CFOs on the defence thanks to Brexit and trade war fears

13 August 2018 6 min. read
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CFOs face a gruelling 12 months, as many attempt to figure out the conundrum of an antidote to Brexit uncertainty before the UK formally secedes from the EU. With labour shortages potentially prompting wage inflation, while CFOs look to scale back on spending, many are faced with the need to re-evaluate their top priorities.

As Chief Financial Officers at companies across the UK face up to the seemingly unresolvable uncertainties surrounding Brexit, alongside the mounting threat of international trade wars more generally, many have grown more risk-averse, and are predictably placing greater emphasis on defensive strategies for the coming years. According to a new survey conducted by Deloitte, CFOs in Britain are broadly in line with their European counterparts, however executives polled by Deloitte within the Eurozone (the countries which use the euro as currency) perceived a lower degree of uncertainty over the last six to eight months when contrasting with perceptions of rising uncertainty among CFOs outside the euro area, which includes the UK.

As a result, the report reveals dimming CFO optimism across the UK, with falling expectations for company performance, and heightened risk aversion. The survey also found that as many UK corporates are now placing top emphasis on running defensive balance sheets as they did at the height of the euro crisis of 2012 and immediately after the EU referendum – suggesting a broad inclination toward believing financial turbulence is on the cards. Further to this, Deloitte found that three major issues appear to be top of mind as CFOs plan and set strategies for the next 12 months.

CFO Priorities: Defensive strategies

First, Brexit looks to have significantly impacted on business sentiment, spending, and hiring. Responding to recent developments which have further cast doubt on whether the UK Government can avoid a No Deal scenario, CFOs have once again named Brexit as their top risk. With the perceived risk having receded as recently as the end of 2017, a portion of three-quarters of CFOs now expect that Brexit will lead to a deterioration in the long-term business environment, the highest proportion since this question was first posed in the aftermath of the referendum in late June 2016.

As a result, most CFOs expect to reduce their own spending in the coming 12 months, tightening their belts in anticipation of a troubled market. 40% of surveyed finance chiefs said they intend to scale back their hiring plans, rising rapidly from 30% at the start of 2018, and one-third of surveyed CFOs plan to reduce capital expenditure over the next three years, up from 25% earlier in the year.

Long term impact of Brexit

Following on from this, many CFOs in Europe have also become considerably more agitated about the risks to their business posed by the prospect of greater protectionism in the US leading to trade wars, with the European Union in a particularly vulnerable state, especially with heightened right-wing opposition across a number of key states including Sweden pushing for a membership referendum of their own. This mirrors another poll by Deloitte of North American CFOs, who continued to express concerns about the future – especially around trade policy and geopolitics. Moreover, that group’s perceptions of Europe’s current state and trajectory receded toward the end of 2018’s first half, after hitting survey highs over the prior two quarters.

47% of CFOs in the survey indicated that current conditions in Europe are good, and 36% expect better conditions in a year – both metrics are down from 55% and 51%, respectively, compared to the previous quarter. Meanwhile, among UK CFOs, the prospect of further rate rises and tightening monetary conditions in the UK and US was listed as the third-greatest risk, behind Brexit and weak domestic demand, which has seen a spate of retail closures throughout 2018, which shows no signs of slowing any time soon.

Skills shortages

While the top priority of UK CFOs is following with a broad preference for cost reduction in second place, however, growing wage pressures are building in response to rising recruitment difficulties and skills shortages – with prospective employees capable of demanding higher pay thanks to an ageing population, and a sudden likelihood that sourcing talent from the EU will become difficult after 2019. The problem faced by CFOs in this regard is further exacerbated by unemployment resting at a 43-year low, further depleting the resource pool from which executives can recruit from.

The skills shortage appears especially urgent for companies’ digital transformation efforts, as new staff are required with the relevant skills to boost the application of new technologies in a business’ operations. 44% of UK CFOs surveyed reported that their businesses have experienced a rise in recruitment difficulties in the last three months, rising from 31% in the opening three months of 2018. A recent Deloitte survey of UK digital leaders meanwhile found that only 16% believe their talent pool has enough knowledge and expertise to deliver their digital strategy, while over three-quarters are experiencing challenges in recruiting employees with the relevant digital skills.

Effect of Brexit on own spending and hiring decisions

Commenting on how CFOs can respond to these pressures, Deloitte’s Sandy Cockrell lll said, “It is important to note that even as CFOs emphasise cost-cutting, increasing cash flow, and other defensive balance sheet moves, offensive strategies could be helpful in navigating through the uncertainty. For example, by using scenario planning along with finance’s analytic and forecasting capabilities, CFOs can identify and understand how to mitigate economic and other external risks.”

Richard Muschamp of Deloitte North West Europe added, “CFOs should consider asking what could happen to the business’s capital allocation plan – and the strategies and investments the plan is designed to fund – if the credit markets should slump and a large bond issuance has to be postponed. When it comes to addressing Brexit uncertainty, scenario planning can help CFOs understand what it would mean for their operations, businesses, systems, and regulatory compliance to conduct trade with the EU outside the single market, under World Trade Organisation rules.”