Q4 The Deloitte CFO Survey Focus on cost control, no retreat from growth The UK s largest businesses enter 2018 more focussed on controlling costs than at any time in the last eight years. Although the UK is in the ninth year of recovery corporates seem to be reacting to slower UK growth and Brexit uncertainties with a renewed focus on costs. Despite December s agreement between the UK and the EU to proceed to trade talks, CFOs concerns about Brexit have mounted. It tops the list of risks for businesses in 2018. Weak UK growth ranks as the second greatest risk facing businesses this year, with growing concern about productivity in third place. In a world of accelerating growth and buoyant equity markets domestic risks loom large for UK CFOs. Yet strikingly, a sharper focus on risk and cost control has not led to a collapse in business sentiment. CFOs are more optimistic today than they have been, on average, in the last couple of years. Perceptions of uncertainty are far lower than during the euro crisis in -12 and following the EU referendum in. Far from backing away from growing their businesses, as happened during previous periods of uncertainty, CFOs are putting increased weight on growth. The priority CFOs attach to expansion over the next 12 months, whether organically, through acquisitions, or introducing new products/services or moving into new markets, is at its highest level since we first asked this question in 2009. So why, in an environment where home-grown risks and cost control loom large, are CFOs still committed to growth? For a business cost control counters the risk from weaker UK growth. But beyond these shores activity is accelerating and opportunities are increasing. -2018 looks set to be the best two-year period for growth in Britain s core export market, the EU, in ten years. Nor is it all doom and gloom at home. On average, economists see the UK economy growing this year in line with what the Office of Budget Responsibility sees as its trend rate. Some CFOs may anticipate an easing of Brexit risks, feel that their own business is less directly affected by Brexit or that they can mitigate the risks. The backwash from Brexit is the dominant theme for UK corporates as they enter 2018. But it has not crushed the animal spirits of the business sector nor forced a retreat from expansion. The central challenge for UK business will be to achieve growth in an environment of stringent cost-control. Chart 1. Risk to business posed by the following factors Weighted average ratings on a scale of 0-100 where 0 stands for no risk and 100 stands for the highest possible risk Weak demand in the UK Poor productivity/weak competitiveness in the UK economy The prospect of further rate rises and a general tightening of monetary conditions in the UK and US A bubble in housing and/or other real and financial assets and the risk of higher inflation Q4 Effects of Brexit Authors Ian Stewart Chief Economist 020 7007 9386 istewart@deloitte.co.uk Debapratim De Senior Economic Analyst 020 7303 0888 dde@deloitte.co.uk Alex Cole Economic Analyst 020 7007 2947 alecole@deloitte.co.uk Rebecca Porter Economic Analyst 020 7007 5728 reporter@deloitte.co.uk Tom Simmons Economic Analyst 020 7303 7370 tsimmons@deloitte.co.uk Key contacts Ian Stewart Chief Economist 020 7007 9386 istewart@deloitte.co.uk Richard Muschamp CFO Programme Leader 020 7007 0724 rmuschamp@deloitte.co.uk For current and past copies of the survey, historical data and coverage of the survey in the media and elsewhere, please visit: www.deloitte.co.uk/cfosurvey 43 47 45 53 58 59 62 35 40 45 50 55 60 65 1
The Deloitte CFO Survey Q4 Focus on cost control, no retreat from growth Brexit pessimism rises CFOs enter 2018 with greater pessimism about the effects of Brexit. Chart 2. Long-term impact of Brexit % of CFOs who think the overall environment for business in the long term will be better/worse if the UK leaves the EU About three-quarters expect Brexit to lead to a worsening of conditions in the long term, up from 6 in the previous quarter. 8 7 6 5 4 3 2 1 13% 68% Q2 72% 73% 65% 66% 6 6 14% 19% 8% 14% 9% Q4 Q2 Q4 Better Worse CFOs continue to expect to reduce their own spending as a result of Brexit. More than half say it will lower their discretionary spending. A third or more will scale down their capital investment and hiring plans. Chart 3. Effect of Brexit on own spending and hiring decisions % of CFOs who expect M&A activity, capital expenditure, hiring and discretionary spending by their business to decrease over the next three years as a consequence of Brexit 8 7 6 5 4 3 2 1 4 Mergers and acquisitions Q4 15% 19% 17% 16% 15% 58% 4 39% 35% 33% 3 26% Capital expenditure 66% 46% 39% 38% 41% 36% 3 Hiring 74% 55% 55% 51% 5 5 % Discretionary spending Q2 Q4 Q2 Q4 CFO perceptions of uncertainty edged up marginally in the fourth quarter. 38% of CFOs rate the level of external financial and economic uncertainty facing their businesses as high or very high, a significantly lower proportion than during the euro crisis in -12 and following the EU referendum in. Chart 4. Uncertainty % CFOs who rate the level of external financial and economic uncertainty facing their business as high or very high 7 6 5 4 3 2 1 2
The Deloitte CFO Survey Q4 Focus on cost control, no retreat from growth Optimism declines CFO optimism edged lower in the fourth quarter. But CFOs are more optimisitic today than they have been, on average, in the last two years. Chart 5. Business optimism Net % of CFOs who are more optimistic about the financial prospects of their company than three months ago 7 5 3 1-1 -3-5 -7-9 2008 2009 2010 21% of CFOs think that now is a good time to take greater risk onto their balance sheets. Risk appetite has remained broadly around these levels since late. Chart 6. Corporate risk appetite % of CFOs who think this is a good time to take greater risk onto their balance sheets 8 7 6 5 4 3 2 1 2008 2009 2010 A net 66% of CFOs expect operating costs to rise over the next 12 months, close to the highest reading in more than six years. Despite a slight improvement, CFO expectations of a decrease in operating margins over the next 12 months persist. Chart 7. Outlook for corporate revenues, costs and margins Net % of CFOs who expect UK corporates revenues, costs and margins to increase over the next 12 months 10 8 6 4 2-2 -4-6 -8 Revenues Operating margins Operating costs 3
The Deloitte CFO Survey Q4 Focus on cost control, no retreat from growth Focus on UK-specific risks CFOs see issues related to the domestic environment as the biggest risks facing their businesses. They rank Brexit as their top risk, followed by concerns over weak demand and poor productivity/weak competitiveness in the UK economy. Concerns over each have increased since the third quarter. CFOs have also become markedly more concerned about the risks posed by US policy uncertainty/ protectionism as well as weakness or volatility in emerging markets/rising geopolitical risks worldwide. The continued recovery of the euro area economy means that concerns over deflation and economic weakness in the region remain the lowest ranked risk for CFOs with such concerns having fallen sharply over the last three years. Chart 8. Risk to business posed by the following factors Weighted average ratings on a scale of 0-100 where 0 stands for no risk and 100 stands for the highest possible risk Effects of Brexit 58 62 Weak demand in the UK 53 59 Poor productivity/weak competitiveness in the UK economy 43 The prospect of higher interest rates and a general tightening of monetary conditions in the UK and US A bubble in housing and/or other real and financial assets and the risk of higher inflation 45 47 Policy uncertainty in the US and risk of greater protectionism 38 46 Weakness and/or volatility in emerging markets and rising geopolitical risks worldwide 33 41 Deflation and economic weakness in the euro area, and the possibility of a renewed euro crisis 35 39 20 30 40 50 60 70 Q4 4
The Deloitte CFO Survey Q4 Focus on cost control, no retreat from growth Corporate strategies defensive CFOs enter 2018 with a sharper focus on cost than at any time in the last eight years. Chart 9. Corporate priorities in the next 12 months % of CFOs who rated each of the following as a strong priority for their business in the next 12 months Reducing costs 41% 51% Introducing new products/services or expanding into new markets 41% 39% Increasing cash flow 34% 35% Expanding by acquisition 21% 2 Increasing capital expenditure 17% 17% Raising dividends or share buybacks 16% 15% Reducing leverage 1 Disposing of assets 5% 1 2 3 4 5 6 Q4 Despite their focus on cost reduction, CFOs have not turned their backs to growth. In marked contrast to previous periods of uncertainty such as during the euro debt crisis, when the euro recovery seemed to have halted and after the EU referendum, CFOs are placing much greater emphasis on growth now. Chart 10. CFO priorities: Growth Arithmetic average of the % of CFOs who rated growth strategies as a strong priority for their business in the next 12 months 5 45% 4 35% 3 Euro debt crisis Euro growth scare 25% 2010 EU referendum Growth strategies are expanding organically, introducing new products/services or expanding into new markets and expanding by acquisition 5
The Deloitte CFO Survey Q4 Focus on cost control, no retreat from growth Accommodative credit conditions Funding conditions remain extremely favourable for the large corporates on our survey panel. CFOs continue to view credit as being cheap and available. Chart 11. Cost and availability of credit Net % of CFOs reporting credit is costly and credit is easily available Credit is costly Credit is cheap 10 8 6 4 2-2 -4-6 -8-10 Availability of credit (RHS) Cost of credit (LHS) 2008 2009 2010 10 8 6 4 2-2 -4-6 -8-10 Credit is available Credit is hard to get Following the Bank of England s November rate rise the first since the financial crisis CFOs see rates rising further in 2018. 85% of them expect the base rate to be 0.75% or above in a year s time, up from 42% in the third quarter. Chart 12. Interest rate expectations % of CFOs who expect the Bank of England s base rate to be at the following levels in a year s time 6 5 4 3 2 1 8% 0.25% or lower 5 0.5 15% 33% 0.75% 47% 7% 1% 31% 2% 7% 1.25% or above Q4 CFOs continue to see debt as the most attractive form of financing, with bond issuance and bank loans easily trumping equity issuance. Chart 13. Favoured source of corporate funding Net % of CFOs reporting the following sources of funding as attractive 10 8 Bank borrowing Attractive 6 4 Bond issuance 2 Unattractive -2-4 -6 2008 2009 2010 Equity issuance 6
