CFO Sentiment: new forces driving uncertainty

Australia’s post-lockdown economic rebound has been very strong, with a significant employment surge despite the continued prevalence of COVID in the community. However, CFOs face a number of new challenges as they enter the second half of 2022. CPI data last week saw annual inflation rise further to 6.1% (the highest level since the introduction of GST), while the RBA today has announced another increase in the official cash rate to 1.85% – the fourth consecutive monthly rise. Against this backdrop, the good news is that three-quarters of CFOs surveyed for Deloitte’s latest CFO Sentiment report are still optimistic about the prospects of their own business – although these new risks have made them more cautious about the state of the broader economic environment.

Persistent inflation and rapid interest rate increases are challenges CFOs have not faced in decades. As a result, net optimism about financial prospects relative to half a year ago has dropped from 37% in the last survey to -8% now. This is a significant fall in net optimism, especially when compared to much smaller falls in the last three surveys, where CFOs were grappling with more disruptive (but now familiar) COVID outbreaks and related challenges.  

Chart 1: Financial prospects compared to six months ago 

Source: Deloitte CFO Survey.

Such risks are also contributing to uncertainty levels, with 88% of CFOs presently considering uncertainty to be higher than normal – and contributing to a decline in risk appetite. Interestingly, the cautiousness and uncertainty CFOs are experiencing is different to that experienced in the past. Previously, even though uncertainty levels were high over the last 18 months, CFOs still felt ready to take on risk. Today, however, only 25% believe they should take on more risk presently, compared to 58% at the end of last year.

While economic conditions are concerning, CFOs nominated securing and retaining key talent as their biggest business risk. Some 90% are worried that talent shortages are becoming either business critical or preventing them from expanding the business as quickly as hoped. In recognition of this, 83% of CFOs are placing greater emphasis on skilling, reskilling, and upskilling employees through the provision of practical, on-the-job experience. This not only supports productivity gains, but also assists in engaging and retaining employees. However, 77% of CFOs believe the growth and development (and by extension engagement and retention) of their employees is being inhibited by insufficient in-house training and reskilling capabilities. 

Looking longer term, 32% of CFOs are focussing their M&A strategy to accelerate their long-term transformation to business models. Even though the economic challenges of supply chain disruptions and inflation are adversely affecting short-term performance, CFOs recognise M&A-led business model transformation can strengthen their market positioning and provide long-term benefits. 

Overall, despite the economic challenges that 2022 has posed so far (including today’s rate rise), Australia is approaching this difficult economic environment from a strong footing. Businesses can look at a range of strategies to mitigate the impacts of cost pressures. As well as pricing decisions, for many this will include a fresh look at technology solutions, as well as investment back in their workforce, to both raise skill levels and encourage staff retention.

For more on CFO Sentiment, including upskilling and M&A insights, see the full publication here.