Sentiment among finance
leaders of the UK’s largest firms has improved significantly since the start of
the year, according to Deloitte’s UK CFO Survey Q1 2023.
A net 25% of CFOs are more optimistic about the financial prospects
of their business than they were three months ago. Having run well below the
long-term average reading of -2% throughout the last year, this marks the
largest increase in confidence since the CV19 vaccine rollout at the end of
2020.
Conducted between March 21 and April 3, 2023, Deloitte’s latest quarterly CFO Survey captures
sentiment amongst the UK’s largest businesses. A total of 64 CFOs participated,
including the CFOs of 11 FTSE 100 and 24 FTSE 250 companies. The combined
market value of the 38 UK-listed companies surveyed is £253bn, or approximately
10% of the UK quoted equity market.
Uncertainty
down sharply
This quarter’s survey was conducted in the period following the
collapse of Silicon Valley Bank on 10 March and pressures on some regional US
banks. However, the findings suggest these events seem to have had little, if
any, impact on UK CFO sentiment.
Perceptions of external financial and economic uncertainty have
fallen at the fastest pace since this question was first asked in 2010, from
71% of CFOs rating uncertainty as high or very high in Q4 2022, to 39% doing so
in Q1 2023. CFOs now rate external uncertainty at levels far below the previous
peak last autumn, the start of the pandemic in 2020, and following the EU
referendum in 2016.3
Ian
Stewart, chief economist at Deloitte, said: “The economic unpredictability that marked the beginning of 2023
has started to clear, with CFOs reporting the largest decline in perceptions of
uncertainty to date. Business confidence has rebounded, helped by a decrease in
energy prices, an easing of Brexit concerns and an improving inflation backdrop.
“Crucially, finance leaders report little change in credit
conditions, suggesting that March’s events in the global banking system have
not affected the pricing and availability of credit for UK corporates. Despite
a brighter outlook, CFOs are alive to the continued risks facing the economy.
Corporates remain in defensive mode and CFO risk appetite is subdued.”
Focus
on defensive strategies
CFOs report a slight
rise in the cost of credit and a marginal improvement in credit availability in
the first quarter. Around three quarters (a net 73%) rate credit as costly – up
from a net 66% in Q4 2022 – while a net -2% say that new credit is easily
available, up from a net -22% in Q4 2022.
Risk appetite remains below normal levels, with just 17% of CFOs
saying this is a good time to take greater risk onto their balance sheets. CFOs
are instead heavily focussed on cost control and building up cash, with 41% and
44% of CFOs respectively rating those as strong priorities for their
businesses. Furthermore, although CFOs’ revenue growth expectations have jumped
from a net -8% to a net 44%, a large majority of respondents (65%) expect
margins to shrink in the next 12 months, reflecting continued growth in input
costs.
Inflation
tide turning
CFOs see Brexit, high energy prices and disrupted energy
supplies posing significantly less risk to business than they did in Q4 2022.
The announcement on 27 February of the Windsor Framework, which aims to improve
the flow of goods between Britain and Northern Ireland, is likely to have
contributed to the easing of CFO concerns around Brexit, which are now close to
the lowest level in over six years. Falling energy prices – with wholesale gas
prices down by almost 70% since CFOs were last surveyed – are also likely to
have reduced the risks posed by elevated energy prices.
Finance leaders report a fall in supply disruptions faced by
their businesses this quarter. A small proportion (7%) expect ‘significant’ or
‘severe’ levels of disruption to persist in a year’s time, and the panel
expects such disruption to ease entirely in two years from now. CFOs also
reported a marked easing of recruitment difficulties in the first quarter,
while expectations for inflation in one year’s time have declined from 5.8% to
4.2%, and eventually to 2.9% in two years’ time.
Look
towards growth
Meanwhile, an overwhelming majority of CFOs expect to see a
significant growth in capital spending on artificial intelligence (AI) over the
next five years. A large majority (a net 67%), also believe the adoption and
application of AI will help raise UK productivity. However, respondents were
almost equally divided between those who believe that AI will lead to an
increase in the number of jobs and those who believe it has the potential to
reduce jobs over the next five years.
Ian Stewart added: “The CFOs foresee artificial intelligence
helping to drive UK productivity, an outcome that could provide a lasting boost
to business growth. They are divided, however, on how AI will affect the number
of jobs in the economy, highlighting the need to ensure the gains from new
technologies are widely shared.”