The Deloitte CFO Survey [PDF]

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Despite December's agreement between the UK and the EU to proceed to trade talks, CFOs' concerns about Brexit have mounted. It tops the list of risks for businesses in 2018. Weak UK growth ranks as the second greatest risk facing businesses this year, with growing concern about productivity in third place. In a world.
Q4 2017

The Deloitte CFO Survey Focus on cost control, no retreat from growth

Authors

The UK’s largest businesses enter 2018 more focussed on controlling costs than at any time in the last eight years. Although the UK is in the ninth year of recovery corporates seem to be reacting to slower UK growth and Brexit uncertainties with a renewed focus on costs.

Debapratim De Senior Economic Analyst 020 7303 0888 [email protected]

Despite December’s agreement between the UK and the EU to proceed to trade talks, CFOs’ concerns about Brexit have mounted. It tops the list of risks for businesses in 2018. Weak UK growth ranks as the second greatest risk facing businesses this year, with growing concern about productivity in third place. In a world of accelerating growth and buoyant equity markets domestic risks loom large for UK CFOs. Yet strikingly, a sharper focus on risk and cost control has not led to a collapse in business sentiment. CFOs are more optimistic today than they have been, on average, in the last couple of years. Perceptions of uncertainty are far lower than during the euro crisis in 2011-12 and following the EU referendum in 2016. Far from backing away from growing their businesses, as happened during previous periods of uncertainty, CFOs are putting increased weight on growth. The priority CFOs attach to expansion over the next 12 months, whether organically, through acquisitions, or introducing new products/services or moving into new markets, is at its highest level since we first asked this question in 2009. So why, in an environment where home-grown risks and cost control loom large, are CFOs still committed to growth?

Ian Stewart Chief Economist 020 7007 9386 [email protected]

For a business cost control counters the risk from weaker UK growth. But beyond these shores activity is accelerating and opportunities are increasing. 2017-2018 looks set to be the best two-year period for growth in Britain’s core export market, the EU, in ten years. Nor is it all doom and gloom at home. On average, economists see the UK economy growing this year in line with what the Office of Budget Responsibility sees as its trend rate. Some CFOs may anticipate an easing of Brexit risks, feel that their own business is less directly affected by Brexit or that they can mitigate the risks.

Alex Cole Economic Analyst 020 7007 2947 [email protected] Rebecca Porter Economic Analyst 020 7007 5728 [email protected] Tom Simmons Economic Analyst 020 7303 7370 [email protected]

Key contacts Ian Stewart Chief Economist 020 7007 9386 [email protected]

The backwash from Brexit is the dominant theme for UK corporates as they enter 2018. But it has not crushed the animal spirits of the business sector nor forced a retreat from expansion. The central challenge for UK business will be to achieve growth in an environment of stringent cost-control.

Richard Muschamp CFO Programme Leader 020 7007 0724 [email protected] For current and past copies of the survey, historical data and coverage of the survey in the media and elsewhere, please visit: www.deloitte.co.uk/cfosurvey

Chart 1. Risk to business posed by the following factors

Weighted average ratings on a scale of 0-100 where 0 stands for no risk and 100 stands for the highest possible risk 62

Effects of Brexit

58 59

Weak demand in the UK

53 49

Poor productivity/weak competitiveness in the UK economy

43

The prospect of further rate rises and a general tightening of monetary conditions in the UK and US

49 49

A bubble in housing and/or other real and financial assets and the risk of higher inflation 35 2017 Q4

47 45 40

45

50

55

60

65

2017 Q3 1

The Deloitte CFO Survey Q4 2017 | Focus on cost control, no retreat from growth

Brexit pessimism rises CFOs enter 2018 with greater pessimism about the effects of Brexit. About three-quarters expect Brexit to lead to a worsening of conditions in the long term, up from 60% in the previous quarter.

Chart 2. Long-term impact of Brexit

% of CFOs who think the overall environment for business in the long term will be better/worse if the UK leaves the EU 80% 70% 60% 50% 40% 30% 20% 10% 0%

68%

13%

11%

14%

2016 Q2

2016 Q3

2016 Q4

Better

CFOs continue to expect to reduce their own spending as a result of Brexit. More than half say it will lower their discretionary spending. A third or more will scale down their capital investment and hiring plans.

60%

19%

14%

8% 2017 Q1

2017 Q2

9%

2017 Q3

2017 Q4

Worse

% of CFOs who expect M&A activity, capital expenditure, hiring and discretionary spending by their business to decrease over the next three years as a consequence of Brexit 80%

74%

70%

66%

50% 40% 30%

0%

55% 55% 51%50% 50% 49%

58%

60%

10%

38% of CFOs rate the level of external financial and economic uncertainty facing their businesses as high or very high, a significantly lower proportion than during the euro crisis in 2011-12 and following the EU referendum in 2016.

60%

Chart 3. Effect of Brexit on own spending and hiring decisions

20%

CFO perceptions of uncertainty edged up marginally in the fourth quarter.

73%

72%

66%

65%

40%

2017 Q4

46% 39% 38% 41% 36% 30%

40% 39% 35% 33% 30% 26%

19% 17% 16% 15% 15% 11%

Mergers and acquisitions

Capital expenditure

2016 Q2

2016 Q3

2017 Q3

2017 Q4

2016 Q4

Hiring 2017 Q1

Discretionary spending 2017 Q2

Chart 4. Uncertainty

% CFOs who rate the level of external financial and economic uncertainty facing their business as high or very high 70% 60% 50% 40% 30% 20% 10% 0%

2

2011

2012

2013

2014

2015

2016

2017

The Deloitte CFO Survey Q4 2017 | Focus on cost control, no retreat from growth

Optimism declines CFO optimism edged lower in the fourth quarter. But CFOs are more optimisitic today than they have been, on average, in the last two years.

Chart 5. Business optimism

Net % of CFOs who are more optimistic about the financial prospects of their company than three months ago 70% 50% 30% 10% -10% -30% -50% -70% -90% 2008

21% of CFOs think that now is a good time to take greater risk onto their balance sheets. Risk appetite has remained broadly around these levels since late 2016.

2009

2010

2011

2012

2013

2014

2015

2016

2017

Chart 6. Corporate risk appetite

% of CFOs who think this is a good time to take greater risk onto their balance sheets 80% 70% 60% 50% 40% 30% 20% 10% 0%

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.

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Chart 7. Outlook for corporate revenues, costs and margins

Net % of CFOs who expect UK corporates’ revenues, costs and margins to increase over the next 12 months 100%

Revenues

80%

Operating costs

60% 40% 20% 0% -20% -40% Operating margins

-60% -80%

2011

2012

2013

2014

2015

2016

2017

3

The Deloitte CFO Survey Q4 2017 | Focus on cost control, no retreat from growth

Focus on UK-specific risks CFOs see issues related to the domestic environment as the biggest risks facing their businesses. They rank Brexit as their top risk, followed by concerns over weak demand and poor productivity/weak competitiveness in the UK economy. Concerns over each have increased since the third quarter. CFOs have also become markedly more concerned about the risks posed by US policy uncertainty/ protectionism as well as weakness or volatility in emerging markets/rising geopolitical risks worldwide. The continued recovery of the euro area economy means that concerns over deflation and economic weakness in the region remain the lowest ranked risk for CFOs – with such concerns having fallen sharply over the last three years.

Chart 8. Risk to business posed by the following factors

Weighted average ratings on a scale of 0-100 where 0 stands for no risk and 100 stands for the highest possible risk

62 Effects of Brexit

58 59

Weak demand in the UK

53 49

Poor productivity/weak competitiveness in the UK economy

43 49

The prospect of higher interest rates and a general tightening of monetary conditions in the UK and US

49 47

A bubble in housing and/or other real and financial assets and the risk of higher inflation

45 46

Policy uncertainty in the US and risk of greater protectionism

38 41

Weakness and/or volatility in emerging markets and rising geopolitical risks worldwide

33 39

Deflation and economic weakness in the euro area, and the possibility of a renewed euro crisis

35 20

2017 Q4

4

2017 Q3

30

40

50

60

70

The Deloitte CFO Survey Q4 2017 | Focus on cost control, no retreat from growth

Corporate strategies defensive CFOs enter 2018 with a sharper focus on cost than at any time in the last eight years.

Chart 9. Corporate priorities in the next 12 months

% of CFOs who rated each of the following as a strong priority for their business in the next 12 months 51%

Reducing costs

41% 41%

Introducing new products/services or expanding into new markets

39% 34%

Increasing cash flow

35% 21%

Expanding by acquisition

20% 17%

Increasing capital expenditure

17% 16%

Raising dividends or share buybacks

15% 11%

Reducing leverage

Disposing of assets

10% 11% 5%

0% 2017 Q4

Despite their focus on cost reduction, CFOs have not turned their backs to growth. In marked contrast to previous periods of uncertainty such as during the euro debt crisis, when the euro recovery seemed to have halted and after the EU referendum, CFOs are placing much greater emphasis on growth now.

10%

20%

30%

40%

50%

60%

2017 Q3

Chart 10. CFO priorities: Growth Arithmetic average of the % of CFOs who rated growth strategies as a strong priority for their business in the next 12 months 50% 45% 40% 35% 30% 25%

Euro debt crisis

Euro growth scare EU referendum

2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Growth strategies are expanding organically, introducing new products/services or expanding into new markets and expanding by acquisition

5

The Deloitte CFO Survey Q4 2017 | Focus on cost control, no retreat from growth

Funding conditions remain extremely favourable for the large corporates on our survey panel.

Chart 11. Cost and availability of credit

CFOs continue to view credit as being cheap and available.

Credit is costly

Accommodative credit conditions Net % of CFOs reporting credit is costly and credit is easily available 100%

80%

80%

60%

60%

40%

40%

20%

20%

Availability of credit (RHS)

Credit is cheap

0%

0%

-20%

-20%

-40%

85% of them expect the base rate to be 0.75% or above in a year’s time, up from 42% in the third quarter.

