Optimism in the UK continues to strengthen but largely cautiously, the latest survey by Deloitte UK among chief financial officers and group financial directors of major UK companies for the second quarter of 2009 has found.

While there is clear, though not universal, conviction among Chief Financial Officers (CFOs) that the UK economy will recover during the next year, most expect the recovery to be marked by sluggish growth, a strong focus on cost control and tight lending conditions, Deloitte UK said.

The Deloitte CFO Survey is the only study of its nature of major corporate users of capital which gauges attitudes to valuations, risk and financing: 117 CFOs participated in the June survey, including CFOs of 29 FTSE 100 and 39 FTSE 250 companies. The rest were CFOs of other FTSE companies, large private companies and UK subsidiaries of major companies listed overseas. The combined market value of the 83 UK listed companies surveyed is £396 billion, or approximately 30 per cent of the entire quoted UK equity market.

Although 73 per cent of CFOs expect a recovery to unfold in 2010, a substantial minority - 23 per cent - do not expect a return to growth until 2011 or even later.

"This is hardly a return to 'business as usual'," Margaret Ewing, Deloitte UK partner and vice-chairman, observed. "It seems that optimism is returning, although nobody is getting carried away.

"While CFOs may believe the end of the recession is in sight, they believe the business environment will remain very difficult during the first year of any recovery. As far as their own business is concerned, 59 per cent see no revival in demand for at least another year."

Ms Ewing pointed out that CFOs believe that conditions for UK corporates will remain tough even as the economy recovers.

"It will be a very different environment to the last years of the boom - CFOs don't see a return to the robust growth of late 2006 and early 2007," she pointed out. "With CFOs assuming that growth will be weak and cost reduction a priority, it is unsurprising that 85 per cent of CFOs think unemployment will continue to rise through at least the first year of recovery."

Looking at the findings from a Maltese perspective, Raphael Aloisio, Deloitte Malta partner, believes that "the challenges in the UK economy will continue to have a significant impact on spending power and will continue to depress the numbers of outbound tourists. This is clearly of great concern to Malta's tourism prospects, which are highly dependent on the UK market."

While financial conditions have improved in recent months, one of the underlying causes of the crisis - excessive debt - remains. This explains the widespread expectation that a process of deleveraging lies ahead, particularly for financial institutions and households: 80 per cent of CFOs expect deleveraging for corporates to continue throughout the recovery, with twice as many CFOs planning to reduce gearing in their own companies compared to those planning to increase it.

Despite a slight improvement in credit availability, bank borrowing is out of favour. CFO sentiment about issuing equity and corporate bonds hit its highest level since the CFO Survey began two years ago. Equity is seen as the most popular form of finance, and bank borrowing the least popular, a complete reversal of the situation in 2007 and 2008.

Ian Stewart, chief economist at Deloitte, commented: "The end of the credit boom has caused a big shift in the way in which corporates plan to finance their businesses. CFOs are increasingly looking towards equity and bond markets for finance. The dominant view among CFOs is that corporate balance sheets are over-leveraged and half of the CFOs surveyed expect to reduce gearing in their own companies over the next year".

Ms Ewing concluded: "While the signs of possible recovery remain fragile, it is great to see CFOs feeling more optimistic and starting to look to the future, rather than focusing solely on survival. There will be winners in these challenging markets, and I expect it to be those who positively position themselves now who will emerge from this recession ahead of the pack."

Deloitte UK Q2 key findings

• Optimism about the financial prospects of the UK corporate sector at highest level in two years.

• GDP growth is expected to be sluggish, unemployment expect-ed to rise for at least a year into recovery.

• CFOs believe upturn will be marked by tight credit conditions and high levels of risk aversion.

• Corporates likely to react by reducing debt levels, cutting costs.

• CFOs positive about outlook for M&A activity.