Executive summary

• The Deloitte European Chief Financial Officers Survey reveals that the invasion of Ukraine has delivered a sharp shock to business sentiment which had previously been recovering as lockdown measures from the COVID-19 pandemic were lifted. CFOs now report a record level of risk, stemming from geopolitics and inflation. The data was collected two weeks after the Russian invasion of Ukraine, which may have amplified the uncertainty expressed by CFOs.

• CFOs remain positive on capital expenditure (CAPEX), employee hiring and revenue. But their expectations for operating margins are gloomier than in the autumn edition. Despite this, businesses are still looking to grow, with a continued focus on investment and expansion as a top balance sheet priority.
• CFOs report a very high level of uncertainty, higher than at any time since the inception of the survey in 2015. Given this severe uncertainty, most CFOs across all sectors feel it is not a good time to take greater risk on to the balance sheet.
• CFOs believe inflation will continue to surge and prove a longer-term problem, with the expected average inflation rate in 12 months’ time for the euro area expected to increase considerably from 2.7 per cent in the autumn survey to 5.9 per cent.

Steep decline in financial outlook

The Deloitte European CFO Survey shows a steep decline in businesses’ financial outlook. Uncertainty has reached the highest level recorded since the survey’s inception.

The Russian invasion of Ukraine is weighing heavily on European businesses. CFOs report a sharp decline in companies’ financial prospects compared to autumn 2021. Economic activity had been recovering as lockdown measures from the COVID-19 pandemic gradually eased. The service sector was bouncing back and the demand for manufactured goods had risen quicker than many expected – until the invasion on February 24.

The immediate fallout was a pronounced drop in business expectations. CFOs report a record level of risk driven by geopolitical events and inflation. In business confidence the net balance (defined as the difference between the share of positive and negative responses) has suffered a dramatic reversal from 32 per cent in the previous survey in autumn 2021 to -29 per cent in this spring survey.

Almost half the CFOs surveyed (48 per cent) are less optimistic about their company’s financial prospects. This figure has risen more than threefold from 14 per cent in autumn 2021.

The decline in optimism is more marked in the euro area than in non-euro countries. In the euro area CFOs are most pessimistic about business confidence in Spain (66 per cent), Austria (61 per cent), Greece (53 per cent) and Germany (52 per cent). In non-euro countries CFOs in the UK (47 per cent) are the most pessimistic.

The results for business sectors reflect those of the survey overall. All sectors have witnessed a decline in optimism about their financial prospects. CFOs in the automotive industry, still reeling from the semiconductor chip shortage and supply chain problems, report the lowest business confidence, with a net balance of -50 per cent – a drop of 60 percentage points from the autumn survey. The proportion of CFOs in the automotive sector who say they are less optimistic about their financial prospects has doubled from 30 per cent in autumn 2021 to 61 per cent in spring 2022. CFOs from the tourism & travel sector, by contrast, are the most optimistic across all sectors with half (55 per cent) saying they are more optimistic about the financial prospects for their company.

The survey data were collected just two weeks after the Russian invasion, which may have amplified the uncertainty expressed by CFOs.

Positive on CAPEX, hiring and revenues

Despite worsening expectations about the financial outlook compared to the autumn 2021 survey, CFOs remain positive about revenue, CAPEX and hiring.

Faced with a more uncertain economic climate and surging operating costs, CFOs anticipate a sharp deterioration in operating margins. Almost half (49 per cent) believe operating margins will decline over the next year. This figure has doubled since the previous survey. The reasons include high inflation across European countries caused by rising commodity, energy, operating and transport costs. The net balance of expectations concerning operating margins (the difference between the share of positive and negative responses) declined from 20 per cent in the autumn to -23 per cent in spring 2022.

CFOs in the consumer goods sector, faced with persistent supply chain disruptions, labour shortages and rising costs, are the most pessimistic, with 64 per cent believing that operating margins will decrease over the next year. At the other extreme, CFOs in the tourism & travel sector are the most optimistic: half (49 per cent) believe their margins will increase.

Although most CFOs remain optimistic that revenues will increase over the next 12 months, the net balance of expectations has decreased from 71 to 44 per cent. Despite this, 63 per cent of CFOs believe revenues will increase in the next 12 months while only 19 per cent feel revenues will decrease.

Similar trends can be observed across all sectors. CFOs in the business and professional services sector are the most optimistic, with 89 per cent expecting revenues will increase in the next 12 months. CFOs in the automotive industry are the least optimistic, with just 41 per cent expecting revenues to increase over the same period.

The net balance of expectations about capital expenditures (CAPEX) over the next 12 months has declined sharply, from 38 per cent in the autumn to 10 per cent in spring 2022. Despite this, a third of CFOs across Europe remain optimistic that they will increase CAPEX spending during the next 12 months.

CFOs in the automotive sector are the most pessimistic: it is the only sector to show a negative net balance in CAPEX spending intentions in spring 2022. The net balance of CFOs responding that CAPEX investments will increase declined sharply from 20 per cent in autumn 2021 to -13 per cent in spring 2022. Meanwhile the proportion of CFOs in the automotive industry who believe CAPEX investments will decrease has doubled, from 16 per cent in autumn 2021 to 37 per cent in spring 2022.

As with other critical metrics, the net balance in CFOs’ hiring expectations has also declined, from 42 per cent in spring 2021 to 28 per cent in autumn 2021 – but it remains higher than one year ago. The survey results also reveal that CFOs have revised up their plans for future employment considerably more strongly than for CAPEX. More than 40 per cent of CFOs expect to expand the number of employees over the next year, nearly three times more than those who expect a decrease (15 per cent) over the same period.

CFOs in all other sectors except automotive plan to increase hiring in the next 12 months. CFOs in the business and professional services sector (75 per cent) and tourism & travel (72 per cent) are the most confident that they will be increasing the employee headcount over the next 12 months. In contrast, a significant portion of CFOs in automotive (33 per cent) plan to decrease the employee headcount over the next year, the highest across all sectors.

One reason for the strength of corporate hiring plans is the pronounced shortage of skilled labour. This has been identified as one of the top three business risks in spring 2022.

Inflation will continue to climb

The Russian invasion of Ukraine has caused inflationary expectations to soar. CFOs see inflation as one of the most significant future risks.

Inflation remained persistently low during the past decade but recent surveys had revealed that CFOs were expecting upward pressure to emerge. This pressure has indeed emerged and has been exacerbated by the war and supply chain disruptions. The expected average inflation rate in 12 months’ time for the euro area has jumped from 2.7 per cent in the autumn survey to 5.9 per cent in this spring edition.

Uncertainty at the highest point on record

The level of financial and economic uncertainty has reached an all-time high – exceeding the level recorded during the COVID-19 pandemic.

The level of uncertainty expressed by CFOs about the financial and economic environment has reached a level not seen since the inception of the survey in 2015. The net balance of CFOs who feel financial and economic uncertainty is significant has increased from 58 per cent to 77 per cent. The proportion of CFOs who assess the overall level of external financial and economic uncertainty as high or very high has increased to 81 per cent from 64 per cent in autumn 2021.

Tourism & travel is the only sector that saw a decline in the net balance of uncertainty, by 10 percentage points, from 77 per cent in autumn 2021 to 66 per cent in spring 2022. All other sectors witnessed an increase in the net balance of uncertainty.

The high degree of uncertainty about the macro environment is reflected in CFOs’ risk appetite. More than 80 per cent of European CFOs believe now is not a good time to take on risk. The net balance of CFOs who believe it is not a good time to take greater risk on to balance sheets increased from -27 per cent last autumn to -74 per cent in this survey.

With the current Russia-Ukraine conflict, geopolitical risk has emerged as the top risk faced by CFOs across Europe, followed by economic growth and the shortage of skilled labour. Geopolitical risk had not previously ranked as a significant business risk over the past couple of years. Now it is identified as the most significant risk over the next year in 15 of the 18 countries surveyed. With the emergence of geopolitical risk as the prime concern in most countries the shortage of skilled labour has fallen in the first quarter of this year from the top risk to the third most important.

Despite the fact that businesses are operating in an increasingly uncertain and challenging environment the majority of CFOs are focusing on organic growth and expansion in their existing markets. They are also targeting increased digitalisation in order to remain competitive and be better prepared for future challenges.

Significant supply chain disruptions

European CFOs report high or very high supply chain and delivery problems as raw material and transport costs rise. These issues are expected to persist until late 2023.

