Deloitte sent out its annual CFO report this morning and it’s a case of new year, familiar challenges.
Brexit, the report showed, is at the forefront of British CFOs’ minds despite December’s breakthrough talks. Pessimism about the effects of Brexit has grown: about three-quarters expect Brexit to lead to a worsening of conditions in the long term, up from 60% in the previous quarter.
The macro concern of regional politics has been made more acute by insipid economic growth, said Deloitte. Weak UK growth follows as the second greatest risk facing business this year, with concern about productivity in third place.
A net 66% of CFOs expect operating costs to rise over the next 12 months, close to the highest reading in more than six years. Despite a slight improvement, CFO expectations of a decrease in operating margins over the next 12 months persist.
Speaking to AccountingWEB about the mounting Brexit anxieties, James Heath, CFO of the challenger bank CivilisedBank said the enduring uncertainty of the UK’s withdrawal inhibits CFOs ability to forecast. “When I was the CFO at ABN Amro, the chief economist always told me ‘Don’t ask me to a forecast for Brexit, because no one knows’.
“I’m not an economist, but if you ask me: it’s going to be difficult to withdraw from one of the largest economic blocs in the world and for there not be a negative impact on the UK economy.
“If you look at any sort of IMF, World Bank, Treasury forecast, they’re all forecasting a drop in GDP and that’s down to Brexit. Now the question is, how prolonged or deep will that be and what impact will that have on UK SMEs?”
Following the Bank of England’s November rate rise – the first since the financial crisis – the majority of CFOs see rates rising further in 2018. Eighty-five percent expect the base rate to be 0.75% or above in a year’s time, up from 42% in the third quarter.
The renewed popularity of protectionism with American policymakers have also left CFOs feeling wobbly, Deloitte’s report showed. President Trump’s throwback economics have coalesced with the “weakness or volatility” in emerging markets (and, again, looming Brexit) to create a tricky playing field.
It’s not all bad, though
“Encouragingly, far from backing away from growth as they did in previous periods of uncertainty,” said Dave Sproul, Deloitte’s chief executive, “CFOs are putting increased weight on expansion.”
Growth in spite of economic uncertainty and stringent cost control is the top priority according to the report. Expansion, “whether organically, through acquisitions, introducing new products and services or moving into new markets is at its highest level since we first asked this question in 2009,” explained Sproul.
Ben Eaton, the finance director the Dining Club Group agreed with Sproul's assessment. Speaking to AccountingWEB, Eaton explained that while “Brexit and a forecast slowdown in the UK economy” have made it hard, Dining Club Group is dead set on pursuing growth. “At the Dining Club Group, we will spend where we find new growth opportunities, which is a strategy that could make sense for other growth seeking corporates, especially whilst credit remains relatively cheap and available.”
And while American and other regions’ volatility loom large, the continued recovery of the euro area economy has provided some relief, with economic weakness in the region falling sharply as a concern in the past three years.
Thirty-eight percent of CFOs asked for the Deloitte report rate the level of external financial and economic uncertainty facing their businesses as “high or very high”. And while 38% is a high number, it’s actually significantly lower proportion than during the euro crisis in 2011-12 and the immediate aftermath the EU referendum in 2016.
Adding to Sproul’s comments, Ian Stewart, Deloitte’s chief economist said: “CFOs enter 2018 more focussed on controlling costs than at any time in the last eight years. Despite this, CFOs are more optimistic today than they have been over recent years, and perceptions of uncertainty are far lower than during the euro crisis and following the referendum.”
About Francois Badenhorst
I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter.