Deloitte CFO Survey reveals fall in confidence as fear of a ‘double dip’ recession increases
Optimism among UK chief financial officers has declined for the second quarter running, reaching a 12 month low, despite a continued improvement in credit availability.
The second quarter 2010 Deloitte CFO Survey findings indicate that recent volatility in financial markets and concerns about fiscal tightening at home and abroad have weighed on CFO sentiment. CFOs now see a 38% chance of a “double dip”, up from 33% in the first quarter of this year.
CFOs see fiscal tightening bringing more direct risks than benefits for UK corporates. Two thirds of CFOs expect tighter fiscal policy to have short term negative effects on their company and 69% foresee few or no direct long term benefits.
However, the clearly stated view of CFOs in last quarter’s survey, conducted just before the General Election, was that fiscal consolidation is essential, with 85% of respondents saying that deficit reduction should be the new government’s top priority.
Encouragingly, a substantial minority of CFOs, approximately one third (34%), expect few negative effects from fiscal tightening in the short term and, indeed, 31% foresee benefits in the long term for their companies.
While the external environment looks less positive, some pressures on corporates’ balance sheets are easing. The cash crisis in the corporate sector has abated significantly and companies are more bullish about prospects for their own cash flow than at any time in the last two years. Financial risk appetite among CFOs has not, so far, been dented by doubts about the recovery.
Ian Stewart, Deloitte chief economist, commented: “Crucially, credit conditions for larger corporates are getting better. CFOs now rate credit as being more available than at any time since the CFO Survey started in the third quarter of 2007. Bank borrowing has regained its pre-recession appeal to CFOs as a source of funding. CFOs see a more attractive and available supply of bank credit driving growing demand for bank borrowing over the next year.
“The latest CFO Survey paints a picture of concern about growth coupled with improvements in the corporate credit and liquidity environment. Examining how CFOs plan to run their companies’ finances enables us to see how corporates plan, in practice, to reconcile these pressures. Cost control remains the top priority for UK CFOs, as it has been for the last two years. With fears of a double dip increasing, CFOs are maintaining a strong focus on costs.
“Yet cash flow is no longer the central pre-occupation that it was and has dropped down CFOs’ list of priorities. Expansionary including capital spending, expanding into new markets and launching new products and services, have shifted up the priority list. A majority of CFOs expect M&A activity to rise over the next year.
“Recent financial market turbulence has made finance directors much more cautious about financing their companies using equity. This shift in preferences underscores the close relationship between financial market activity and corporate attitudes.”
Margaret Ewing, vice chairman of Deloitte, added: “A recurring theme from the CFO Survey in the last year has been uncertainty about growth prospects. Uncertainties have mounted, yet, at the concerns about liquidity and credit are easing. CFOs are focussing more on how to capitalise on growth, no matter how unsure and patchy.
“The last three years have been a period of exceptional volatility. CFOs are not convinced the problems are over, but what emerges from this quarter’s Survey is that CFOs are alive to the risks and looking for opportunities in what lies ahead.”