The Deloitte CFO Survey: 2012 Q1 results
Confidence up but corporates remain defensive
The first quarter’s Deloitte CFO Survey, published on 2nd April 2012, indicates a strong improvement in business confidence among the UK’s largest companies although perceptions of uncertainty remain at elevated levels.
The survey reveals that confidence among Chief Financial Officers about their own firms’ finances has risen at the fastest rate since the survey started in 2007, taking it close to levels last seen in late 2010. The worries about the risk of recession and a breakup of the single currency that dominated corporate thinking at the end of last year have eased. On average CFOs now assign a 30% probability to the UK economy seeing a double dip recession, down from 54% in December. In December CFOs on average saw a 37% probability of one or more members of the single currency leaving the euro in 2012. This has fallen to 26% in the latest survey.
Stronger financial conditions, reflected in rising global equity markets, seem to be benefiting larger UK companies, with CFOs reporting an increase in credit availability in the first quarter. This more than unwinds the deterioration in credit availability seen in December which, at the time, some feared could be the start of a second credit crunch.
Larger corporates have become markedly more open to taking risk. Corporate risk appetite has risen at the fastest rate in five years, exceeding the increase seen in the second half of 2009 as the economy emerged from recession.
Perhaps surprisingly, CFOs’ balance sheet strategies remain defensive. Rising levels of optimism have not yet led major UK corporates to adopt significantly more expansionary policies. Business confidence is higher now than in March 2011 and, by a narrow margin, the top priority for CFOs is introducing new products or services. But corporates are less likely to be raising capital spending, undertaking M&A or introducing new products than a year ago. Instead, CFOs are more focused on defensive strategies including boosting cash flow and reducing costs than a year ago. It is indicative of the weaker outlook for corporate activity that the independent Office for Budget Responsibility has cut its forecast for UK business investment in 2012 to an increase of just 0.7%, down from 7.7% last November.
How can we explain the gap between buoyant sentiment and still-cautious corporate strategies?
Perceptions of uncertainty have eased since December but the world remains unpredictable. 84% of CFOs rate the general level of uncertainty facing their business as being above normal. On average CFOs see a non-trivial probability - 1 in 4 - that the UK will lapse back into recession, the same probability they attach to a country exiting the euro this year. At the time of writing record petrol prices and rising concerns about the pace of debt reduction in Spain underscore the varied and changeable nature of the macroeconomic risks facing corporates. In the background is the worry that rates of growth will remain anaemic for years to come. On average, economists expect UK growth over the next few years to run at significantly lower levels than were seen in the years before the recession. CFOs are not counting on a swift return to pre-recession rates of growth and most expect the UK’s current weak patch in growth to last for more than a year.
Current high company cash balances may well be a manifestation of caution on the part of CFOs. 53% of CFOs say that running higher cash balances than before the financial crisis is either a “strong priority” or “somewhat of a priority”. One interpretation of current, near-record levels of cash being held by UK corporates is that they represent insurance against a volatile, slower-growth world in which the availability of capital can shift quickly.
The marked deterioration in UK and European growth prospects in the second half of 2011 derailed what, in early 2011, looked like a solid recovery. That episode underscored how macroeconomic risks can escalate and how quickly the outlook can change. This quarter’s CFO Survey shows a strong rebound in UK corporate optimism from December’s lows. But having been wrong footed by a weakening of the economy in 2011, CFOs may need more evidence that the recovery is on track before committing to more expansionary policies.
About the Deloitte CFO Survey panel
In the first quarter’s CFO survey, 136 CFOs participated, including CFOs of 39 FTSE 100 and 53 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 101 UK listed companies surveyed is £610 billion, or approximately 32% of the UK quoted equity market.