Deloitte has this week released the results of its fourth quarter’s 2011 CFO Survey. It reveals that UK CFOs see a break-up of the euro as the biggest threat to their businesses in 2012. One CFO summed up the wider concern when he wrote that the biggest risk was a “Eurozone collapse sparking a second credit crunch”. UK corporates have been unconvinced by the response of European politicians and policymakers to the crisis. On average respondents see a high probability, 37%, that one or more member states will leave the single currency in the course of 2012. CFOs believe that a collapse of the euro would have its most severe effects on UK business through financial channels – by causing a new credit crunch and by driving major swings in asset prices and exchange rates.
Against such a backdrop it is no surprise that a recession is, after the euro, the second biggest concern for CFOs in 2012. CFOs are working on the assumption that the UK is likely to fall back into recession. On average they see a 54% chance of the UK suffering a ‘double dip’. Most expect the period of weakness to be prolonged, lasting for more than a year. Financial stress is already affecting big UK corporates: CFOs reported the sharpest decline in credit availability since the third quarter of 2008. Uncertainty is another significant risk. 56% of CFOs rate the level of uncertainty facing their business as being “high” or “very high”. As one respondent put it, “Everyone is waiting for something very bad to happen”.
The CFO Survey illustrates the corrosive effect of uncertainty on corporate spending. 87% of CFOs believe this is a bad time to be taking additional risk onto their balance sheets. Just as happened in late 2008, CFOs are reacting to a tough climate by strengthening their balance sheets. The financial strategies of UK corporates have reversed in the last year. CFOs entered 2011 with a focus on expanding into new markets and increasing capital spending; they enter 2012 with a focus on cutting costs and increasing cash flow. Companies which derive a high proportion of revenues outside the UK are more optimistic and have a more expansionary stance than their UK-focussed counterparts. But those pinning their hopes for growth on a big increase in corporate spending in the UK may be disappointed. On balance CFOs expect corporate hiring, investment and discretionary spending to contract in 2012.
The CFO Survey testifies to the risks, but it also maps how CFOs are responding - with a renewed focus on cost control and cash flow and a search for growth opportunities. Perhaps most of all, the survey demonstrates how external risk blunts corporates’ appetite for expansion. By and large big corporates in the UK, the euro area and the US have the firepower to spend. The challenge for policymakers in 2012 is to convince them that it makes business sense to do so, says Deloitte.
