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Chief Financial Officers Anticipate Growth & Lasting Change

Finance leaders expect a return to growth in 2021 with optimism rising to a record high, according to Deloitte’s latest chief financial 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 amongst the United Kingdom’s largest businesses, took place between 2nd December and 14th December 2020, so before new COVID restrictions announced on 19th December and the Brexit deal on 24th December.

A total of 90 CFOs participated in the latest survey, including CFOs of 12 FTSE 100 and 44 FTSE 250 companies.

The combined market value of the United Kingdom-listed companies that participated is £308 billion, approximately 13% of the United Kingdom quoted equity market.

Revenues, risk appetite & economic landscape

There has been a sharp improvement in CFO expectations for United Kingdom corporates’ revenues this quarter with 71% expecting a rise over the next 12 months, up from 29% in Q3 2020, while over half 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, however this is up from just 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 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 & beyond

More than three quarters of finance leaders expect COVID-19 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 that the pandemic is set to trigger a fundamental change in the business environment. An overwhelming net balance of CFOs expect flexible and home working to increase – with a five-fold increase in home working expected by 2025.

Similarly, 98% of CFOs expect levels of corporate and individual taxation to rise, two thirds anticipate higher regulation of the corporate sector and 59% see the size and role of government in the economy increasing.

The 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 our panel are more confident about their own ability to deal with Brexit than the wider economy’s.

Two thirds 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 of CFOs expect the post-Brexit points-based immigration system to act as somewhat of a drag on long-term economic growth. Around a quarter expect little or no effect, while 6% expect the new immigration system to support growth.

A net balance of 66% of CFOs expect both 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 & spending

CFOs remain in defensive mode with 49% and 46% respectively rating increasing cash flow and reducing costs as strong priorities. Meanwhile expansionary strategies have risen in popularity slightly since Q3, for example, around a quarter cite introducing new products, services or expanding into new markets as a priority for the year ahead.