Home »
Inflation, interest rate rises and fiscal squeeze weighs on CFOs less optimistic outlook
Deloitte CFO survey suggests UK CFOs' optimism has fallen to its lowest level in two years, however, companies are seeking growth opportunities, and for larger companies, financing conditions remain favourable.UK CFOs are less optimistic about the prospects for economic recovery in 2011 as inflation, interest rate rises and the fiscal squeeze takes hold. According to Deloitte’s 15th quarterly survey of chief financial officers and group finance directors of more than 130 major companies in the UK, CFO optimism fell to its lowest level in two years. The sustainability of the recovery remains fragile with CFOs in the first quarter this year attaching a 29% probability to the chance of a double dip in the economy, up from 27% in the previous quarter. On average, CFOs expect the UK fiscal squeeze to reduce UK corporates’ potential profits by 7% this year. More than 80% expect the “fiscal squeeze” will reduce companies’ profits in 2011.
Ian Stewart, Deloitte chief economist, commented that the most widespread concern about inflation – cited by 40% of CFOs - relates to the way in which it raises input or raw material costs, and thus threatens margins. “While corporate profits have rebounded strongly from their lows, high inflation and the prospect of higher interest rates may limit the scope for margin growth from here,” he says. “CFOs are less confident than the Bank of England that inflation will decline over the next two years. Most CFOs think there is a less than even chance of inflation falling back to its 2.0% target in two to three years.”
Stewart said finance directors also believe that the first rise in UK interest rates is in sight, with two thirds expecting the Bank of England to raise rates by September. In total, 86% of CFOs surveyed expect UK interest rates to rise by the end of the year.
Yet, despite CFO’s less optimistic outlook, Stewart says companies are seeking growth opportunities through expansion, raising capital spending and acquisitions. “However, with inflation at current levels, profit margins are unlikely to expand at the heady rates seen in 2010,” he warned.
Margaret Ewing, Deloitte partner and vice chairman, said that reduced optimism among finance chiefs seem to be influenced by external events, such as conflict in the Middle East and the earthquake in Japan, and movements in financial markets. “By contrast, high levels of risk appetite seem to reflect longer term judgements and more positive views on corporate balance sheets, the opportunities available to companies and financial conditions.”
The survey indicated that “risk appetite” among UK companies rose to its highest level since the CFO Survey commenced in Q3 2007, with 41% of CFOs saying that now is a good time to take risk on to their balance sheets. The survey suggested that risk appetite is strongest among the largest companies.
With expansion being the top priority for CFOs over the next 12 months, the survey suggests that financial conditions remain favourable for larger companies to execute that strategy. According to the survey, credit availability for the largest UK corporate has risen to its highest level since the Deloitte CFO Survey started in 2007.
Image provided by jscreationzs
Date Posted:11th April 2011