The latest Deloitte survey of UK Chief Financial Officers released today shows that uncertainty over Brexit is driving a marked shift towards defensive strategies among British businesses. With the UK’s growth prospects heavily dependent on the so far uncertain nature of its exit from the EU, corporates are cutting back on capital expenditure and hiring. Cost reduction is the top priority for CFOs who are placing a greater emphasis on it now than at any time in the last nine years.
CFOs continue to be pessimistic about the long-term effects of Brexit, with more than three-quarters expecting it to lead to a deterioration in the business environment. Domestic risks seem to be the dominant concern for CFOs, Brexit rated as the biggest threat to business by far, followed by greater US protectionism and weak demand in the UK. Despite slowing global growth leading to a weaker external environment, CFOs rate emerging market and euro area weakness among the bottom three risks to their businesses.
After a long period of easy access to cheap credit, funding conditions have begun to tighten for the large corporates on our survey panel. CFOs report that the cost of credit for their businesses has risen to its highest level in almost six years and availability has dropped to a two-year low. Rising interest rates have also brought a renewed focus on corporate leverage. For the first time in eight years, a net balance of CFOs rate UK corporate balance sheets as overleveraged.
The survey reveals a divergence of opinion between economists and CFOs on the likely nature of Brexit. The latest consensus growth forecasts suggest that economists expect a transition deal, but corporates are positioned for the hardest Brexit, with risk appetite at recessionary levels and an intense focus on cost control. Businesses seem to be increasingly pricing in a worst-case outcome. Anything better, including a delay or a deal, could deliver a Brexit bounce in sentiment.
To read the full report and download the survey data please click on the link below:
PS – In last week’s briefing we highlighted the risk posed by Italy’s high level of government debt, yields on which rose sharply last year. Italy’s populist coalition government is committed to boosting public spending but had to scale down its plans to avoid EU sanctions for breaching European budgetary rules. Now, with the latest economic data showing that Italy was in recession in the second half of last year, its government is likely to face increased pressure to raise spending, which could further strain its relations with the EU.