-80% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

-100%

Chart 12. Interest rate expectations

% of CFOs who expect the Bank of England’s base rate to be at the following levels in a year’s time 60%

50%

50%

47%

40%

33%

30% 20%

31%

15%

8%

10%

7%

2%

0%

0%

0.25% or lower 2017 Q3

0.50%

0.75%

1%

7%

1.25% or above

2017 Q4

Chart 13. Favoured source of corporate funding

Net % of CFOs reporting the following sources of funding as attractive 100%

Bank borrowing

80% Attractive

CFOs continue to see debt as the most attractive form of financing, with bond issuance and bank loans easily trumping equity issuance.

-60%

-80% -100%

Following the Bank of England’s November rate rise – the first since the financial crisis – CFOs see rates rising further in 2018.

-40%

Cost of credit (LHS)

-60%

60% Bond issuance

40%

Unattractive

20%

6

Credit is available Credit is hard to get

100%

0% -20% -40% -60%

Equity issuance 2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

The Deloitte CFO Survey Q4 2017 | Focus on cost control, no retreat from growth

CFO Survey: Economic and financial context The macroeconomic backdrop to the Deloitte CFO Survey Q4 2017 The global recovery picked up pace in the second half of 2017, driven by faster growth in developed economies. The euro area saw a broad-based acceleration in growth across member nations, while Japan grew for the seventh successive quarter, its longest period of growth since 2001. Business and consumer confidence rose in the developed world, particularly in the euro area and the US. Unemployment continued to decline globally, with UK unemployment falling to a 43-year low and the EU’s unemployment rate reaching its lowest level in nine years. Despite falls in unemployment, wage growth has picked up only modestly. Inflation in the UK reached a five-year high in November but remains subdued in other developed countries. Central banks continued to tighten monetary policy during the final quarter of 2017. The European Central Bank announced that it would slow its quantitative easing programme. In moves which were widely anticipated by financial markets, the Bank of England raised interest rates for the first time in a decade and the US Federal Reserve raised rates for the fifth time since 2015. Following elections in Germany, Angela Merkel’s ruling CDU/CSU coalition and the Social Democrats are in talks of a renewed ‘grand coalition’. In the UK, Chancellor Phillip Hammond’s Autumn Budget eased the pace of austerity and the Office for Budget Responsibility downgraded official forecasts for productivity and GDP growth. Brexit talks achieved a breakthrough with the UK and EU agreeing a deal on the ‘divorce’ payment, paving the way for talks over future trading arrangements.

UK GDP growth: Actual and forecast (%)

FTSE 100 price index Forecasts

4%

7500 7000

3% 2%

6500

1%

6000

0%

Quarter-on-quarter growth

-1% -3%

4500

-4% -5%

Year-on-year growth

-6%

4000 3500

-7% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: ONS, Consensus Economics and Deloitte calculations

UK private and public sector job growth (thousands, quarterly)

3000 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: Thomson Reuters Datastream

UK annual CPI inflation (%) 9%

500

8%

400

7%

300

6%

200

5%

100

4%

0

3%

-100

2%

-200 -300

5500 5000

-2%

1% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

0% -1%

Private

Public

Source: Thomson Reuters Datastream

1993

1997

2001

2005

2009

2013

2017

Source: Thomson Reuters Datastream

7

Two‑chart summary of key survey messages Business optimism

Long-term impact of Brexit

70%

80% 68% 66% 65% 70% 60% 60% 50% 40% 30% 19% 20% 13% 14% 11% 10% 0% 2016 2016 2016 2017 Q2 Q3 Q4 Q1

Net % of CFOs who are more optimistic about the financial prospects of their company than three months ago

50% 30% 10% -10% -30% -50% -70% -90% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

% of CFOs who think the overall environment for business in the long term will be better/worse if the UK leaves the EU

Better

73%

72% 60%

8%

2017 Q2

14%

2017 Q3

9%

2017 Q4

Worse

About the survey This is the 42nd quarterly survey of Chief Financial Officers and Group Finance Directors of major companies in the UK. The 2017 fourth quarter survey took place between 3rd and 15th December. 112 CFOs participated, including the CFOs of 23 FTSE 100 and 46 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 83 UK‑listed companies surveyed is £512 billion, or approximately 19% of the UK quoted equity market. The Deloitte CFO Survey is the only survey of major corporate users of capital that gauges attitudes to valuations, risk and financing. To join our panel of CFO respondents and for additional copies of this report, please contact Anthea Neagle on 020 7303 0116 or email [email protected]

This publication has been written in general terms and we recommend that you obtain professional advice before acting or refraining from action on any of the contents of this publication. Deloitte LLP accepts no liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication. Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Deloitte LLP is the United Kingdom affiliate of Deloitte NWE LLP, a member firm of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”). DTTL and each of its member firms are legally separate and independent entities. DTTL and Deloitte NWE LLP do not provide services to clients. Please see www.deloitte.com/about to learn more about our global network of member firms. © 2018 Deloitte LLP. All rights reserved. Designed and produced by The Creative Studio at Deloitte, London. J14495