CFOs report the highest cost of credit in over a decade

• CFOs of the largest UK corporates rate credit as being more costly than at any time since 2010

• CFOs have become markedly more pessimistic about financing costs since the mini-Budget

• The majority of CFOs expect revenues to fall over the next 12 months

• CFOs have tilted to defensive strategies with cost reduction and cash control their top two priorities

• On average, CFOs attach a 78% probability to the UK falling into recession in the next 12 months
  

CFOs view credit as being more costly than at any time since 2010, according to Deloitte’s UK CFO Survey, Q3 2022. Over half (56%) rate credit as costly while over a third of finance leaders (39%) note that new credit is not easily available.

The financial market impact of the government’s mini-Budget on 23 September, which took place roughly halfway through the survey period, has added to the pressures. Those CFOs who responded after the mini-Budget foresaw materially higher interest rates and were more likely to report elevated credit costs than those who responded before.

Tightening credit conditions have resulted in a sharp fall in the attractiveness of debt finance to CFOs - whether bank borrowing or bond issuance - over this year. CFOs now see equity as a more attractive source of finance than corporate bonds, an assessment last seen during the credit crunch in 2009.

On average, CFOs* believe inflation will moderate from its current level to 6.2% in a year’s time but expect inflation to stand at 3.8% in two-years' time, almost double the Bank of England's 2% target.

Finance leaders expect the Bank of England to continue tightening monetary policy but at a significantly less aggressive pace than markets suggest. CFOs see the Bank's base rate at 3.75% in a year's time, well below market expectations.

On average, CFOs attach a 78% probability to the UK falling into recession in the next 12 months.

The latest Deloitte CFO Survey took place between 20th September and 3rd October 2022. 87 CFOs participated, including the CFOs of 23 FTSE 100 and 30 FTSE 250 companies. The combined market value of the 60 UK-listed companies surveyed is £463 billion, or approximately 20% of the UK quoted equity market.

Risk and economic uncertainty

The dampening effect of tighter credit conditions is reinforced by wider concerns. Over three quarters of CFOs (77%) rate the level of external financial and economic uncertainty as high or very high, up sharply from last quarter (Q2: 61%) and at its highest level since the beginning of the pandemic.

Higher energy prices or disruption to its supply, and rising geopolitical risks are the top two concerns among CFOs. The prospect of further interest rate rises and higher inflation closely follow as the next biggest concerns.

Rising costs and shifting strategies

CFOs expect a combination of rising costs and falling revenues to squeeze corporate margins. An overwhelming majority (91%) expect operating margins for UK corporates to decline over the next 12 months - the highest reading on record** except at the beginning of the pandemic.

With rising credit costs and expectations of a margin squeeze, corporates are tilting to defensive strategies. Cost reduction is the top priority for CFOs, with over half (55%) saying it is now a strong priority. They are placing less emphasis on expansionary strategies such as introducing new products or services, increasing capital expenditure and expanding by acquisition.

Ian Stewart, chief economist at Deloitte, says:

“A twelve-year period of easy credit conditions is drawing to an end. Corporates are seeing a reset in the cost and availability of credit. Not since the credit crunch have CFOs rated debt – whether that’s bank borrowing or corporate bonds - as being less attractive as a source of finance for their businesses than they do today.”

Labour market and supply chains

Just over half of CFOs (53%) expect hiring by UK corporates to decrease over the next 12 months.

Over a third (41%) of finance leaders continue to report that their businesses have faced significant or severe recruitment difficulties over the last three months. CFOs expect labour shortages to ease somewhat as the economy and hiring soften. Nonetheless, CFO expect labour market pressures to persist - one in four CFOs expect to face significant or severe recruitment difficulties in a year’s time and earnings growth is expected to accelerate.

CFOs expect growth in average wage costs for their businesses to accelerate significantly over the next 12 months, from 4.6% to 6%.

-Ends-

Notes to editors

*Median
**Since the question was first asked in 2010

About Deloitte’s CFO Survey

This is the 61st quarterly survey of Chief Financial Officers and Group Finance Directors of major companies in the UK. The 2022 third quarter survey took place between 20 September and 3 October 2022. A total of 87 CFOs participated, including the CFOs of 23 FTSE 100 and 30 FTSE 250 companies. The rest were CFOs of other UK-listed companies, large private companies and UK subsidiaries of major companies listed overseas. The combined market value of the 60 UK-listed companies that participated is £463 billion, approximately 20% of the UK quoted equity market.

The Deloitte CFO Survey is the only survey of major corporate users of capital that gauges attitudes to valuations, risk and financing.

For copies of previous CFO surveys, please visit www.deloitte.co.uk/cfosurvey.

About Deloitte
In this press release references to “Deloitte” are references to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”) a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see deloitte.com/about for a detailed description of the legal structure of DTTL and its member firms.

Deloitte LLP is a subsidiary of Deloitte NSE LLP, which is a member firm of DTTL, and is among the UK's leading professional services firms.

The information contained in this press release is correct at the time of going to press.

For more information, please visit www.deloitte.co.uk.