Finance leaders expect a return to growth in 2021, with optimism rising to a record high since the survey began in 2007, according to Deloitte’s latest chief finance officer survey.
Despite the surge in business optimism, half of CFOs do not expect demand for their own businesses to recover to pre-pandemic levels until the last quarter of 2021 or later.
The Deloitte CFO survey for Q4 2020, which gauges sentiment among the UK’s largest businesses, took place between 2 and 14 December 2020, before new Covid restrictions were announced on 19 December and the Brexit deal on 24 December.
A total of 90 CFOs participated, including CFOs of 12 FTSE 100 and 44 FTSE 250 companies. The combined market value of the UK-listed companies that participated is £308bn, about 13% of the UK quoted equity market.
Revenues, risk appetite and economic landscape
There has been a sharp improvement in CFO expectations for UK corporates’ revenues this quarter. Some 71% expect a rise over the next 12 months, up from 29% in Q3 2020, while over half (53%) of CFOs expect operating costs to rise.
For the first time since 2015, a net balance of CFOs are expecting corporate operating margins to increase in the next year.
Risk appetite remains weak, with only 19% believing it is a good time to take greater risk onto the balance sheet, although this is up from 3% in Q1 2020.
Consistent with the idea of a return to growth, CFOs’ expectations for inflation have risen markedly since Q3 2020. Over half of CFOs (59%) expect consumer price inflation to be at or above 1.6% in two years’ time, up from 36% three months ago.
While still showing a net negative balance, CFOs’ expectations for hiring, capital spending and discretionary spending have increased from the record lows seen in Q1 2020, with a strong uptick in each category in the last quarter.
Expectations for hiring and spending are running higher than the levels seen between 2016 and mid-2019.
Covid and beyond
More than three quarters (78%) of finance leaders expect pandemic restrictions on movement and activity to continue through the first half of 2021, while 57% expect these measures to be removed permanently in Q3 2021.
CFOs believe the pandemic is set to trigger a fundamental change in the business environment – 98% expect flexible and homeworking to increase, with a five-fold increase in home working by 2025.
Similarly, 98% of CFOs expect levels of corporate and individual taxation to rise, 62% anticipate greater regulation of the corporate sector and 59% see the size and role of government in the economy increasing.
Ian Stewart, Chief Economist at Deloitte, commented: “Boosted by the prospect of mass vaccination and growth, business sentiment surged this quarter, with CFOs taking the most positive view on profit margins for the last five years.
"This rebound in sentiment occurred despite a backdrop of continued Brexit negotiations and with two-thirds of CFOs believing that a no-deal outcome would have a severe or significant negative effect on the economy.
"In the three and a half years between the EU referendum and the pandemic, CFOs have ranked Brexit as the top business risk for all but two quarters. The announcement of a deal after the survey closed is likely to have offered an end-year boost to CFO sentiment.
"The survey shows that in the first half of December, CFOs expected restrictions on movement and activity needed to combat COVID-19 to continue for the first half of this year. The announcement of further restrictions after the survey will clearly add to such concerns.
“Business leaders believe the pandemic will permanently change the business landscape. CFOs anticipate a five-fold increase in homeworking relative to pre-pandemic levels by 2025 and believe the state will be larger and more active in the long term.”
Impact of Brexit
CFOs think a no-deal Brexit would have been a far greater risk to the economy and to business than the actual outcome of a trade deal. Moreover, they saw either Brexit outcome as having a greater negative impact on the economy than on their own businesses.
The large companies on Deloitte's panel are more confident about their own ability to deal with Brexit than the wider economy’s.
Two thirds (66%) of CFOs saw a no-deal outcome as having a severe or significant negative effect on the economy and 18% expected a similarly negative impact on their own business. Just 20% of CFOs saw a trade deal as a major negative for the economy and this dropped to 7% in relation to their own business.
A majority (61%) of CFOs expect the post-Brexit points-based immigration system to act as a drag on long-term economic growth. Around a quarter (27%) expect little or no effect, while 6% expect the new immigration system to support growth.
A net balance of 66% of CFOs expect goods and services trade with the EU to decrease, while 77% expect a decrease in high-skilled immigration from the EU, with only 24% expecting an increase in skilled immigration from outside the EU.
Strategy and spending
CFOs remain in defensive, mode with 49% and 46% respectively rating increasing cashflow and reducing costs as strong priorities.
Meanwhile, expansionary strategies have risen in popularity slightly since Q3 – 28% cite introducing new products, services or expanding into new markets as a priority for the year ahead.
• For copies of this and previous CFO surveys click here