Over three months on from the EU referendum, 57% of CFOs surveyed still consider Brexit the biggest risk to their businesses.
Ian Stewart, chief economist at Deloitte said, “The animal spirit of the corporate sector took a battering in the wake of the referendum and, three months on, Brexit continues to loom large for the UK corporate sector.”
“Since our last survey we’ve seen the appointment of a new prime minister, a strong rally in equity markets and a solid run of UK economic data. But CFOs continue to see significant risks in the economic environment and perceptions of uncertainty remain elevated.”
“These concerns are weighing on corporate risk appetite with low levels of risk appetite a weaker outlook for investment and hiring.”
David Sproul, senior partner and chief executive of Deloitte
There is some caution as we look ahead to next year
Almost half of CFOs surveyed (46%) expect hiring to slow over the next three years as a result of the referendum result (down from 66% in Q2), 40% said capital expenditure will decrease (down from 58%) and 55% expect discretionary spending to decrease (down from 74%).
CFOs also remain concerned about the long-term impact of Brexit and two-thirds (65%) believe it will lead to a deterioration in the UK business environment, down from 68% in Q2.
Continued concern over the UK’s exit from the EU has also had a negative effect on risk appetite and optimism among CFOs.
Despite some improvement since the sharp, post-referendum deterioration, risk appetite and optimism remain close to previous lows and perceptions of uncertainty are elevated.
Almost half (47%) of CFOs surveyed said they are less optimistic about the financial prospects for their company compared with three months ago (down from 74% in Q2) while just 16% said they were more optimistic.
Half of the respondents said their businesses faces an above-normal level of external financial and economic uncertainty (31% in Q2), 32% said they faced a high level of uncertainty (28% in Q2) and 7% said they face a very high level of uncertainty (37% in Q2).
Expectations for spending and hiring over the next 12 months also remain low. Despite improving over the last quarter, over half of CFOs (58%) still expect UK corporates to cut capital spending in the next 12 months, down from 82% in Q2. Meanwhile, 64% expect discretionary spending to slow, down from 82% and 51% say hiring will slow, down from 83%.
Concerns about weak growth and competitiveness have also risen sharply in the last six months.
A quarter (24%) of CFOs say they expect corporate revenues to decrease over the next 12 months, down from 63% in Q2, while 44% expect operating margins to decrease, down from 70%. In addition, 61% of CFOs expect operating costs to increase over the next 12 months.
The survey also found that 82% of CFOs said now is a bad time to take risk onto their balance sheet, down from 95% in Q2 but still the second highest level since Q4 2011.
With risk appetite among CFOs subdued, finance chiefs are focused on defensive balance sheet strategies.
According to the survey, their top priority is cost reduction, with 47% of CFOs rating reducing costs as a strong priority, unchanged from Q2. Increasing cash flow is rated as the second highest priority, with 42% saying they plan to increase cash flow. More than one third (39%) plan to introduce new products and services, up from 27% in Q2.
Despite continued concern among UK CFOs, David Sproul, senior partner and chief executive of Deloitte, remains optimistic.
“While our survey suggests corporate Britain is in a pessimistic mood, the evidence we have seen so far in the market is somewhat brighter. In the near term we continue to see our clients making investment decisions and strong interest in our services,” he said.
Sproul acknowledged, “There is some caution as we look ahead to next year” but added that he remains “a long-term optimist about the UK economy”.
“The UK has built and enviable business environment which values enterprise and wealth creation. The UK’s move up the World Economic Forum’s competitiveness league, to seventh place, underscores the strength of our economy,” he said.
“The central challenge for the UK government is to ensure that the Brexit settlement enhances these strengths.”