"Finance leaders have edged towards more defensive balance sheet strategies, particularly cost control and building up cash."
Over two-thirds (68%) of UK CFOs believe high inflation will continue - anticipating it to remain higher for longer - and to exceed economists’ expectations.
The latest ONS figures, released yesterday, show that inflation rose to a new 40-year high of 9.4% in June.
The majority of CFOs (86%) now expect inflation to exceed 2.5% in two-years’ time (up from 78% in Q1) – the highest reading on record. More than a third (39%) think inflation will settle 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).
This quarter’s survey asked CFOs how they are responding to the highest levels of inflation seen 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 ten years.
The majority of CFOs (61%) say that 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.
Ian Stewart, chief economist at Deloitte, said: “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.”
Richard Houston, senior partner and CEO of Deloitte, commented: “It’s interesting that CFOs remain optimistic on investment - despite rising inflation and recessionary risks. They remain convinced that growth and resilience will only come through increased spending on digital technology – and the skills to use it.”
