For UK corporates, the potential euro breakup, the recession and overall uncertainty are taking a major toll on sentiment, according to a new survey.
The second quarter Deloitte CFO Survey
, which polled 137 CFOs and finance directors in the UK, revealed the steepest drop in CFO confidence since the survey began in 2007. This is the third major decline in five years.
Respondents see a breakup of the euro as the biggest threat to their businesses. Fully 36 percent of respondents see one or more countries leaving the euro area by the end of 2012, up from 26 percent at the end of Q1. Major UK corporates are gearing up for a potential breakup; 28 percent of CFOs said their plans for doing so are “all made” or “at an advanced stage,” compared to 18 percent in March.
CFOs also see a one-in-two chance that the recession continues through the end of this year or for a “triple-dip” recession to occur over the next two years.
Macroeconomic uncertainty continues to hinder corporate confidence. Fully 95 percent of respondents said that financial and economic uncertainties facing their businesses are higher than normal. This has had a negative effect on risk appetite as 80 percent of CFOs now view it is a bad time to take risk onto their balance sheets.
In response to the recession and the uncertain economic outlook, corporates have adopted more defensive strategies. Top priorities over the next 12 months include cutting costs and boosting cash flow. CFOs are now more focused on reducing leverage and disposing of assets, and less concerned with making acquisitions or undertaking capital expenditure. Hiring, capital spending and discretionary spending are projected to decline over the next year.
Eighty-two percent of respondents attribute the drop-off in capital spending to the expected demand at home and abroad, as well as economic uncertainty. Only 4 percent said they have been influenced by the cost or ability of finance.
Deloitte noted that its first quarter survey, CFOs indicated a rise in business confidence, but still pursued defensive balance sheet strategies. Deloitte noted that recent events appear to have “vindicated” the caution in Q1. “Views on the degree of risk facing the corporate sector, like the equity markets, are changeable,” the company said, in a statement. “But our latest survey shows that CFOs see plenty of risks ahead. Economic uncertainty is the big constraint on corporate expansion. The challenge for UK-based corporates is to find sources of growth in a volatile macro environment.”