The latest Deloitte survey of UK Chief Financial Officers (CFOs) released this morning shows that business confidence has edged up and is running not far off its long-term average. CFOs seem to have shrugged off weakness in equity markets and concerns about trade with perceptions of uncertainty dropping to the lowest levels since the spring of 2016, before the EU referendum. This finding fits with our own “Worry Index” which tracks newspaper references to terms relating to uncertainty and risk. It dropped to a ten-year low in the first quarter.
The announcement of the Brexit transition on 19th March seems to have had a positive effect on the corporate mood. 84 CFOs responded to the CFO survey before the deal was announced, 22 after. Those who answered in the wake of the announcement showed significantly higher levels of optimism and risk appetite than earlier respondents. Later respondents were also less negative about the long-term effects of Brexit.
For the first time in two years CFOs do not rate Brexit as the main risk facing their businesses. Brexit has dropped to second place, with concerns about slower UK growth now at the top of the risk league.
Such uncertainties about prospects for activity in the UK are reflected in the balance sheet strategies being pursued by large businesses. CFOs in businesses that derive most of their revenues abroad report a clear focus on expansion, especially introducing new products or services and moving into new markets. Their counterparts in businesses deriving most of their revenues from the UK are operating more defensively, with cost control as their top priority.
With the unemployment rate at a 43-year low, labour shortages are emerging in the UK economy. 31% of CFOs report that recruitment difficulties or skills shortages have increased in the last three months, with none reporting a decline. CFOs have also brought forward their estimates for the timing of interest rate rises, with 96% expecting rates to be higher in a year’s time.
The effect of the transition announcement on this quarter’s survey results underscores the sensitivity of sentiment to developments in the Brexit negotiations. The moment of truth on Brexit is approaching. The UK government hopes to strike a deal with the EU and have it endorsed by Parliament this year. Whether it succeeds in doing so seems likely to be a major driver of business confidence through the rest of this year.
To read the full report and download the survey data please click on the link below:
PS: Two weeks ago we argued that the trade spat between the US and China represented an economic and a geopolitical contest. An article in the FT by Richard Staropoli, former Chief Information Officer for the US Department of Homeland Security, lends support to this view. In it Mr Staropoli wrote that tariffs on Chinese imports to the US, “are long overdue and they must be only the first step to safeguarding the technological interests of America and the world. We are in a new cold war with Beijing, to retain control of the technology critical to the modern economy."
PPS: We recently wrote a briefing on the advantages of cash whilst noting the rise of digital payments. Last week the head of Sweden’s Central Bank, Stefan Ingves, warned of the dangers of a completely digital payments system controlled by private companies. The governor cautioned that a lack of public control would leave the country vulnerable in the event of a serious crisis or war.
PPPS: We recently wrote another briefing on the value of a university degree. Last week we came across figures published in 2015 by The Chartered Institute of Personnel Development – which represents people working in HR – showing that 35% of bank and post office clerks have degrees, ten times the percentage in 1979 and the number of newly-employed teaching assistants with a degree has increased from 5.6% to 36.9% since 1979.