Amid rising inflation and intensifying economic headwinds, finance leaders have given a 63% probability to experiencing a recession in the next year, according to Deloitte’s UK CFO Survey for Q2 2022.
More than two-thirds (68%) believe high inflation will continue - anticipating it will remain higher for longer - and exceed economists’ expectations.
Most CFOs (86%) expect inflation to exceed 2.5% in two years’ time, up from 78% in Q1 and the highest reading since the question was first asked in 2013.
More than a third (39%) think inflation will settle at between 2.6% and 3.5% in two-years’ time and almost half (47%) expect it to remain above 3.5%.
CFOs’ expectations for interest rate rises have also sharply increased. They now anticipate rates to almost double over the next 12 months, with the Bank of England’s base rate reaching 2.5% in a year’s time, up from 1.5% in Q1.
Conducted between 16 and 30 June, Deloitte’s latest quarterly CFO Survey captured sentiment among the UK’s largest businesses. A total of 77 CFOs participated, including CFOs of 15 FTSE 100 and 32 FTSE 250 companies. The combined market value of the 49 UK-listed companies that participated is £392bn, about 16% of the UK quoted equity market.
Impact of rising costs
This quarter’s survey asked CFOs how they are responding to the highest levels of inflation in 40 years. The top three corporate responses to rising costs are: passing on price rises to customers; improving cash flow management; and absorbing higher inflation through a reduction of margins.
Increases in the Bank of England’s base interest rate since the start of the year are also having a pronounced effect on corporate financing costs. Almost a quarter (24%) of CFOs report credit as fairly or very costly, the highest reading in 10 years.
The outlook for operating margins also continues to deteriorate. The overwhelming majority of CFOs (87%) believe operating margins will be squeezed over the next 12 months. This compares with 71% expecting a fall in operating margins in Q1.
Nonetheless, 54% of CFOs expect revenues to rise over the next year.
Finance leaders are placing greater emphasis on defensive strategies. They are now most focused on reducing costs and increasing cash flow, but continue to rate introducing new products and services or expanding into new markets as a priority.
Ian Stewart (pictured), Chief Economist at Deloitte, commented: “The chief financial officers of the UK’s largest companies are braced for a recession. Finance leaders have edged towards more defensive balance sheet strategies, particularly cost control and building up cash.
“Yet CFOs are not in 'batten down the hatches' mode. Risk appetite is only slightly below average levels, and well above the lows seen in the financial crisis, at the time of the EU referendum and during the pandemic.”
Labour shortages, recruitment difficulties and supply chains
More than a third (40%) of finance leaders report that their businesses have faced significant or severe recruitment difficulties in Q2 – a slight increase from Q1 (35%). CFOs anticipate labour shortages will persist, with a third saying these will be significant or severe in a year’s time.
In Q2, 31% of CFOs reported significant or severe levels of supply chain disruption. A modest improvement in conditions is expected, with around a fifth of CFOs (22%) anticipating similar levels of disruption in a year’s time.
Risk and outlook
The majority of CFOs (61%) say the level of uncertainty facing their business is high or very high. Geopolitics, further interest rate rises, rising inflation and persistent labour shortages, respectively, rank at the top of the list of CFO concerns.
However, increasing capital spending remains a strong priority for 19% of CFOs, remaining above the five-year average of 14%.
CFOs are optimistic about medium-term prospects for investment and most expect business productivity, spending on skills and investment in digital technology and assets to speed up in the next three years.
• To view this and previous CFO surveys, visit www.deloitte.co.uk/cfosurvey