CFO confidence recovers, although Brexit remains major concern

22 November 2017 Consultancy.uk

The state of CFOs’ confidence in the UK’s markets has been in a constant state of flux since the shock Brexit vote of 2016. According to the latest available research, companies have regained some of the optimism that was lost following the snap election, as CFOs’ appetite for spending has increased slightly from previous levels.

Brexit continues to concern many British Chief Financial Officers (CFOs), although less so than in the previous quarter. In July, it was found that confidence among UK CFOs had tumbled, largely as a result of the latest election result. Companies were increasingly worried about the effect that Brexit and the resultant weak demand will have on their operations, while many are opting to reduce investment and begin cost cutting. 72% of CFOs said that they would be worse off in the long-run after Brexit, up from 60% in the previous quarter.

However, while negotiations between the beleaguered government of Theresa May and Brussels continue to stutter, the latest survey of the sector by Deloitte, as part of its quarterly ‘CFO Survey’, has found that CFOs, and their decisions, have recovered from recent dips in confidence.Long-term impact of Brexit

Despite falls in investment sentiment among the previously bullish real estate sector on the back of the growing prospect of a “No Deal” scenario, the survey found CFOs generally think that the overall environment for business in the long-term will be worse off if the UK leaves the EU (excluding those who say it will have little effect), stood at 60%, while 14% said that they believed the UK would be better off for the divorce. The numbers are an improvement on the previous quarter, in which a relatively uninspiring hung parliament reduced the government’s mandate and bargaining power, while deep uncertainty about the negotiation strategy held sway – resulting in 72% of respondents saying that the long-term looked worse and 8% better, the lowest result since the referendum result.Business optimism

Meanwhile, net business optimism, which fell to less than -20% net in the previous survey, has rebounded to a net 0%. Businesses are therefore slightly more optimistic on balance about their financial position than three months previously.

The number of businesses that report the uncertainties facing their business as high or very high has fallen slightly, from over 40% to around 30%. While uncertainty spiked following the snap election result, the long-term trend among businesses implies a belief that the government can somehow provide certainty – despite its precarious confidence and supply coalition – as the consequences of Brexit become increasingly clear – or the effect of the worst case is better understood.

Remarking on the change, Ian Stewart, Chief Economist at Deloitte, said, “Optimism among CFOs has rebounded after a slump following the snap general election and perceptions of uncertainty are almost half the level seen immediately after the referendum. It is testament to the changeable business environment that, this far into the UK recovery, CFOs remain on a cautious footing with inflation squeezing corporate margins and measures like cost control still topping their list of priorities.”

Effect of Brexit on own spending

When it comes to key decision making, the latest result shows a mixed bag result – although largely positive compared to the previous quarter. In terms of M&A, the number of businesses that say that investment will decrease has fallen slight from 17% in Q2 2017 to 30% in the most recent quarter. Capital expenditure, meanwhile, saw a decrease from 33% to 30% who expect a decrease, although still well above the 26% recorded prior to the snap election.

Those who are considering a decrease in hiring activity have decreased slightly, falling from 38% of the total to 36%. Although, again, the snap election appears to have dented hiring confidence slightly, with 30% recorded in Q1 2017. Discretionary spending appears to have been the least affected by the election – hovering at around 50% since Q4 2016.

Risk posed to business by factor

In terms of key business risks, Brexit – not considering the margin of error – has dropped two points to 58*. Weak demand in the UK has seen its risk level decrease slightly, from 57 points to 53. The tightening of monetary policy in the US and UK, with The Bank of England indicating that rate rises are increasingly likely as inflation ticks up, remains at around 50 points on the risk scale.

For the most part, the respondents saw risk decrease across all categories measured – with the one exception, ‘weakness and/or volatility in emerging markets and rising geopolitical risks in the Middle East’, which rose from 32 points to 33. A pickup in growth in the EU is partly complicit in the decrease of risk profile across various key businesses market interfaces.

Corporate priories in the next 12 months

In terms of corporate priorities, most respondents remain focused on reducing costs and introducing new products/services or expanding into new markets, at 41% and 39% respectively. However, both categories have seen a decrease in attention on the previous period, down from 46% and 42% of respondents respectively.

Expansion by acquisition appetite has decreased slightly, from 25% of respondents to 20%, while increasing dividends or share buybacks have increased somewhat, up from 8% in the previous quarter to 15% in the most recent quarter.