The Deloitte CFO Survey Q4 Focus on cost control, no retreat from growth CFO Survey: Economic and financial context The macroeconomic backdrop to the Deloitte CFO Survey Q4 The global recovery picked up pace in the second half of, driven by faster growth in developed economies. The euro area saw a broad-based acceleration in growth across member nations, while Japan grew for the seventh successive quarter, its longest period of growth since 2001. Business and consumer confidence rose in the developed world, particularly in the euro area and the US. Unemployment continued to decline globally, with UK unemployment falling to a 43-year low and the EU s unemployment rate reaching its lowest level in nine years. Despite falls in unemployment, wage growth has picked up only modestly. Inflation in the UK reached a five-year high in November but remains subdued in other developed countries. Central banks continued to tighten monetary policy during the final quarter of. The European Central Bank announced that it would slow its quantitative easing programme. In moves which were widely anticipated by financial markets, the Bank of England raised interest rates for the first time in a decade and the US Federal Reserve raised rates for the fifth time since. Following elections in Germany, Angela Merkel s ruling CDU/CSU coalition and the Social Democrats are in talks of a renewed grand coalition. In the UK, Chancellor Phillip Hammond s Autumn Budget eased the pace of austerity and the Office for Budget Responsibility downgraded official forecasts for productivity and GDP growth. Brexit talks achieved a breakthrough with the UK and EU agreeing a deal on the divorce payment, paving the way for talks over future trading arrangements. UK GDP growth: Actual and forecast (%) 4% 3% 2% 1% -1% -2% -3% -4% -5% -6% -7% Quarter-on-quarter growth Year-on-year growth 2007 2008 2009 2010 2018 Source: ONS, Consensus Economics and Deloitte calculations Forecasts FTSE 100 price index 7500 7000 6500 6000 5500 5000 4500 4000 3500 3000 2008 2009 2010 Source: Thomson Reuters Datastream UK private and public sector job growth (thousands, quarterly) UK annual CPI inflation (%) 500 400 300 200 100 0-100 -200-300 2007 2008 2009 2010 Private Public 9% 8% 7% 6% 5% 4% 3% 2% 1% -1% 1993 1997 2001 2005 2009 Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream 7
Two chart summary of key survey messages Business optimism Net % of CFOs who are more optimistic about the financial prospects of their company than three months ago Long-term impact of Brexit % of CFOs who think the overall environment for business in the long term will be better/worse if the UK leaves the EU 7 5 3 1-1 -3-5 -7-9 2008 2009 2010 8 7 6 5 4 3 2 1 13% Better 68% Q2 65% 66% Worse 19% 14% 14% 8% 9% Q4 6 6 72% 73% Q2 Q4 About the survey This is the 42 nd quarterly survey of Chief Financial Officers and Group Finance Directors of major companies in the UK. The fourth quarter survey took place between 3 rd and 15 th December. 112 CFOs participated, including the CFOs of 23 FTSE 100 and 46 FTSE 250 companies. The rest were CFOs of other UK listed companies, large private companies and UK subsidiaries of major companies listed overseas. The combined market value of the 83 UK listed companies surveyed is 512 billion, or approximately 19% of the UK quoted equity market. The Deloitte CFO Survey is the only survey of major corporate users of capital that gauges attitudes to valuations, risk and financing. To join our panel of CFO respondents and for additional copies of this report, please contact Anthea Neagle on 020 7303 0116 or email aneagle@deloitte.co.uk This publication has been written in general terms and we recommend that you obtain professional advice before acting or refraining from action on any of the contents of this publication. Deloitte LLP accepts no liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication. Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Deloitte LLP is the United Kingdom affiliate of Deloitte NWE LLP, a member firm of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ). DTTL and each of its member firms are legally separate and independent entities. DTTL and Deloitte NWE LLP do not provide services to clients. Please see www.deloitte.com/about to learn more about our global network of member firms. 2018 Deloitte LLP. All rights reserved. Designed and produced by The Creative Studio at Deloitte, London. J145