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The survey gauges sentiment among Chief Financial Officers (CFOs) of the UK’s largest businesses during the COVID-19 lockdown. 104 CFOs took part representing firms which account for 21% of the entire UK equity market by market capitalisation.
The COVID-19 shock had a dramatic impact on CFO expectations and strategy. CFOs expect their revenues to be 22% lower, on average, this year than estimated in their pre-COVID plans. This decline is four times as great as the 5.4% contraction in UK GDP forecast, on average, by economists. Confidence among CFOs has declined to its lowest ever level, well below the trough at the height of the financial crisis in 2008.
CFOs have reacted to the COVID-19 shock with a decisive shift from growth to strengthening balance sheets. Businesses have never adopted a more defensive stance, with an unprecedented focus on cost control and cash conservation.
Bank of England data show that, in March, UK businesses’ cash deposits rose by a record £34bn. Households appear to be just as cash-concerned. The Centre for Economics and Business Research estimates that the average share of household disposable income that is saved will rise from 6% pre-COVID to over 20% during the lockdown, even after accounting for a fall in incomes.
The Bank’s data also show that in March business bank loans increased by a record £34.1bn. Indeed, debt provision is the main mechanism by which policymakers hope to keep companies afloat during the lockdown and in the transition period when operations resume but revenues lag.
Yet CFOs of the large, international businesses on our panel have reported a marked deterioration in the availability and cost of debt in the last three months. The latest CBI survey also had similar findings, with 79% of businesses reporting cash flow difficulties and a third experiencing constraints on the availability of external finance.
Corporates seem to have frozen activity, with CFO plans for capital spending and expansion in the next year at all-time lows. Most CFOs expect the lockdown to start to ease in May or June and demand for their services to pick up through this year – but most do not anticipate demand for their products and services to return to pre-COVID-19 levels until 2021. This is more along the lines of a ‘u’-shaped recovery than the more rapid ‘v’-shaped recovery that many economists’ forecasts assume.
CFOs see COVID-19 causing lasting change in the areas of business resilience and flexible working. Flexible working is seen as the big winner, with 98% of CFOs expecting it to increase as a result of the crisis. CFOs also believe the post-COVID-19 world will see a greater role for the state and higher levels of corporate and household taxation.
Although these long-term trends are clearer, it is the medium-term period of a partial lockdown that will be the most uncertain for firms. Corporates will be faced with uncertainty over the path of the virus, over their ability to function in a world of limited capacity and about their responsibility for the health of their employees and customers.
The National Institute of Economic and Social Research notes in its latest forecast that a partial lockdown could be “the worst of both worlds” in some sectors, as businesses need to contend with the operating costs of reopening while demand and revenues are limited by social distancing restrictions.
As with Brexit and the US-China trade war – but on a far greater scale – pervasive uncertainty has eroded corporate confidence and derailed expansion plans. CFOs have responded with a laser-like focus on cost control and building up cash.