Good morning,
With a looming recession in the U.K., debt finance is highly unattractive to CFOs.
Some countries will be hit harder by a recession than others as the global economy is expected to contract this year, but the U.K. is in trouble. A Financial Times survey released on Monday found the U.K. is facing a “deeper and more prolonged recession” than any nation in the G7, a global policy forum representing seven of the world’s most advanced economies, Fortune reported. About four-fifths of economists said the U.K. will experience a much longer recession than its peers. They predict a rough 2023 and a potential return to normal by 2024.
“The U.K. suffers from an energy shock as bad as Europe’s, an inflation problem…as bad as the U.S., and a unique problem of lack of labor supply from the combination of Brexit and the NHS crisis,” Ricardo Reis, a polled economist and professor at the London School of Economics, said in the report.
Corporate distress has accelerated faster in the U.K. than in the rest of Europe and reached a two-year high, according to the recent Weil European Distress Index.
A key finding of Deloitte’s UK CFO Q4 2022 survey released on Tuesday found CFOs view bank borrowing and debt issuance as the least attractive it has been since the financial crisis. As interest rates are at 3.5%, finance chiefs rate credit as being more expensive than at any time since 2009, according to the report.
“When interest rates were at very low levels, debt finance easily eclipsed equity as a source of finance,” Ian Stewart, chief economist at Deloitte, said in a statement. “CFOs now see them as being roughly on par.”
Seventy percent of CFOs rate credit as costly, meanwhile 45% say that new credit is hard to get. Just 28% say they expect their company’s demand for credit to increase over the coming 12 months. However, Stewart also noted that CFO "concerns about energy supply and prices have fallen back," he said. The findings are based on a survey of 78 CFOs participated, including those at FTSE 100 and FTSE 250 companies.
The Office for National Statistics reported last month that Britain’s inflation rate in November was 10.7%, down from a 40-decade high of 11.1%. On average, CFOs believe inflation will fall to 5.8% in a year’s time. However, in the next two years, they expect it to stand at 3.3%, which is above the Bank of England’s 2% target.
In late September, the U.K. experienced market turmoil after government proposed tax-cutting plans sent bond and currency markets spiraling. If the U.K. markets are any indication, due to this macroenvironment, the era of putting in place fiscal stimulus, cutting taxes, and greatly replacing lost income without inflation or rising interest rates being a major concern could be over.
Deloitte’s Q4 report on the sentiments of CFOs in North America released on Dec. 14, found net optimism of finance chiefs for their own companies fell for the third quarter in a row, and the lowest level since Q2 2020. The talent crunch also remains major concern.
Each quarter, Deloitte tracks a series of metrics around CFO expectations in revenue, earnings, dividends, cap spending, domestic hiring, and domestic wages, Steve Gallucci, the global and U.S. leader of Deloitte’s CFO Program, told me last month. “When you look at fourth quarter 2022 versus third quarter 2022 all those measures came down," he said. The biggest declines were in year-over-year growth expectations for revenue and earnings at 4.2% and 2.9%, respectively, down from 6.2% and 6.4% in Q3, according to the report.
“Cost management going into 2023, with the continued uncertainty in respect to inflation, is going to be critical,” Gallucci said.
In the U.S., consumer prices rose 7.1% in November from a year ago, down from 7.7% in October and a high of 9.1% in June. In December, the Federal Reserve announced a half of a percentage point interest rate hike, its seventh rate hike in an effort to tame inflation. The minutes from the Fed's meeting Dec. 13-14 meeting were released on Wednesday. "Participants stressed that the committee’s ongoing monetary policy tightening to achieve a stance that will be sufficiently restrictive to return inflation to 2 percent is essential for ensuring that longer-term expectations remain well anchored," according to the document.
CFOs across the globe are undoubtedly preparing for what many are predicting to be a roller coaster year.
See you tomorrow.
Sheryl Estrada
sheryl.estrada@fortune.com
