2016 Q1 Global CFO Signals™

How does CFO sentiment in 2016 Q1 break down? What follows is a synopsis by region:

• Argentina: Growing optimism about governmental reforms
• Austria: Investment may decline sharply
• Belgium: Optimism fades, but growth ambitions hold
• China: Achieving growth under the “New Normal”
• Finland: Hiring on the rise
• France: A very cautious optimism
• Germany: The new reality: Digital and volatile
• India: Optimism persists
• Ireland: Cautious optimism amid uncertainty
• Italy: Cautious optimism
• Japan: Surging uncertainties
• Middle East: Tempered outlook across the region
• Netherlands: CFOs cautious about Brexit
• North America: A rough start to 2016 sparks concerns
• Norway: Steeled for challenging times
• Portugal: Fasten your seatbelts
• Spain: Global economic uncertainty threatens Spain’s recovery
• Sweden: Domestic strength; international uncertainty
• Switzerland: CFOs see a brighter outlook
• Turkey: Optimistic, yet cautious
• United Kingdom: Brexit tops risks list

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CFO Sentiment 2016 Q1

In any quarter, there are typically several overhangs weighing on CFOs’ outlooks. And in the Q1 2016 edition of Global CFO Signals, there are two big ones:

• The UK’s membership in the European Union goes up for a vote June 23, and the uncertain outcome is causing consternation about the ripple effects a vote to exit may have on the region;
• Meanwhile, the outcome of the November US presidential election is already causing angst, particularly around the potential for de-globalization that could undermine business.

Add in other on-going risk factors, such as the strength of the US dollar, fluctuating oil prices, uncertainty over monetary policies, and indecisive elections (think Ireland and Spain), and there are numerous reasons why 9 of the 21 surveys and regions reporting cite negative net optimism, and others report cautious net optimism.

Still, there are plenty of reasons to be positive, according to the Deloitte Global Economist Network, which operates in nine countries. After all, capital remains accessible; there are signs of strength in emerging markets; and recent volatility in financial markets and the Chinese currency has subsided. In addition, says Ian Stewart, chief economist, Deloitte UK: “By and large, the consumer sector seems to be holding up.”

What doesn’t add up, according to the economists, is the lack of investing in several countries. In North America, for example, capital spending (CAPEX) expectations fell drastically from 4.9 percent to just 1.7 percent—eclipsing the previous low of 4.2 percent. UK CFOs also have taken a step back with a net balance expecting decreases in CAPEX over the next 12 months. And while, the story is brighter in Europe, expectations have softened, with 20 percent expecting CAPEX decreases.

What could be happening, of course, is that “companies may not see opportunities for profitable investment,” says Ira Kalish, chief global economist for DTTL. Another theory: companies are taking a wait and see approach toward how technology will impact their business models. Or, says Chris Richardson, chief economist for Deloitte Australia, “hurdle rates may simply be too high.”

Whatever the reason, there is still not a comfort level to unleash the financial power sitting on many corporate balance sheets, and with risk appetite declining in many countries (including India) there is no telling when that might be.

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Regional perspectives

Americas

An undercurrent of fear over the sustainability of the strong North American economy combined with a very rocky financial start to 2016 clearly shook CFOs’ outlooks. Their performance expectations fell sharply to levels at or near new survey lows, and their confidence in their companies’ longer-term prospects is on the verge of turning net-negative for the first time in some three years. Still, CFOs remain positive about the strength of the North American economy, although confidence in its trajectory slipped. Meanwhile, in the one South American country reporting—Argentina—CFO outlooks have turned around due to optimism toward newly elected President Mauricio Macri’s economic policies.

Asia-Pacific

Of the three countries reporting in Asia-Pacific—China, India, Japan—only India reports positive net optimism. And, in fact, some 94 percent of India’s CFOs express confidence in the Indian economy long-term. In Japan, though, CFOs are wary of “further deceleration of the Chinese economy” and problems with “Abe government’s policy management.” Such concerns have led to almost 42 percent of CFOs reporting decreased optimism, and 80 percent reporting uncertainty as “high” or “very high.” Meanwhile, in China, where CFOs are adapting to the “New Normal,” half are less optimistic about economic prospects compared with the last three months, and almost 60 percent ranked further economic turmoil as the top risk factor. Going forward, says Xu Sitao, Deloitte China’s chief economist, China’s economic changes, particularly toward the renminbi, will not have the same “impact to global financial markets” as last summer.

