Germany
United Kingdom
Spain
United Kingdom
India
European chief financial officers (CFOs) believe their businesses face a grim set of financial and economic conditions shaped by the Russian invasion of Ukraine, increasing inflationary pressures, shortages of skilled labour, market and supply chain disruptions and setbacks to their business transformation aspirations.
Russia’s invasion of Ukraine is causing significant global economic disruption, adding further stress to a global economy that continues to struggle with the legacies of the COVID-19 pandemic and the supply chain problems and inflation it has provoked.
The International Monetary Fund said this autumn that one-third of the world economy would probably contract this year or the next as prices rise and real incomes shrink.1 That challenging outlook is reflected in the responses in Deloitte’s European CFO Survey for Autumn 2022.
Since 2015, the survey has given voice twice a year to approximately 1,500 CFOs from across Europe. This article provides an overview of current economic trends, CFOs’ hiring and investment intentions, their views on business transformation as well as critical business risks and strategic priorities and the factors they currently consider vital to success.
We also ask CFOs for their expectations about medium-term prospects. In addition, each survey contains a specific set of questions about current business issues.
This edition focuses on inflation and specifically CFOs’ opinions on the prospects for the annual inflation rate in their country and the strategies they are undertaking to mitigate the impact of high inflation.
The responses provided reflect record levels of business uncertainty – the most extreme since the survey's inception. There are, however, some bright spots amid the gloom. European CFOs are still optimistic about their revenues and intend to keep hiring, and they expect average inflation will drop to a somewhat more manageable level of 6.10 per cent in the euro area and 4.11 per cent in the non-euro area towards the end of 2023.
Although it makes for sobering reading, we hope the views set out in this article will nourish your thinking and help provide a good basis for your business plans. Please contact one of our Deloitte leaders to discuss any aspects of our findings.
CFOs have become more pessimistic about the financial prospects for their companies and sectors as high inflation, lower growth and tight monetary policy make themselves felt.
The mood among European CFOs became grim immediately after the Russian invasion of Ukraine in February 2022 but has plummeted even further as the conflict has dragged on. More than half (60 per cent) of the CFOs say they are less optimistic about their company's financial prospects in the next 12 months. Only 13 per cent describe themselves as optimistic.
Overall, the net balance for financial prospects declined from –29 per cent in the spring of 2022 to –47per cent in the autumn of 2022, almost reaching the depths observed during the early months of COVID-19 lockdowns.
The steep decline can be attributed to the severe disruption caused by the war in Ukraine, which has dimmed the prospects for a post-pandemic economic recovery.
The global economy continues to be weakened by the war through trade disruptions, pressure on food commodity prices and energy price shocks, all of which contribute to rising inflation. In addition, rapid monetary tightening by central banks in response to the high inflation is making the outlook for the European economy still worse.
The same sentiments prevail in the euro area and outside it. In the euro area, CFOs in Germany (72 per cent) and Spain (70 per cent) are the most pessimistic about their financial prospects. In non-euro countries, CFOs from Norway (60 per cent) and the UK (57 per cent) are the most pessimistic.
The sector results reflect the tone of the survey overall and continue the trends noted in the spring of 2022. All sectors have become less optimistic about their financial prospects. CFOs in life sciences are the most pessimistic, with the proportion of CFOs in this sector saying they are less optimistic doubling from 37 per cent in the spring of 2022 to 77 per cent in the autumn of 2022.
CFOs in the automotive sector, still reeling from the semiconductor chip shortage and other supply chain issues, report the lowest business confidence. Nearly two-thirds of the sector are less optimistic. Not one CFO in this sector said they are optimistic about the financial outlook.
By contrast, almost a quarter (24 per cent) of CFOs in the tourism and travel sector say they are more optimistic about their financial prospects in the next 12 months as they are expecting a promising tourism season ahead.
Gloom prevails among European CFOs regarding the evolution of operating margins and CAPEX. Future revenues and hiring are seen more positively.
The net balance of expectations for the evolution of revenues in the next 12 months decreased from 44 per cent in the spring of 2022 to 18 per cent in the autumn of 2022. Despite this, half (50 per cent) of European CFOs believe their revenues will increase compared to nearly a third (32 per cent) who expect a decrease. Non-euro countries where CFOs are most optimistic about revenue growth are Iceland (75 per cent), Norway (63 per cent), Switzerland (62 per cent) and Sweden (60 per cent). In the euro area, CFOs are most optimistic in the Netherlands (61 per cent), Austria (59 per cent) and Spain (57 per cent). The most pessimistic CFOs are from the UK and Ireland, where 46 per cent and 38 per cent respectively feel revenues will decrease.
