Rising costs weigh on business sentiment

Deloitte’s third quarter CFO Survey, conducted in the second half of September, shows a softening of business sentiment, largely unwinding the pick-up in confidence seen in the first half of the year.

Cost pressures have moved to the fore with CFO expectations for operating costs rising to the highest level in more than four years.

Concerns about UK productivity and competitiveness have also increased and stand at the highest level since we first asked this question in 2014. Productivity and competitiveness now rank joint first with geopolitics on CFOs’ risk list.

This is consistent with a wider story of high inflation and wage growth. UK inflation is running at 3.8% inflation, the highest rate in the G7, and seems likely to hit 4.0% or even more before the end of the year. In April the National Living Wage increased by 6.7% and companies faced the largest corporate tax hike in 30 years as new, higher rates of employer NI (national insurance) came in.

Official data suggests that higher costs are not being offset by gains in productivity. On the contrary, the latest data shows that output per hour worked in the second quarter was 0.8% lower than a year earlier.

CFOs have responded to these pressures with a focus on cost control, building cash reserves and reducing debt. These measures, however, seem unlikely to be enough to preserve margins. Most CFOs expect operating margins to decline in the next 12 months.

One bright spot is a slight decline in concerns around geopolitics. While it remains at the top of the CFO risk list, along with UK productivity, the absolute reading has declined, perhaps in part as a result of a series of US trade deals in recent months (the survey closed before the latest US-China spat over tariffs).

After an improvement in the first half of the year UK business sentiment and risk appetite have softened amid growing concerns around costs and competitiveness. The findings are consistent with our view that the pace of UK GDP growth is likely to slow in the second half of this year. High inflation, business caution and slowing growth create a challenging backdrop for the chancellor’s budget on 26 November.

PS: We’ve written recently about the surge in the valuation of tech stocks in the US with the ‘Magnificent Seven’ US tech companies now accounting for more than 30% of the S&P 500’s market capitalisation. Last week IMF managing director Kristalina Georgieva warned of the danger of a sudden correction in stock markets as AI tech stocks push past valuations seen during the dotcom boom. Jamie Dimon and David Solomon, CEOs of US investment banks JP Morgan and Goldman Sachs, have given similar warnings and highlighted the risk of a market correction in the next 24 months.