Amid rising inflation and intensifying financial headwinds, finance leaders assign a 63% chance to experiencing a recession throughout the subsequent yr, in line with Deloitte’s UK CFO Survey Q2 2022. Over two-thirds (68%) imagine excessive inflation will proceed – anticipating it to stay increased for longer – and to exceed economists’ expectations.
The vast majority of CFOs (86%) now anticipate inflation to exceed 2.5% in two-years’ time (up from 78% in Q1) – the best studying on report.* Greater than a 3rd (39%) suppose inflation will settle between 2.6% and three.5% in two-years’ time and nearly half (47%) anticipate it to stay above 3.5%.
CFOs’ expectations for rate of interest rises have additionally sharply elevated. They now anticipate charges to nearly double over the following 12 months with the Financial institution of England’s base price reaching 2.5% in a yr’s time (up from 1.5% in Q1).
Performed between 16 and 30 June 2022, Deloitte’s newest quarterly CFO Survey captured sentiment amongst the UK’s largest companies, in opposition to a backdrop of historic UK inflation charges and the sharpest tightening of financial coverage because the Nineteen Eighties. The most recent survey noticed 77 CFOs take part, together with CFOs of 15 FTSE 100 and 32 FTSE 250 corporations. The mixed market worth of the 49 UK-listed corporations that participated is £392 billion, roughly 16% of the UK quoted fairness market.
Impression of rising prices
This quarter’s survey requested CFOs how they’re responding to the best ranges of inflation seen in 40 years. The highest three company responses to rising prices are passing on worth rises to clients, enhancing money movement administration and absorbing increased inflation by way of a discount of margins.
Will increase within the Financial institution of England’s base rate of interest because the begin of the yr are additionally having a pronounced impact on company financing prices. Nearly 1 / 4 (24%) of CFOs report credit score as pretty or very expensive, the best studying in ten years.
The outlook for working margins additionally continues to deteriorate. The overwhelming majority of CFOs (87%) imagine working margins might be squeezed over the following 12 months. This compares to 71% anticipating a fall in working margins in Q1. Nonetheless, 54% of CFOs anticipate revenues to rise over the following yr.
Finance leaders are putting higher emphasis on defensive methods. They’re now most centered on lowering prices and growing money movement, however proceed to price introducing new services and products or increasing into new markets as a precedence.
Ian Stewart, chief economist at Deloitte, says:
The Chief Monetary Officers of the UK’s largest corporations are braced for a recession. Finance leaders have edged in direction of extra defensive steadiness sheet methods, notably price management and increase money.
But CFOs will not be in batten down the hatches mode. Danger urge for food is barely barely beneath common ranges, and properly above the lows seen within the monetary disaster, on the time of the EU referendum and throughout the pandemic.
Labour shortages, recruitment difficulties and provide chains
Over a 3rd (40%) of finance leaders report that their companies have confronted important or extreme recruitment difficulties in Q2 – a slight enhance from Q1 (35%). CFOs anticipate labour shortages will persist, with a 3rd saying these might be important or extreme in a yr’s time.
In Q2, 31% of CFOs reported important or extreme ranges of provide chain disruption. A modest enchancment in situations is predicted, with round a fifth of CFOs (22%) anticipating comparable ranges of disruption in a yr’s time.
Danger and outlook
The vast majority of CFOs (61%) say that the extent of uncertainty going through their enterprise is excessive or very excessive. Geopolitics, additional rate of interest rises, rising inflation and chronic labour shortages, respectively, rank on the high of the record of CFO considerations.
Nevertheless, growing capital spending stays a robust precedence for 19% of CFOs, remaining above the five-year common of 14%. CFOs are optimistic about medium-term prospects for funding and most anticipate enterprise productiveness, spending on abilities and funding in digital know-how and belongings to hurry up within the subsequent three years.
Ian Howse, senior companion at Deloitte in Wales, mentioned:
Anecdotally we’re listening to the same sentiment throughout Wales. Recruitment is a matter – there’s a particular abilities scarcity in sure sectors, corresponding to know-how. Provide chain points are ongoing – with some industries struggling greater than others. Prices proceed to rise and margins are being squeezed regardless of corporations passing price rises onto the buyer. However it’s attention-grabbing that CFOs stay optimistic on funding – given rising inflation and recessionary dangers. They continue to be satisfied that progress and resilience will solely come by way of funding in digital know-how and the talents to make use of it.
