UK: The Deloitte CFO Survey - Q4 2015

The year ahead: A cautious start to 2016

Support among the Chief Financial Officers of the UK's largest corporates for staying in the EU has narrowed, mirroring a drift towards greater scepticism on the part of the UK public in the second half of 2015. A clear majority of CFOs continue to favour remaining in the EU, but those expressing unqualified support for membership fell from 74% in the second quarter to 62% in the fourth quarter. Just 6% of CFOs favour leaving. But 4% did not express an opinion, and a sizeable minority, 28%, say their decision will depend on the results of the Prime Minister's renegotiation of the UK's membership of the EU. The outcome of these discussions is likely to emerge following the European Council meeting in February. With almost a third, or 32%, of CFOs undecided or undeclared, an eventual deal could significantly affect business attitudes to EU membership.

UK CFOs are downbeat about the outlook for growth in the euro area in 2016 despite a stronger than expected acceleration in activity seen in the region in 2015. Indeed, CFOs are more pessimistic about prospects for the euro area this year than for emerging market economies. CFO sentiment is most positive on the US and the UK economies. Nonetheless, doubts about the pace and sustainability of the global recovery are weighing on business sentiment. CFO confidence fell through 2015 and ended the year at its lowest level since the second quarter of 2012, when the euro area was in recession.

Corporate risk appetite often reflects trends in financial markets. Thus the decline in the FTSE100 UK equity index since last summer has been accompanied by a softening in corporate risk appetite.

The proportion of CFOs who think now is a good time to take risk dropped to 37% in the fourth quarter, down from 47% in the third quarter and a peak of 72% in late 2014.

Such large moves in risk appetite feed through to the way in which companies run their finances. CFOs' balance sheet strategies have become more defensive, with a sharper focus on cost control which now tops CFOs' list of priorities. Meanwhile CFOs are placing less weight on growth through acquisitions and on capital spending.

In recent months uncertainties, especially in emerging markets, have prompted the Bank of England to push back the timing of UK interest rate rises. The consensus in financial markets in mid-December was that the Bank will start raising interest rates in the second half of 2016. The pace of tightening is expected to be gentle, with three- month interest rates rising by a total of about 100bp, from a current 0.6% to 1.6% at the end of 2018. The corporate sector seems well positioned to cope with this sort of trajectory with 64% of CFOs reporting that a 100bp rate rise would have no effect, or a positive effect, on their plans for investment or employment.

The surge in CFO confidence and risk appetite that started in late 2012 went into reverse in 2015. CFOs are upbeat about prospects for the US and UK economies, but see more risks elsewhere, especially in emerging markets and the euro area. CFOs have reacted by cutting back on risk-taking and sharpening their focus on cost control. This more defensive stance by the corporate sector points to slower growth in corporate hiring and capital expenditure in coming months.


Public support for the UK's membership of the EU fell in the second half of 2015.

Between the end of May and the beginning of July four major opinion polls gave the 'In' camp an average lead of 18 percentage points. In the fourth quarter the same four polls showed the lead had been reduced to six percentage points.

This decline in public support for the EU has coincided with a narrowing in support among CFOs.
CFOs are positive about prospects for growth in the US and the UK in 2016.

But CFOs are strikingly downbeat about the euro area. Levels of pessimism about euro area growth in 2016 are greater than for emerging markets' growth.
Although CFOs are negative about prospects for the euro area, activity in the region picked up through 2015, and at a rather faster rate than expected.

German business confidence ended 2015 at higher levels than at the beginning of the year. Meanwhile US manufacturing activity dropped to a six-and-a-half year low in November.

Risk appetite wanes

Other than a brief, post-election bounce, corporate risk appetite has been trending down for over a year. Just 37% of CFOs say that now is a good time to take greater risk onto their balance sheets, down from a peak of 72% in Q3 2014.
The fall in corporate risk appetite has been mirrored by a decline in investor risk appetite.

The second half of 2015 saw a rise in risk aversion among investors, as they moved from riskier assets including equities into safer government bonds.
Sentiment among large corporates has declined for the third consecutive quarter. CFO optimism is at its lowest level since the second quarter of 2012, when the euro area was in recession and gripped by concerns that the single currency might break up.

To read this Survey in full, please click here.

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