is a long and uncertain process and business sentiment is changeable. But it is clear from this survey that the UK corporate sector enters the negotiation phase of Brexit in far better spirits than seemed likely in the months after last year’s referendum vote.”

The survey also explored wider risks to business posed by a range of factors across the wider economy, comparing the latest quarter to the last quarter in 2016.

Businesses surveyed still point to the effects of Brexit as the biggest risk posed to business, at a weighted average rating of 55 (with 0 no risk and 100 highest possible risk), the risk is down slightly on the previous quarter when it scored 62. Wear demand in the UK comes second, on 51, it too is down slightly on the previous quarter when it stood at 55.

Tightening monetary policy in the UK and US follows, cited as 50, down from a 53, while policy uncertainty in the US and move towards greater protectionism by the US administration comes fourth, at 47 – CFOs are increasingly concerned about the risk, which is up from 43 in Q4 2016.

The risk factor with the biggest decrease in risk is deflation and economic weakness in the euro area and the possibility of a renewed euro crisis, which fell from 52 to 40. Weakness and or volatility in emerging markets and rising geopolitical risks in the Middle East/Ukraine comes last, with a risk score of 35.

The CFOs were also asked about their priorities for the coming 12 months. Cost reduction remains the biggest corporate priority in 2017, as cited by 42% of respondents. This is followed by expanding into new markets, which is up slightly from the previous quarters’ 36% to 41%. Increasing cash flow falls slightly on the previous quarter, to 34% from 41%.

Respondents said that they are somewhat more likely to increase capital expenditure in the latest quarter, at 22% of respondents, while expanding by acquisition is too up slightly to 19%. Reducing leverage and disposing of assists have both decreased slightly, to 9% and 7% respectively.

Sproul adds, “Businesses will hope that the UK can secure the best possible deal on trade and market access, but must continue to plan for an exit in 2019, several years of trade negotiations, and a transitional phase to bridge the two. For many businesses, including our own, access to skills is one of the most pressing issues they face. I believe mobility of people should be as high a priority as trade in the future negotiations. If we are to maintain the UK’s status as an open and thriving economy we must retain the diversity of skills that has helped our nation flourish.”