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Economy in Brief

Deloitte U.K. Survey of CFOs
by Robert Brusca  October 18, 2021

The Deloitte U.K. CFO survey finds a lot of above average (literally above median) responses for Q3 with only the response for the amount of cash on hand getting a weak response that is below its median - and in that case, far below its median (FYI: statistical medians occur at a rank standing of 50%). There are extremely strong readings (top ten percentile responses) for plans to hire, to spend on travel, to spend on training and on marketing as well as for increases in operating costs and for revenues. Surveyed firms also assess there as being a lot of corporate leverage (top 20 percentile response), and on a par with that they see financing costs rising and dividend and share buybacks increasingly attractive (apparently pushing leverage even higher).

There are very middle of the road assessments given to the risk climate, the attractiveness of bank financing, the cost and availability of credit, and for operating margins. The survey is rather remarkable for the moderate readings given all the stress that the Covid period and the post-Brexit environment have put the U.K. economy though and given the inflation environment and the problems with supply chains. CFOs seem to be nonplussed for the most part and rolling with the punches as though it is mostly business as usual – but then maybe it is because since the Brexit vote nothing has been usual or normal for U.K. businesses other than that there is change and disruption.

Of course, the high standing for discretionary spending seems to reflect a desire to try to get back in the flow of traditional business again. And firms are still trying to ramp up hiring. In this environment, the quite high ranking for operating costs is no surprise, especially with the inflation numbers we have been seeing. But the silver lining in the black cloud is the higher revenue estimate that accompanies those costs. The next impact is a moderate rating for operating margins even though the reading for Q3 has dropped sharply compared to Q2 and has a net negative reading.

Operating margins and cash levels are the only two readings that switched from net positive to net negative in Q3. The assessment of “it’s a good time to take on risk” turned to a deeper negative reading. The cost of credit stayed as a net-negative reading, but the net negative reading dissipated to some extent.

Quarterly changes in survey responses show that the biggest changes quarter-to-quarter in Q3 are step backs. The largest negative change is for expected financial conditions over the next three months. That is probably not much of a surprise with the Fed and the ECB both giving consideration to how long to stay with the special stimulus programs especially with inflation so high. That reading has regressed by 42 net points in Q3 compared to its Q2 reading. Operating cash flow is weaker by a 40 net point margin in Q3 compared to Q4. Operating margins are down by 36 net points while the expected attractiveness of equity financing fell by a net 24 points. And what rises most in terms of quarter-to-quarter change is expected financing costs, expected operating costs, and expected credit availability. But rising the next most is the attractiveness of corporate debt issuance and of bank credit financing.

On balance, the corporate sector still has a lot of positive ratings for important corporate metrics. And there are some elevated readings that raise eyebrows as well. But on balance, quarter-to-quarter, the outlook seems to have lost some mojo. It is not clear how the spread or expected spread of the virus contributes to these responses since we do not know what CFOs are assuming for the quarter ahead. But the simple chart at the top tells an important part of the story that operating costs are expected to be up, and margins are down despite some very strong revenue growth expectations. It’s a tough world out there and the supply chain troubles seem to be taking their toll while inflation gives with one hand and takes away with the other. But that’s how that has always worked.

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