Deloitte's CFO Survey reveals defensive shift amid rising economic uncertainties and Brexit concerns

Deloitte’s latest CFO Survey reveals a shift in the business landscape, with CFOs adopting a more defensive stance in response to rising economic uncertainties.

The survey, which gauges sentiment among the UK’s largest businesses, paints a picture of reduced optimism, falling expectations for company performance, and heightened risk aversion.

Economic and financial

The macroeconomic backdrop for the Q4 2023 Deloitte CFO Survey was characterised by slowed economic growth across advanced economies. The UK and Europe experienced stagnation or minor contractions, while the US remained a bright spot. Despite weak growth, economic activity held up better than expected due to robust labour markets, consumer spending, and accumulated savings from the pandemic.

Inflation declined rapidly, prompting central banks to halt their rate-hiking cycles. Financial market expectations for future interest rates fell considerably. The FTSE 100 price index reflected this positive sentiment, reaching new highs.

Brexit continues to be a significant concern for CFOs, with 75% expecting it to lead to a deterioration in the long-term business environment. This is the highest level of concern since the question was first posed in the immediate aftermath of the referendum in 2016. As a result, 40% of CFOs plan to scale back their hiring plans, and a third plan to reduce capital expenditure over the next three years.

In addition to Brexit, CFOs are increasingly concerned about the prospect of international trade wars. This concern is echoed by CFOs in Europe, with a widening gap in perceptions of uncertainty between those inside and outside the euro area. CFOs inside the euro area perceive a lower degree of uncertainty, while those outside, including the UK, perceive rising uncertainty.

Business optimism and long-term changes

Nevertheless, CFOs participating in the survey expressed increasing optimism about their own companies’ financial prospects. The net percentage of CFOs reporting increased optimism rose for the second consecutive quarter and reached well above average levels. Admittedly, this optimism is tempered by concerns about geopolitical risks and poor UK productivity. CFOs expect better times ahead but are maintaining a defensive balance sheet stance.

Looking at long-term changes, CFOs foresee several significant shifts.

• They expect labour costs to remain elevated, leading to sustained investment in new technology.
• CFOs also anticipate short-term interest rates to average 3.5% over the next five years, higher than the average of 0.5% between 2009 and 2022.
• CFOs believe that the era of big government will continue, resulting in rising levels of regulation and taxation.

Jobs market and wage pressures

With unemployment at a 43-year low and inflows to the UK labour force from overseas slowing, 44% of CFOs reported a rise in recruitment difficulties or skills shortages over the last three months. This is a significant jump from 31% in the first quarter of 2018. The skills shortage is particularly acute in the area of digital transformation, with only 16% of UK digital leaders believing their talent pool has the necessary knowledge and expertise to deliver their digital strategy.

CFOs, on balance, expect a decline in hiring at UK corporates over the next 12 months. This cautious approach to hiring is reflected in CFOs’ priorities, with reducing costs and increasing cash flow remaining top concerns.

Wage growth in businesses is expected to slow over the next 12 months, but CFOs still anticipate an increase of 4.4%, well above pre-pandemic averages.

Risk assessment and priorities

Geopolitical risks top the list of concerns for CFOs, with rising geopolitical risks worldwide being the highest-rated risk. Poor productivity and weak competitiveness in the UK economy have also increased CFOs’ anxiety. However, concerns about inflation and higher interest rates have moderated.

CFOs continue to prioritise defensive strategies such as reducing costs, increasing cash flow, and reducing leverage. Expansionary strategies, such as introducing new products or expanding into new markets, have decreased in priority.

However, the survey suggests that offensive strategies, such as scenario planning and re-tooling talent recruitment and development strategies, could also be beneficial in navigating through the uncertainty.

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