Wild swings in supply and demand during the pandemic put global supply chains under enormous pressure. Late last year it looked as though these disruptions would start to ease. Increasing production and alleviation of some of the pent-up demand pointed to a gradual return to something closer to normal. Such hopes have been dashed in the last two months by Russia’s invasion of Ukraine and COVID-19 lockdowns in China.

Supply chain issues have again become an acute issue for the majority of European CFOs. Two out of three European CFOs (64 per cent) report that their companies are affected by supply chain problems to a moderate or large extent. The main supply chain issues stem from the increasing cost of raw materials, intermediate goods and transport.

The sectors most significantly affected by supply chain problems are automotive (98 per cent), industrial products & services (80 per cent), consumer goods (80 per cent) and retail (78 per cent). Least affected by supply chain problems are financial services (25 per cent), business & professional services (32 per cent) and technology, media & telecommunications (43 per cent).

Almost 50 per cent of CFOs affected by supply chain problems to a very high extent identify higher prices for commodities and intermediate goods as their leading problem; two out of five (44 per cent) point instead to higher shipping costs. Cancellation of orders by customers, low inventory levels and issues related to the delivery of final goods to customers were not seen as significant.

Half of the companies (49 per cent) are responding to the supply chain challenges by diversifying their suppliers and supply routes. Increasing both collaboration with suppliers and parts and supplies inventories are the other top two actions European CFOs are taking to address supply chain problems.

The mitigation strategy differs from one sector to another sector. Almost two out of three CFOs in industrial products & services (66 per cent) and consumer goods (63 per cent) say diversification of suppliers and distribution routes is the top strategy to mitigate supply chain risks. By contrast only about a fifth of CFOs in financial services (17 per cent) and business and professional services (21 per cent) say this is a top strategy for them.

Similarly, around half of CFOs in the consumer goods sector (56 per cent), industrial products & services (53 per cent) and energy, utilities and mining (51 per cent) feel that increased collaboration with suppliers is a top strategy to mitigate supply chain problems.

Increasing parts and supplies of inventories is a top strategy for the majority of CFOs in the industrial products & services sector (63 per cent), automotive (56 per cent) and consumer goods sector (51 per cent).

Increasing digital planning tools is the top strategy for CFOs in the tourism & travel sector (60 per cent) and transport & logistics sector (44 per cent).

A significant portion of CFOs in the financial services sector (34 per cent), technology, media & telecommunications (27 per cent) and business & professional services (21 per cent) say that they have not taken or are not planning to take any action.

Most CFOs (86 per cent) expect supply chain concerns to remain part of the business landscape until well into 2023. A third feel the supply chain issue will improve by mid-2023. One in five believe it will improve by the end of 2023.

Across different sectors, similarly, the majority of CFOs believe supply chain issues will persist until the end of 2023. A fifth of CFOs from energy, utilities & mining (19 per cent) and transport & logistics (19 per cent) feel that supply chain issues will be resolved by the end of 2024. However, a third of CFOs in the financial services sector (37 per cent) and technology, media & telecommunications (28 per cent) say they don’t know or that supply chain problems do not affect their sector.

Conclusion

Geopolitical risk has risen in the past decade, but business has largely shrugged it off, assuming any impact will be limited. This Deloitte European CFO Survey indicates that the invasion of Ukraine is likely to break this pattern.

Six months ago CFOs’ greatest concern was the shortage of skilled professionals. Their fear was that a lack of skilled labour could exacerbate wage inflation and begin to limit growth. That concern has certainly not disappeared but is now overshadowed by something far worse: the outbreak of the most serious conflict in Europe since the Second World War.

Unsurprisingly CFOs now see the external risks to their business as more significant than at any point since the inception of our survey in 2015. The immediate implications of the Russian invasion of Ukraine are greatly accelerated inflation and diminished hopes for growth amid persistent and serious supply chain disruptions.

Despite this, CFOs remain optimistic about the evolution of revenues, CAPEX and hiring, though they are less confident about operating margins.

How their views develop depends on how the Ukraine conflict plays out and sanctions on Russia evolve and the extent of the impacts on European and global economic prospects. Businesses so far are not allowing themselves to be daunted. They remain committed to expansionary strategies, including organic growth, expansion in existing markets and digitalisation. But, as the results of the survey show, they know that the macroeconomic and business risks are greater now than at any time in recent years. Time will tell whether businesses can maintain their current expansionary orientation even as war continues and recession risks grow.

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