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Economy in Brief

Deloitte Surveyed CFOs Batten Down Their Hatches in the U.K.
by Robert Brusca  July 20, 2022

CFOs in the U.K. responding to the Deloitte survey paint a dour picture of current circumstances and a picture of difficult circumstances for the coming 12 months. Among the ten elements in the current survey, the highest standing goes to the cost of credit being high, followed by a very high ranking for financial and economic uncertainty, a moderately high reading for demand for credit for the next year, and a moderately firm reading on corporate leverage. These responses show us that CFOs are wary about credit costs, needs for credit and about financial uncertainty.

The lowest rating among these current conditions is for the attractiveness of corporate debt. Clearly in this environment with high inflation and rising interest rates, corporate debt isn't attractive. This is the lowest rating in the survey on this timeline for this component. As an overall view, there's also an extremely weak reading for the financial prospects compared to three months ago. That assessment has been lower less than 5% of the time. And in a related low ranking, CFOs rate credit availability as quite poor and equity issuance as unattractive. Bank borrowing is also viewed as unattractive. There is a low, 31 percentile standing, in response to the question it's a good time to take risk. Only one third of the surveyed CFOs think that it's a good time to take risk.

Turning to some of the key metrics for 12 months ahead, the two lowest responses are for operating cash flow and for cash (or equivalent) levels. Operating margins also get very low assessment standing in the lower 5% of their historic queue of values. Dividends and share buybacks show a standing in the lower 10% of their historic queues. CFOs give their expected revenues a lower one-third standing for the next 12 months. Capital expenditures have a lower 25 percentile standing. Ranking very high, of course, are costs: operating costs have a 97.8 percentile standing as do financing costs.

Looking at the survey responses by quarter, much of this weakening has occurred within the last two quarters. Almost any category that you would consider a good response has deteriorated sharply over two quarters; all those considered bad responses have increased sharply. The outlook portion of the survey mostly began to deteriorate sharply as of Q1 2022. Deterioration has continued or worsened into Q2 2022.

Looking at changes since Q4 2019, which takes us back before the COVID virus struck, we see that for the most part bad metrics have gotten worse and good metrics have deteriorated. Despite there have been a significant recovery after COVID struck, the rise in inflation seems to have reintroduced an extremely negative sentiment across CFOs in the United Kingdom. The survey gives us a road map of how CFOs are starting to pull back and batten down the hatches and prepare for bad things to happen as inflation continues to linger high, as the Bank of England gets prepared to raise rates further and as war continues between Ukraine and Russia causing risks of more supply disruption and higher inflation to linger. There's almost nothing in this survey from which to take heart.

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