CFOs view credit as being more costly than at any time
since 2010, according to Deloitte’s UK CFO Survey, Q3 2022. Over half (56%)
rate credit as costly while over a third of finance leaders (39%) note that new
credit is not easily available.
The financial market impact of the government’s
mini-Budget on September 23, which took place roughly halfway through the
survey period, has added to the pressures. Those CFOs who responded after the
mini-Budget foresaw materially higher interest rates and were more likely to
report elevated credit costs than those who responded before.
Tightening credit conditions have resulted in a sharp fall
in the attractiveness of debt finance to CFOs - whether bank borrowing or bond
issuance - over this year. CFOs now see equity as a more attractive source of
finance than corporate bonds, an assessment last seen during the credit crunch
in 2009.
On average, CFOs* believe inflation will moderate from
its current level to 6.2% in a year’s time but expect inflation to stand at 3.8% in two-years' time,
almost double the Bank of England's 2% target.
Finance leaders expect
the Bank of England to continue tightening monetary policy but at a
significantly less aggressive pace than markets suggest. CFOs see the Bank's
base rate at 3.75% in a year's time, well below market expectations.
On average, CFOs attach a 78% probability to the UK
falling into recession in the next 12 months.
The latest Deloitte CFO Survey
took place between 20th September and 3rd October
2022. 87 CFOs participated, including the CFOs of 23 FTSE 100 and 30 FTSE 250
companies. The combined market value of the 60 UK-listed companies surveyed is
£463 billion, or approximately 20% of the UK quoted equity market.
Risk
and economic uncertainty
The dampening effect of
tighter credit conditions is reinforced by wider concerns. Over three quarters
of CFOs (77%) rate the level of external financial and economic uncertainty as
high or very high, up sharply from last quarter (Q2: 61%) and at its highest
level since the beginning of the pandemic.
Higher energy prices or disruption
to its supply, and rising geopolitical risks are the top two concerns among
CFOs. The prospect of further interest rate rises and higher inflation closely
follow as the next biggest concerns.
Rising
costs and shifting strategies
CFOs expect a combination of
rising costs and falling revenues to squeeze corporate margins. An overwhelming majority (91%) expect operating margins for
UK corporates to decline over the next 12 months - the highest reading on
record** except at the beginning of the pandemic.
With rising credit costs and
expectations of a margin squeeze, corporates are tilting to defensive
strategies. Cost reduction is the top priority for CFOs, with over half (55%) saying it is now a strong
priority. They
are placing less emphasis on expansionary strategies such as introducing new
products or services, increasing capital expenditure and expanding by
acquisition.
Ian Stewart, Chief Economist at Deloitte, says “A twelve-year period of easy credit conditions is
drawing to an end. Corporates are seeing a reset in the cost and availability
of credit. Not since the credit crunch have CFOs rated debt – whether that’s
bank borrowing or corporate bonds - as being less attractive as a source of
finance for their businesses than they do today.”
Labour
market and supply chains
Just over half of CFOs (53%) expect hiring by UK
corporates to decrease over the next 12 months.
Over a third (41%) of finance
leaders continue to report that their businesses have faced significant or severe
recruitment difficulties over the last three months. CFOs expect labour
shortages to ease somewhat as the economy and hiring soften. Nonetheless, CFO
expect labour market pressures to persist - one in four CFOs expect to face
significant or severe recruitment difficulties in a year’s time and earnings
growth is expected to accelerate.
CFOs expect growth in average wage costs for their
businesses to accelerate significantly over the next 12 months, from 4.6% to 6%.