* On a 100 point scale, where 100 is existential risk and 0 is no risk at all.

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UK manufacturing sees orders slow amid Brexit anxiety

11 April 2019 Consultancy.uk

Manufacturing in the UK saw negative growth for the end of 2018, reflecting a wider slowdown in the UK economy to 0.2% for the quarter, followed by three months at the start of 2019 which saw continued softening in orders. With uncertainty still hitting the sector ahead of Brexit’s deferred deadline, the industry faces a difficult 2019.

Despite a perpetually changing economic landscape, manufacturing remains a keystone industry in the UK. Optimism in the industry has been riding high in recent years, reflecting the perceived potential of automotive technologies, but last year saw a slight dip in business performance, ahead of what seems set to be a turbulent period for British manufacturing. Ordinarily, the sector might have expected to recover its footing relatively quickly, but with the looming spectre of Brexit making the economy’s future completely uncertain, this has not been the case.

The uncertainties of Brexit have continued to create headaches for companies on both sides of the channel. As contingency planning continues, new analysis from BDO and the Make UK explores how manufacturing – a segment likely to be hard hit by Brexit – has fared in the final quarter of 2018.

Output balance stable

Manufacturing remains a key industry in the UK, generating around 10% of total economic output and supporting around 2.7 million jobs. Yet while the industry has seen a number of years of strong optimism as well as demand, Brexit is set to throw a spanner in the works, with a range of manufacturing companies leaving the UK, or considering it. Indeed, UK manufacturing’s output currently sits at a 15-month low as the industry anticipates a cliff edge Brexit.

In terms of growth for various parts of the UK economy, a slowdown was noted in the final quarter of 2018 compared to Q4 2017. Manufacturing, in particular, saw growth declines coming in at almost -1%, with a similar trend in production. Construction saw a sharp contraction, falling 2 percentage points to below 0% growth in December 2018. Only services managed to have positive % growth in the final quarter. The final quarter as a whole saw growth of 0.2% in the UK economy – the lowest level in six years.

Output across most sectors in the industry remains positive, with the percentage balance of change in output at 22%. The result is the tension quarter of positive percentage balance of change, with stagnation on the final quarter of 2018. The firm is projecting a slight softening of output going into Q2 2019. The firm notes that there is some stockpiling taking place, with orders and outputs unaligned going into 2019.

Order balance remains positive but dips further

While there is a broadly positive picture for output, the firm does note considerable differences between subsectors. Basic metals for instance, saw a net 24% fall to -18% over the past three months. Metal production is also seeing relatively poor performance as demand from the automotive industry enters a period of acute uncertainty. However, most industries are to see improved output on balance, with rubber & plastic increasing from a net 11% to net 56%.

Export trade

Having been buoyed by the lowered value of the pound, UK export orders are up slightly on the previous quarter, but remain well below the most recent peak in Q3 2018. Domestic orders were relatively strong, with a year between the most recent peaks for the segment. However, Q2 2019 looks to see domestic orders fall sharply, to half Q1’s result, while export orders too are set to see declines.

The decline reflects a decrease in basic metals, possibly a reflection of changes affecting the auto industry. Meanwhile, export orders are down due to Brexit cross-border uncertainty – the effect of the sterling devaluation unable to continue to buoy the market. Basic metals and metal products are both in negative territory for the coming three months.

Investment and employment intentions

UK employment figures reached new milestones, with total unemployment down to 3.9% while participation rates hit record highs. Employment planning continues to be in net positive territory, with a net positive balance of 22% in Q1 2019. The coming months are projected to see a slight dip, again, largely resultant from uncertainties around Brexit. Basic metals is the sector most likely to see a negative trend, reflecting the expected decline in orders.

Investment intentions meanwhile continue to be in positive territory. However, again, the now acute uncertainty about Brexit – the UK government has boxed itself into a corner – mean that confidence around investment could wane rapidly.

Commenting on the wider economy, Peter Hemington, a Partner at BDO, said, “Manufacturing firms have been ramping up their preparations for a disorderly Brexit, in large part through the stockpiling of imported goods. This has had the effect of inflating activity levels… It’s too late to do anything about this now.  But a disorderly Brexit would be far worse than the current relatively mild slowdown, possibly disastrously so… We are concerned it looks more likely than ever that we will exit the EU without a deal.”