• Sentiment among UK CFOs has risen for the second consecutive quarter, with optimism running well above average levels;
• Inflation and high interest rates have dropped down the CFO risk list;¹
• Corporate risk appetite has risen to an 18-month high but remains subdued relative to its long-term average;
• 63% of CFOs anticipate higher investment in new technology;
• CFOs believe geopolitical factors pose the greatest external risk to their own businesses over the next 12 months.

CFOs of the UK’s largest firms are optimistic about prospects for their own businesses as they enter 2024, according to Deloitte’s latest CFO survey. Sentiment among finance leaders has risen for the second consecutive quarter – to well above average levels² – with a net 11%³ of CFOs more optimistic about the financial prospects of their business than they were three months ago.

Ian Stewart, chief economist, said: “These findings may seem at odds with recent economic news, particularly a contraction in third quarter GDP and forecasts of sluggish UK growth in 2024. But, while the pace of growth softened in 2023, activity proved more resilient than expected, with unemployment at low levels, corporate profitability holding up and an absence of stress in financial markets. Crucially, inflation has fallen sharply since the summer, bolstering expectations of earlier interest rate reductions.”

Conducted between 28 November and 12 December 2023, a total of 72 CFOs participated in this quarter’s CFO Survey, including the CFOs of 12 FTSE 100 and 26 FTSE 250 companies. The combined market value of the 35 UK-listed companies surveyed is £328bn, or approximately 13% of the UK quoted equity market.

Inflation worries and interest rate expectations ease

The inflation and rate worries that dominated the CFO Survey for much of the last two years have eased since the last quarter. The risk of higher inflation has dropped down CFOs’ list of concerns to a weighted average rating⁴ of 53, from 58 in the last survey. This shows that the threat of persistently high inflation and the prospect of further interest rate rises has weakened, consistent with price pressures easing faster than expected in recent months.

Finance leaders expect price and wage pressures to soften over the next two years. They see the Bank of England’s base rate falling from its current level of 5.25% to 4.75% in a year’s time.

Geopolitical factors again rated biggest risk

CFOs again see geopolitical factors as the greatest external risk to their own businesses over the next 12 months, with a weighted average rating of 63, up from 59 in the previous survey. Reflecting on the risk that this poses to their businesses, a net 44% of CFOs expect greater diversification and near-shoring of supply chains in the longer term.

There is also increased anxiety about productivity and competitiveness in the UK economy, which is now second on the risk list with a rating of 56, up from 53 last quarter.

Higher energy prices, or disruption to supply, is seen as the third biggest risk (at 54), but the rating remains well below the levels seen in the second half of last year. Notably, there is a marked deterioration in sentiment around the euro area, with an increased risk rating of 42, up from 34 in the last survey.

Anticipated higher labour costs, but more investment in technology

There is a strong consensus among finance leaders that the UK has entered a prolonged period of high labour costs. A net 92% of CFOs expect labour costs to remain elevated in the long term, relative to 2023. But CFOs are decidedly bullish on investment in new technology, with a net 63% of CFOs expecting investment in new technology to increase in the long term.

Finance chiefs also anticipate a greater role for the state in the economy, with significant proportions expecting an increase in levels of taxation (net 39%) and regulation (net 42%).

By contrast, CFOs think that levels of flexible or home working have peaked, with a net 57% expecting home working to decline in the long term.

Defensive strategies dominate

CFOs’ balance sheet strategies remain largely defensive. Cost reduction is their top priority, with 51% of CFOs rated reducing costs as a strong priority for their business over the next 12 months. Increasing cashflow follows, with 47% of CFOs rating it as a strong priority. A sharp fall in the priority assigned to introducing new products and services or entering new markets (only 15% of CFOs say it’s a strong priority now) has driven expansionary strategies further out of favour.

Ian Stewart, added: “Whilst finance chiefs are starting 2024 in positive spirits, this is tempered by high levels of uncertainty, concerns around geopolitics, and low UK productivity. CFOs foresee growth ahead but – based on their defensive balance sheet stance – not imminently.

“For now, corporates are focused on cutting costs and building up cash rather than hiring, capital spending or M&A. But unlike in previous periods of uncertainty the financial system is operating and larger corporates can access debt, albeit at higher rates. Scale matters as the large corporates represented in the survey panel are generally better able to manage periods of stress and are less vulnerable to tightening credit conditions than smaller and medium sized companies.”