Faced with a more uncertain economic climate, a record number of finance leaders (98%) anticipate operating costs to rise in the year ahead, according to Deloitte’s UK CFO Survey Q1 2022, conducted amongst the UK’s largest businesses between 16-30 March 2022.
Almost half of CFOs (46%) expect these rises to be significant.
In light of cost increases, there has also been a sharp deterioration in the outlook for corporates’ margins. A majority of finance leaders (71%) believe operating margins will fall over the next year, compared to less than half (44%) in the previous quarter.
But despite this, three-quarters expect revenues to rise over the next year.
Meanwhile, capital spending remains a strong priority for one in five (21%) CFOs, even with a more challenging operating environment. Although this has dropped from last quarter’s record high (37%), it remains considerably above the five-year average of 14%.
Rising uncertainty and risk
The invasion of Ukraine has heightened the level of financial and economic uncertainty facing businesses. Over half of CFOs (56%) say that the level of uncertainty facing their business is high or very high.
Geopolitics has risen sharply as the top risk facing CFOs’ businesses. With the exception of the pandemic during Q2 and Q3 2020, the risk rating assigned to geopolitics is higher than any other factor since the question was first asked in 2014. Rising inflation, the prospect of further interest rate rises, and persistent labour shortages, also rank high on the list of CFO concerns.
“Rising geopolitical risk in the wake of the invasion of Ukraine and alongside high inflation mean that the external challenges faced by business are greater today than at any time in the last eight years,” says Ian Stewart, chief economist at Deloitte.
These risks now far eclipse Brexit and the pandemic, which have dominated the list of CFO concerns in recent years. Over the next year, CFOs believe a mix of rising costs and slower growth are set to squeeze margins.
“In spite of this - as finance leaders have become accustomed to navigating a more volatile business environment - they remain focused on capital spending and growing their businesses,” adds Stewart.
Inflation and interest rates
Over three-quarters of CFOs (78%) expect inflation to exceed 2.5% in two-years’ time – the highest reading on record. Meanwhile, more than half (53%) expect inflation to settle between 2.5% and 3.5% in two-years’ time and a quarter expect it to remain above 3.5%.
CFOs expect interest rates to rise substantially over the next 12 months. On average, they expect the Bank of England’s base rate to be 1.5% in a year’s time, double its present level of 0.75%, but below current financial market expectations.
Labour shortages, recruitment difficulties and supply chains
Just over a third (35%) of finance leaders report that their businesses have faced significant or severe recruitment difficulties in Q1, a slight improvement from Q4 2021 (46%). CFOs anticipate labour shortages will persist, with around one in four saying these will be significant or severe in a year’s time.
In Q1, more than a quarter of CFOs reported significant or severe levels of supply chain disruption. A modest improvement in conditions is expected, with one in six CFOs anticipating similar levels of disruption in a year’s time.
But while it is clear businesses are operating in an increasingly uncertain and challenging economic and geopolitical environment, finance leaders are not reporting a widescale shift to defensive strategies, like cost-cutting, seen at the beginning of the pandemic.
“Introducing new products, services or entering new markets remain the top balance sheet priorities,” says Richard Houston, senior partner and CEO of Deloitte. “This continued focus on investment will be vital for resilience moving forward.”