Worries about the eurozone and shaky prospects for the wider global economy have dented confidence among bosses of the UK’s biggest companies, according to a survey.
After a tumultuous 2015, when a downturn in China and sharp slowdown in global trade prompted big businesses to scale back spending plans, the year ahead will be marked by even more caution, a poll of chief financial officers (CFOs) suggests.
The survey by consultancy Deloitte also signals growing uncertainty among business leaders over the UK’s planned referendum on EU membership, with support for staying in the bloc waning significantly over the past six months.
The quarterly report chimes with economists’ warnings over a range of risks to the global economic recovery in 2016. It follows a prediction from IMF head Christine Lagarde last week that global growth will be disappointing this year as the prospect of rising interest rates in the US and a further slowdown in China feed into uncertainty around the world.
Confidence back to 2012 levels
Business confidence fell for the third quarter running in the Deloitte survey and is now back to where is was in early 2012 when the eurozone was in recession.
Almost a third of the 137 CFOs surveyed, or 30%, said they were less optimistic about the prospects for their companies compared with three months ago. That was up from 20% feeling more downbeat when asked six months earlier. Just 12% said they were more optimistic in the latest poll, down from 36% six months earlier.
As a result, risk appetite was also down and the pace of hiring and capital spending was likely to slow in coming months, said Deloitte’s chief economist Ian Stewart.
“Doubts about the pace and sustainability of the global recovery are weighing on business sentiment,” Stewart added.
“UK corporate sector risk appetite has fallen to a three-and-a-half-year low, mirroring the loss aversion and caution being seen in financial markets... CFOs’ strategies are more defensive than at any time in the past three years.”
Growth prospects
Finance chiefs were broadly optimistic about the UK’s economic prospects in 2016 as well as for the US, the world’s largest economy. But despite stronger than expected growth in the euro area last year, CFOs remained pessimistic about prospects for the region. Levels of confidence about growth in the single currency bloc were lower than for emerging market economies.
The survey also signalled a drop in support among business leaders for the UK to remain in the EU ahead of a referendum on the issue, expected this year and promised before the end of 2017 by prime minister David Cameron.
Shifting views on EU membership
Deloitte asked CFOs whether it was in the interests of British business for the UK to remain a member of the EU. In the latest survey, 62% agreed that continued membership was beneficial, down from 74% when the question was asked six months earlier. There was also an increase in the number of those saying that UK business would benefit from leaving, to 6% now compared with just 2% before.
Just over a quarter, or 28%, said their decision depended on the outcome of the prime minister’s renegotiation of UK membership, up from 23% six months earlier. The remaining 4% said they were uncertain of their position.
The narrowing support among CFOs for staying in the EU follows polls finding British voters split down the middle on EU membership.
“A clear majority of CFOs continue to favour the UK remaining in the EU, but the proportion of those expressing unqualified support has fallen. This mirrors what we have seen from the broader public in opinion polls in the last six months,” said David Sproul, senior partner and chief executive of Deloitte.
“With around one third of CFOs undecided on their position or awaiting the outcome of renegotiation discussions, the eventual deal may well significantly affect business attitudes to EU membership.”
After almost seven years of interest rates being held at a record low of 0,5%, a potential increase from Bank of England policymakers in coming months represents yet another uncertainty for businesses as they enter 2016.
With low oil prices helping to keep inflation low, financial markets do not point to a rate rise until late 2016 or early 2017. But a recent Reuters poll found that most economists expect a move sooner.
Deloitte said its survey suggested that big companies felt they were well positioned to cope with higher borrowing costs. Almost two thirds, or 64%, said interest rates would have to rise by one percentage point before their businesses cut planned investments or employment. One in ten said a rate rise would be good for their business.
There is similar evidence of falling confidence in a separate survey of 1,500 UK companies by Lloyds Bank out today.
It found that businesses were less confident about prospects for the next six months, with UK and global demand seen as the biggest threats to their fortunes in 2016. Expectations of an interest rate rise in 2016 had increased among the predominantly small to medium-sized businesses surveyed by Lloyds.
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