Similar trends can be observed across all sectors. CFOs in all sectors are very optimistic that revenues will increase in the next 12 months. Those in business and professional services are the most optimistic, with 66 per cent expecting an increase, while those in the retail sector are the least optimistic, with 37 per cent expecting a decline during the same period.
The net balance of expectations for operating margins declined sharply from –23 per cent to –39 per cent in the autumn of 2022, the lowest level since the survey began in the autumn of 2015. This figure even surpasses the lows seen during the COVID-19 pandemic in the spring of 2020. The pessimism might be attributed to rising commodity prices, higher energy costs, the lack of availability of natural gas and disruption in global supply chains. The proportion of CFOs who expect their operating margins will decrease (59 per cent) over the next 12 months is nearly three times those who believe their operating margins will increase (20 per cent). In the euro area, CFOs are most pessimistic about operating margins growth in Germany (63 per cent), Ireland (56 per cent), Austria (54 per cent) and the Netherlands (52 per cent). In the non-euro area, CFOs from the UK are overwhelmingly pessimistic (91 per cent).
Looking at the sectors, CFOs in life sciences are the most pessimistic, with 59 per cent saying operating margins will decrease over the next year. CFOs in technology, media and telecommunications (TMT) are the most optimistic, with 43 per cent believing margins will increase. With rising interest rates and squeezed operating margins, expectations about CAPEX investments have been mostly less optimistic. The net balance of expectations for CAPEX has declined steeply from 10 per cent in the spring of 2022 to –19 per cent in the autumn of 2022. Many CFOs (40 per cent) say they will decrease CAPEX investments in the next 12 months, while only a fifth (21 per cent) intend to increase their CAPEX during the same period.
A diverging trend is evident in the euro area compared to non-euro area countries.
Most CFOs in non-euro area countries, except the UK, say CAPEX will increase in the next 12 months. Optimism about an increase is highest amongst CFOs in Iceland (50 per cent), Norway (37 per cent) and Sweden (35 per cent).
The majority of CFOs in the euro area expect their CAPEX to decrease in the next 12 months. Pessimism is highest in Germany (45 per cent) and Austria (33 per cent).
Looking across sectors, CFOs in automotive and life sciences are the most pessimistic, with 44 per cent and 36 per cent respectively expecting their CAPEX investments to decrease in the next 12 months. CFOs in tourism and travel and transport and logistics are more optimistic, with 45 per cent and 42 per cent respectively saying that CAPEX investments will increase.
Regarding employment, the net balance of expectations for hiring employees has declined steeply, from 28 per cent in the spring to –2 per cent in the autumn of 2022. However, a majority of CFOs across European countries still say they will be hiring more. The current shortage of skilled labour has emerged as one of the top three risks for CFOs in autumn 2022.
CFOs from the UK are the most pessimistic, with half (53 per cent) saying they will reduce hiring over the next 12 months, followed by CFOs in Austria (33 per cent) and Germany (29 per cent). The most optimistic CFOs, who expect to increase hiring, are in Switzerland (45 per cent), the Netherlands (42 per cent), Iceland (40 per cent) and Portugal (40 per cent).
A similar trend can be observed across all sectors except automotive, with most CFOs saying they will increase hiring in the next 12 months. CFOs in energy, utilities and mining (46 per cent) and TMT (43 per cent) are very optimistic that they will increase the employee headcount. But a sizeable portion of CFOs in the automotive sector (38 per cent) believe they will have to decrease the employee headcount over the next year.
The level of financial and economic uncertainty recorded by the European CFO Survey reached an all-time high in spring 2022 after the Russian invasion of Ukraine. The Autumn 2022 figure exceeds that record. Russia’s invasion of Ukraine was a harsh blow to a world economy struggling to shake off the after-effects of COVID-19 lockdowns. As the conflict has dragged on, it has further disrupted supply chains, caused market volatility, prompted energy price spikes and provoked a high-inflation environment that has driven financial and economic uncertainty to an all-time high since the survey began in the autumn of 2015.
