UK worse off under Brexit, say CFOs

Reflecting a wave of Brexit-related corporate announcements, 78% of finance leaders have expressed concern that leaving the European Union will result in the British economy being worse off.

Deloitte’s latest CFO Survey, covering the fourth quarter of 2018, said perceived risks to long-term business environment is seeing firms tightening spending and scaling back on recruitment plans and diminished appetite for capital expenditure, M&A and introducing new products or services. It also said FOs placing greater focus on cost reduction now than at any time in the last nine years.

According to the survey, CFOs are also more negative on the effects of Brexit on their own hiring and spending decisions, with more than half saying that hiring will slow over the next three years. Of the CFOs surveyed, 49% also said that their capital expenditure will slow, an increase from 44% in the third quarter if 2018. While increasing in each of the last three quarters, neither is as high as they were immediately after the referendum.

Ian Stewart, chief economist at Deloitte, said: “This survey shows that uncertainty over Brexit is driving a marked shift towards defensive balance sheet strategies among British businesses. With the UK’s growth prospects heavily dependent on the so far uncertain nature of its exit from the EU, corporates are cutting back on capital expenditure and hiring, focusing instead on cost reduction.

“Corporates are positioned for the hardest of Brexits, with risk appetite at recessionary levels and an intense focus on cost control. Businesses seem to be increasingly pricing in a worst-case outcome. Anything better, including a delay or a deal, could deliver a Brexit bounce in sentiment.”

Defensive strategies

CFOs continue to focus on defensive strategies for the coming twelve months, with 56% citing cost control as a strong priority, compared with 53% in Q3. This is followed by increasing cash flow, a priority for 47% of CFOs, down from 48%. CFOs also expect fellow UK corporates to reduce capital expenditure over the next 12 months.

Risk appetite has dropped to a nine-year low and expectations for revenue growth are down to the lowest level since the EU referendum in 2016. Expansionary strategies such as introducing new products and services, increasing capital expenditure and expanding by acquisition have fallen out of favour. CFOs have now adopted their most defensive mix of strategies in nine years.

David Sproul, senior partner and chief executive of Deloitte North West Europe, said:
“This survey shows a definite ‘hunkering down’ mentality across the UK’s CFO community, highlighted by the focus on cost control, a pause on hiring and low appetite for risk.

“Given the ongoing Brexit uncertainty, this attitude is understandable and demonstrates that business urgently needs clarity about the UK’s future relationship with the EU. Unless a favourable deal is agreed, it seems likely that this current lack of appetite for investment or recruitment will continue.”

The 2018 fourth quarter survey took place between 8th and 24th January. 110 CFOs participated in it, including the CFOs of 20 FTSE 100 and 41 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 75 UK-listed companies surveyed is £390 billion, or approximately 16% of the UK quoted equity market.

In recent days a number of companies have said they are taking action in response to concerns over Brexit. Over the weekend, Nissan confirmed it cancel production of a new model at its Sunderland plant, described by business minister Greg Clark as “a warning sign” of the damage that could be wrought on the British car sector by a no-deal Brexit. Last week banking giant Barclays was given the green light to transfer £160 billion worth of assets from the UK to Ireland.

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