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CFOs warn of long-haul to economic recovery

22 July: Chief financial officers from the UK’s biggest companies expect a slow pick-up in economic activity, with dividend payments and share buybacks close to their lowest levels in a decade, according to research from Deloitte.

 The Deloitte CFO survey for Q2 2020 discovered that almost half of the finance leaders surveyed (49%) do not expect demand for their own businesses to return to pre-pandemic levels until the latter half of 2021.

The survey of 109 CFOs – which included 23 companies from the FTSE 100 and 45 from the FTSE 250 and a combined market value of £404bn – found that 78% expect UK corporates’ revenues to fall in the coming 12 months, the second-highest reading on record. 

But this was a 19% improvement in positive sentiment from Q1, where almost all respondents (97%) expected revenues to drop over the year ahead. 

Uncertainty high 

Perceptions of external uncertainty, however, remain elevated. Some 80% of CFOs now believe there is a high or very high level of uncertainty facing their business, an improvement from the record-high of 89% in the first quarter. 

Key amongst those concerns is the fallout from the COVID-19 pandemic. In Q2, 82% of finance leaders say they were unwilling to take risk onto their balance sheets, a slight improvement from the first quarter which saw the second-lowest reading for risk appetite on record. 

CFO expectations for dividend payments and share buybacks remain close to their lowest showing in a decade, as corporates seek to shore up their balance sheets. The majority (86%), said dividend issuance and share buybacks by UK businesses will decrease over the coming year. 

Almost nine out of 10 (86%) expect UK corporates to reduce capital expenditure in the next 12 months, maintaining the sentiment seen in Q1, where almost all (98%) anticipated a decrease. In Q2, hiring expectations remain pessimistic, albeit slightly improved from Q1, with 90% of CFOs expecting a reduction in recruitment over the next year. 

The two-headed beast: COVID-19 and Brexit 

Business investment, which has slowed dramatically since the EU referendum, is expected to see a continued squeeze. Almost two-thirds of CFOs (65%) expect their capital expenditure to decrease over the next three years due to the COVID-19 pandemic or the UK leaving the EU. A quarter (25%) attribute this reduction to both the pandemic and Brexit. 

CFOs now rank the impact of COVID-19 as the greatest risk facing their businesses, while geopolitics risks ranking second, with Brexit taking the third spot, alongside economic weakness in the US. 

Richard Houston, senior partner and chief executive of Deloitte UK, said: “While CFOs are still focused on the impact of the pandemic, many are accelerating their adoption of new technologies and adapting their businesses to different ways of working. 

“As the recovery begins, we expect all businesses will be looking for new opportunities and areas of growth.” 

In the meantime, CFOs are heavily focused on defensive balance sheet strategies with 61% citing reducing costs and 52% increasing cash flow as sound priorities over the next 12 months, the survey which took place between 26 June and 8 July 2020, revealed.