Overall, the net balance of CFOs who feel the level of financial and economic uncertainty is high has increased slightly from 77 per cent to 78 per cent, surpassing the level during the COVID-19 pandemic in the spring of 2020.
The proportion of CFOs who described the overall level of external financial and economic uncertainty as high or very high stayed constant at 81 per cent in the autumn of 2022 compared to the spring of 2022. Agreement among CFOs in the UK that uncertainty is high or very high is unanimous, at 100 per cent. High rates of uncertainty were also recorded in Switzerland (90 per cent), Germany (85 per cent), Italy (81 per cent), Spain (77 per cent), Portugal (76 per cent) and the Netherlands (74 per cent).
The picture was the same across all sectors. In consumer goods (90 per cent), financial services (79 per cent) and tourism and travel (77 per cent), the overall level of uncertainty is very high.
European CFOs point to the economic outlook, shortage of skilled labour and rising energy costs as the three factors likely to hold significant risk for their business over the next 12 months. Given the extremely high uncertainty perceived by European CFOs, the majority (91 per cent) feel this is not a good time to take risk on their balance sheet: The net balance seeing this as a good time to take risk increased from –68 per cent in the spring to –81 per cent in the autumn of 2022. The view is shared by the majority of CFOs across all sectors.
The Russian-Ukraine conflict and its ramifications, such as rising inflation and supply chain issues, weigh heavily on the economic outlook, so it was clearly judged the top risk in the autumn of 2022 in eight out of 15 countries.
The second highest-ranked risk is the skilled labour shortage, which has returned to the top three as a significant risk. Companies are struggling to find and retain skilled employees. The third highest risk is rising energy costs and restrictions on the availability of energy and gas (identified by five out of 15 countries). This is a new risk with which European CFOs are struggling as the conflict between Russia and Ukraine drags on.
Geopolitical risk ranked as the equal third highest risk. Very low in recent years, it has shot up into the top three risks in the autumn of 2022.
European CFOs are becoming more defensive in their strategies as they seek to steer their businesses through the harsh economic environment. As interest rates rise rapidly and expectations for operating margins plummet, European CFOs are tilting towards more defensive strategies, with cost reduction being the top strategy for the next 12 months in 12 out of 15 countries.
However, other companies see investment in digitalisation as offering the greatest benefit in the longer term. Digitalisation is the second highest-ranked strategy in seven out of 15 countries, while CFOs in six countries are prioritising organic growth.
While the majority of CFOs (57 per cent) across all countries plan to continue expansionary strategies, such as digitalisation and organic growth, to a degree, there is a distinct trend towards more defensive strategies. CFOs had been looking to emphasise expansionary strategies since the autumn of 2020. But in 2022, there has been a clear shift towards a more defensive approach.
Inflation is running at levels not seen in decades, putting increasing pressure on businesses, but European CFOs expect it will decline towards the end of 2023. Inflation had been low and relatively stable in the past decade until 2020 but is now reaching levels last seen in the 1980s. According to Eurostat, the European Union’s statistical office, inflation in the euro area climbed from 4.1 per cent in October 2021 to 10.6 per cent in October 2022.2
Inflation in the European Union increased to 11.5 per cent in October 2022 from 4.4 per cent in October of the previous year. The current inflation rates are the highest since July 2008, when prices were growing by a comparatively mild 4.4 per cent year on year. Inflation is expected to remain high for the remainder of the year, further burdening corporates that are already under financial strain.
The primary reason prices have risen so quickly is the reopening of the European economy in 2021 after the sudden shock of the COVID-19 pandemic. Workforce shortages, supply and production problems and travel restrictions all added to cost pressures. When Russia attacked Ukraine in February 2022, it heaped more pressure on buckling supply chains, provoking a spike in energy and food prices.3
In this high-inflation environment, the European Central Bank changed course and increased interest rates for the first time in 11 years. The 50-basis-point rate hike in July was larger than expected and was followed by a 75-basis-point increase in September, which took the deposit rate above zero for the first time since 2013. Further rate increases are expected soon.
There has clearly been a sea change: The extended period of monetary policy at the zero-or-lower bound for interest rates is over. Companies in the Eurozone now need to prepare for rising interest rates.
