Major UK-based corporates have stepped up preparations for the possibility of a eurozone breakup with 28 per cent of chief financial officers saying their own plans for coping with a breakup of the single currency are “all made” or “at an advanced stage”.
Economic uncertainty is the big constraint on corporate expansion
The figure is up from 18 per cent in March as confidence among chief financial officers in the UK continues to be battered, according to Deloitte’s UK CFO Survey for the second quarter of the year.
Macroeconomic and financial uncertainty continues to affect CFOs’ sentiment and business strategies as concerns about the recession and a euro breakup knocks business confidence.
CFOs’ sentiment has zigzagged over the last year, plummeting on the gathering euro crisis in the second half of 2011, rising in March as the European Central Bank injected liquidity into the banks and, in June, registering its sharpest decline since the survey started in 2007.
Along with the post-Lehman decline, CFO sentiment has seen three major dips in the space of five years.
UK CFOs entered the year with a view that a breakup of the euro posed the biggest threat to their businesses. CFOs now see a 36 per cent probability of one or more countries leaving the single currency by the end of the year, up from 26 per cent in March.
Business confidence has also been hit by the UK’s return to recession. On average, CFOs see roughly a one-in-two chance of the recession continuing to the end of this year or for the economy to hit a ‘triple-dip’ recession within the next two years.
The UK CFO Survey underscores the connection between the macroeconomic environment and corporate behaviour. In an indication of the challenges of long-term planning, 95 per cent of CFOs rate the financial and economic uncertainties facing their business as being above normal.
Uncertainty has had a corrosive effect on risk appetite and 80 per cent of CFOs say this is not a good time to take risk onto their balance sheets.
With the UK economy back in recession, corporates are reacting by cutting costs and bolstering cash flow, as in late 2008. Defensive balance sheet strategies are to the fore. Compared with a year ago, CFOs are more focussed on reducing leverage and disposing of assets, and less likely to be making acquisitions or undertaking capital expenditure. On balance, CFOs see hiring, capital spending and discretionary spending declining over the next year.
One of the special questions from this quarter’s survey sheds light on the factors influencing capital spending.
Only four per cent of CFOs cited the cost or availability of finance as having influenced recent changes in investment plans; 82 per cent of them said investment decisions had been influenced by expected demand at home and abroad and uncertainty about the economic environment. Within larger companies, demand seems to be a greater constraint on investment than shortages of capital. This fits with the survey findings on credit conditions.
UK CFOs currently see credit as being cheaper than at any time in the last five years. Credit availability has deteriorated, although overall credit conditions for large corporates do not seem to be especially stringent.
The first quarter’s UK CFO Survey highlighted a paradox: despite a strong rise in business confidence, CFOs were pursuing defensive balance sheet strategies. Events in the last three months seem to have vindicated such caution.
Views on the degree of risk facing the corporate sector, like the equity markets, are changeable. But the latest survey shows that CFOs see plenty of risks ahead. Economic uncertainty is the big constraint on corporate expansion.
The challenge for UK-based corporates is to find sources of growth in a volatile macro environment.