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UK CFOs relaxed over Grexit risks

Survey finds manifest shift to expansion and growing support for the UK's continued membership of the European Union

DESPITE the deepening crisis in Greece, which escalated today after voters rejected creditors’ demands for greater austerity in a referendum, risk appetitite among finance chiefs increased in the second quarter of the year, according to accountancy firm Deloiite.

The Big Four firm’s latest survey of CFOs found a manifest shift to expansion among large UK corporates and growing support for the UK’s continued membership of the European Union.

Perceptions of external financial and economic uncertainty have fallen for the first time in a year with fewer FTSE 350 CFOs believing the level of financial and economic uncertainty is above normal. Corporate risk appetite is up, with 59% of CFOs determining that now is a good time to take risk onto their balance sheets, up from a two-year low of 51% in first three months of the year.

CFOs’ business strategies have edged toward expansion with the proportion of finance chiefs focusing on growth reaching the highest since the first quarterof 2011. Foof CFOs say introducing new products and services or expanding into new markets is a strong priority for the next 12 months, up from 28% in Q1. Meanwhile, some 66% of CFOs expect UK businesses to increase capital expenditure in the next 12 months, with 70% expecting hiring to increase.

87% of CFOs say that credit for UK corporates is cheap with the same percentage saying credit is easily available.

Asked to rate the level of risk to their business (on a scale of zero to 100), CFOs gave a score of 49 to both higher interest rates in the UK and US and economic weakness in Europe and a potential Euro crisis. The UK’s referendum on EU membership is rated at 45, down from 56 in Q1, alongside weak demand in the UK. The UK’s productivity rate is given a score of 40, the second lowest of all factors.

Almost three quarters (74%) of CFOs say it is in the interests of UK business to remain in the EU, while 2% favour the UK leaving.

Ian Stewart, chief economist at Deloitte, said: “CFOs have shrugged off the effects of the recent sell-off in equity markets and the escalating crisis in Greece. The fears about uncertainty that dampened corporate spirits in the run up to the General Election have also fallen away.

“Risk appetite is on the rise, uncertainty has fallen and CFOs enter the second half of the year in expansionary mode. Our survey suggests the UK recovery is regaining momentum.”

Some 91% of CFOs say UK export performance has benefited from membership of the EU, while 89% say it has attracted foreign direct investment and 78% say the free movement of people is advantageous. However, 57% say the EU legal, regulatory and compliance framework is a burden for UK business.

The results of the UK’s renegotiation of its relationship with the EU are set to have a significant effect on corporate attitudes to the EU. 23% of CFOs say that their judgement about membership will depend on the results of the discussions with the EU.

A majority of CFOs expect the government’s renegotiation of Britain’s relationship with the EU to deliver positive results in all seven areas identified by the government. Sentiment is most positive about the scope for the government to be able to tighten benefit rules and reduce excessive regulation. 83% of CFOs think the negotiations will benefit the UK by tightening controls on welfare payments for EU migrants and 76% expect to see a reduction in Brussels “red tape”.

Easy monetary policy

“After years of easy monetary policy CFOs are contemplating the prospect of higher interest rates in the UK and the US. CFOs rate higher interest rates as the top risk to their business, tying with the danger of renewed euro area weakness”, said Stewart.

“CFOs clearly believe that the era of ultra-loose monetary policy is drawing to an end. This shift in thinking is consistent with the marked rise in government bond yields and an upward drift in interest rate expectations seen through the second quarter.”

David Sproul, senior partner and chief executive of Deloitte, said CFOs are more relaxed about the referendum than they were before May, “perhaps a sign they believe the vote will endorse continued membership”.

“While there is a clear desire among CFOs for the UK to remain a member of the EU,” said Sproul, “there can be little doubt that they see opportunities to establish a more advantageous relationship for the UK. CFOs are hopeful that renegotiation will deliver benefits for the UK, particularly through a tightening of benefit rules for EU migrants and reducing ‘red tape’.”

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