Though inflation is still accelerating now, European CFOs expect the average inflation rate to slow to 6.10 per cent in the euro area and 4.11 per cent in the non-euro area by the end of 2023 as the pressures from energy prices and supply chain constraints ease. Looking further ahead, they expect average inflation to decrease to 3.71 per cent in the euro area and 2.92 per cent in the non-euro area by the end of 2024.
In the European Union, the lowest annual inflation rates by the end of 2023 are expected by CFOs in Switzerland (2.90 per cent), Norway (4.34 per cent), Sweden (4.54 per cent) and Denmark (5.37 per cent). The highest annual inflation rates are expected in Greece (9.32 per cent), Austria (7.98 per cent), Germany (7.15 per cent), the Netherlands (7.06 per cent) and Iceland (6.90 per cent).
Companies are seeking to counteract the impact of inflation by passing on the costs to customers through price rises, improved cash flow management and increased energy efficiency. With persistent high inflation and rising interest rates slowing down economic growth, along with supply chain disruptions, European CFOs are focusing on multiple strategies to mitigate the impact of inflation. Three out of four European CFOs (75 per cent) report that the most widespread strategy they will be taking to a large or moderate extent is to pass costs on to customers by raising prices. The next important strategies for CFOs are improving cash flow management (70 per cent) and increasing energy efficiency or reducing energy use (65 per cent).
However, these top three strategies are not being applied uniformly. Some countries are trying different approaches. For example, the top strategy in Italy is to focus on higher-margin markets, products or services. That is also among the top three strategies in Switzerland. Meanwhile, the top strategy taken by CFOs in Denmark and Ireland is to increase energy efficiency or reduce energy usage.
In Switzerland, CFOs report that increasing product or service differentiation relative to their competitors is among the top three strategies. Meanwhile, CFOs in Denmark, Iceland and Ireland cite increasing investment to reduce costs (such as digitalisation) among the top three strategies. Digitalisation is seen as expensive to implement, but it offers the possibility of scaling beneficially in the longer term.
Mitigation strategies differ from sector to sector. In TMT and business and professional services, the primary strategy is to focus on higher-margin markets, products or services. That is also among the top three strategies in the consumer goods sector.
Increasing product or service differentiation relative to competitors is among the top three strategies applied in the TMT and business and professional services sectors. Increasing investment to reduce costs is among the top three strategies for the financial services sector.
The fears European CFOs expressed in our Spring 2022 survey, conducted just two weeks after Russia’s invasion of Ukraine, have become persistent, long-term challenges.
As the war in Ukraine drags on, the past decade of tame inflation and ultra-low interest rates is clearly behind us. Supply bottlenecks, rising prices for energy and many raw materials and the breakdown of supply chains have become the new reality. Businesses are having to cope with high inflation, severe supply chain disruptions and a weak outlook for growth.
Unsurprisingly, the level of uncertainty felt by CFOs has risen to a new record level. They and their businesses are therefore focusing on resilience and strategies that include identifying savings and prioritising digital projects.
However, more than anything else, the adoption of more defensive approaches reflects companies’ changed expectations for the longer term. After COVID-19 lockdowns, businesses had been emphasising expansionary strategies and business transformation plans. In 2022, their thinking has changed markedly. Defensive strategies are now their priority.
While many CFOs fear further disruptions in the business and macroeconomic environment, they also hope inflation will begin to ease in 2023, and they still remain optimistic about their revenues. How the situation develops will depend on events in Ukraine and on whether the growing threat of recession materialises.
Deloitte has conducted the European CFO survey since 2015, giving voice twice a year to senior financial executives from across Europe. The data for the autumn 2022 edition were collected in September - October 2022 and garnered responses from 1,151 CFOs in 15 countries and across a wide range of industries.
Eurostat, “Annual inflation up to 10.6% in the euro area,” accessed 18 November 2022; Eurostat, “Inflation (M/M12),” accessed 18 November 2022.
View in ArticleStatista, “Harmonized index of consumer prices (HICP) inflation rate of the European Union in August 2022, by country,” accessed 11 November 2022.
View in ArticleThe authors would like to thank all participating CFOs for their support in completing this survey. They would also like to thank the CFO Survey Teams in each of the countries that collected the data from local CFOs, as well as Alexander Boersch, Dennis Brandes and Michael Grampp, for their contributions to the analysis and article.
Cover image by: Mark Hoolahan and Mark Milward.
