Two-thirds of finance leaders brace for recession

Finance leaders have assigned a 63% probability of experiencing a recession within the next year, amid rising inflation and economic headwinds, according to Deloitte’s UK CFO Survey Q2 2022.

Over two-thirds (68%) believe high inflation will continue, anticipating it to remain higher for longer and to exceed economists’ expectations. Overall, 86% of chief financial officers (CFOs) now expect inflation to exceed 2.5% in two-years’ time (up from 78% in Q1), which is the highest reading on record.

CFOs’ expectations for interest rate rises have also increased, anticipating rates to double over the next 12 months with the Bank of England’s base rate reaching 2.5% in a year’s time (up from 1.5% in Q1). 

Additionally, the outlook for operating margins has also dropped as the majority of CFOs (87%) believe operating margins will be squeezed over the next 12 months.

Meanwhile, 31% of CFOs reported “significant” or “severe” levels of supply chain disruption in Q2, and 40% of finance leaders have reported that their businesses have faced recruitment difficulties in Q2, with expectations for labour shortages to persist. 

However, increasing capital spending remains a “strong” priority for 19% of CFOs, remaining above the five-year average of 14%. 

Deloitte said CFOs are still optimistic about medium-term prospects for investment and most expect business productivity, spending on skills and investment in digital technology and assets to speed up in the next three years. Additionally, 54% of CFOs expect revenues to rise over the next year.

Ian Stewart, chief economist at Deloitte, said: “The CFOs of the UK’s largest companies are braced for a recession. Finance leaders have edged towards more defensive balance sheet strategies, particularly cost control and building up cash.

“Yet CFOs are not in batten down the hatches mode. Risk appetite is only slightly below average levels, and well above the lows seen in the financial crisis, at the time of the EU referendum and during the pandemic.”

Richard Houston, senior partner and CEO of Deloitte, added: “It’s interesting that CFOs remain optimistic on investment – despite rising inflation and recessionary risks. They remain convinced that growth and resilience will only come through increased spending on digital technology – and the skills to use it.”