UK CFOs Bracing for Euro Breakup and Triple-dip Recession

For UK corporates the potential euro breakup, the recession and overall uncertainty are taking a major toll on sentiment, according to a new survey.

The Deloitte CFO Survey covering Q212, which polled 137 chief financial officers (CFOs) and finance directors in the UK, revealed the steepest drop in CFO confidence since the survey began in 2007. This is the third major decline in five years.

Respondents see a breakup of the euro as the biggest threat to their businesses, with 36% of respondents expecting one or more countries to leave the euro area by the end of 2012; up from 26% at the end of Q112. Major UK corporates are gearing up for a potential breakup; 28% of CFOs said their plans for doing so are “all made” or “at an advanced stage,” compared to 18% at the end of March.

CFOs also see a one-in-two chance that the recession will continue through to the end of this year or for a ‘triple-dip’ recession to occur over the next two years.

Macroeconomic uncertainty continues to hinder corporate confidence, with 95% of respondents saying that financial and economic uncertainties facing their businesses are higher than normal. This has had a negative effect on risk appetite, as 80% of CFOs now view it is a bad time to take risk onto their balance sheets.

In response to the recession and the uncertain economic outlook, corporates have adopted more defensive strategies. Top priorities over the next 12 months include cutting costs and boosting cash flow. CFOs are now more focused on reducing leverage and disposing of assets, and less concerned with making acquisitions or undertaking capital expenditure. Hiring, capital spending and discretionary spending are projected to decline over the next year.

Eighty-two percent of respondents attribute the drop-off in capital spending to the expected demand at home and abroad, as well as economic uncertainty. Only 4% said they have been influenced by the cost or ability of finance.

Deloitte said that in its Q112 survey CFOs indicated a rise in business confidence, but still pursued defensive balance sheet strategies and that recent events appeared to vindicate the caution evident in Q112.

“Views on the degree of risk facing the corporate sector, like the equity markets, are changeable,” the company said in a statement. “But our latest survey shows that CFOs see plenty of risks ahead. Economic uncertainty is the big constraint on corporate expansion. The challenge for UK-based corporates is to find sources of growth in a volatile macro environment.”

By Andrew Deichler at
AFP online


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