CFO confidence recovers, although Brexit remains major concern

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.

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.

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.”

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.

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.

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.