Europe

There remains much diversity in the outlooks across Europe, even as the region enjoys a modest recovery. As reported in the latest European CFO Survey, CFOs in eurozone countries are once again more optimistic about the financial prospects for their companies than their non-eurozone peers. Still, they share similar concerns, particularly politics and geopolitics. which seem to weigh heavily on sentiment in a number of countries, including the UK and Germany, and are the most commonly cited risks to future growth. Rising perceptions of external uncertainty have been accompanied by risk appetite falling sharply and CFOs reporting increased pressures on operating margins. When uncertainty is high, firms prioritize cost control, and that is what is happening across Europe.

Middle East

Traditionally, perceptions are divided across the Middle East, with Gulf Cooperative (GCC) nations reporting higher levels of optimism compared with countries in North Africa and the Levant. Not this quarter. Across the board, optimism fell—down to its lowest level since the survey began in 2009 (net -2 percent). Factors weighing on CFOs include uncertainty (71 percent rate it “high” or “very high”) and economic growth worries. And given that optimism and risk appetite seem to be correlated with energy prices, finance leaders appear to be operating in a holding pattern, while GCC governments seek to decrease their reliance upon energy-related revenues. A net 38 percent do expect energy prices to be higher in six months, however, which could change attitudes.

An undercurrent of fear over the sustainability of the strong North American economy combined with a very rocky financial start to 2016 clearly shook CFOs’ outlooks. Their performance expectations fell sharply to levels at or near new survey lows, and their confidence in their companies’ longer-term prospects is on the verge of turning net-negative for the first time in some three years. Still, CFOs remain positive about the strength of the North American economy, although confidence in its trajectory slipped. Meanwhile, in the one South American country reporting—Argentina—CFO outlooks have turned around due to optimism toward newly elected President Mauricio Macri’s economic policies.

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Global CFO Signals - By the numbers

Risk appetite

Despite available credit and continued low interest rates, risk appetite is tempered at best. A sharp spike in uncertainty caused by political events has led to particularly big drops in risk appetite in the UK (net -50 percent) and Portugal (net -70 percent). Italy is the only European country, in fact, where a majority of CFOs are willing to take risk onto their balance (net +18 percent). Meanwhile, in the Middle East, risk appetite seems to be correlated with energy prices, and 83 percent of CFOs say now is not a good time to take on risk.

Uncertainty

Uncertainty continues to dampen CFO decision-making. Throughout Europe—with the exception of Norway—CFOs report a higher than normal level of uncertainty. And in Germany, CFOs’ perception of economic and financial uncertainty has risen to its highest levels in four years and is approaching that of the euro crisis in 2012. Elsewhere, more than 80 percent of Japan’s CFOs currently rate the level as “high” or “very high (up from 52 percent),” as do 75 percent of CFOs across the Middle East.

Metrics

Revenue expectations fell slightly in many European countries, with the sharpest decline (-23pp) in the UK over the last six months. The outlook for revenues is most positive in Italy, Sweden, Ireland and Spain. Meanwhile, the outlook on margins has deteriorated in 10 of the 15 countries reporting that asked the question. And in North America, earnings expectations, which had rebounded from their survey low from 3Q15 to 8.3 percent* last quarter, fell to a new survey low of 6.0 percent* this quarter.

Hiring

There is good news on the hiring front in India, where almost 36 percent of CFOs expect to hire, and throughout many European countries. The outlook is particularly strong in Italy and Ireland – two countries that saw among the sharpest rise in unemployment following the financial crisis of 2008-09. In the UK, however, hiring is at a three-year low, with only 18 percent of CFOs expecting to increase headcount in the next 12 months. Meanwhile, in North America, expectations declined sharply to 0.6 percent, matching the survey low.

Corporate strategy

Reining in costs seems to be a common focus for 2016. Cost control or cost reduction were one of the top two priorities for CFOs in 13 of the 14 European countries that asked about strategic priorities. Even in countries where the economic outlook is relatively positive, for example Sweden and Ireland, the focus on cost remains. Similarly, in China, where revenue growth was cited by 77 percent of participants as one of the top three business focuses, it was closely followed by cost reduction at 73 percent. In North America, though, only 28 percent claim a bias toward cost reduction, while more than half say they are biased toward revenue growth.

CFO Priorities

In the short term, India’s CFOs cite internal controls (65 percent) and compliance (61 percent) as top priorities. In North America, a pervasive theme was a focus on helping their companies perform well in a shifting business environment. And the development of data analytical skills is a top priority for 44 percent of Germany’s CFOs.

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