Sentiment in the UK’s major businesses has dropped to its lowest level since the depths of the financial crisis in early 2009, as slow growth at home and the sovereign debt crisis in the eurozone push companies to trim back their domestic investments and build their balance sheets, according to a survey of chief financial officers (CFOs) by Deloitte.
43 per cent of CFOs surveyed now believe that the country will fall back into recession, up from 33 per cent in the previous quarter. Risk appetite in companies is now falling at the fastest rate in four years, with the financial sector the most risk averse. This translates into a focus on trimming and managing costs, with acquisitions and investments now on the backburner.
The drop in sentiment comes against a backdrop that sees UK corporates in a relatively healthy state, with cash on balance sheets and leverage under control.
“When we ask them about leverage, they think that the corporate sector as a whole is under-leveraged, which is a heck of a big change from a couple of years ago, when it was over-leveraged,” Ian Stewart, Deloitte’s chief economist said. “They also say that they see corporate bonds and bank financing as really quite attractive forms of finance for their business.”
However, with financial markets spooked by ongoing concerns over the direction of the global economy and the sovereign issues in the eurozone, corporates - even those with exposure to faster-growing emerging markets - are becoming increasingly defensive.
According to Stewart, it could be up to policymakers, rather than the private sector, to come up with a response.
“What we’ve seen in this survey in the last five years is that risk appetite, which is the driver of corporate spending, is heavily influenced by the risk appetite in financial markets, and risk appetite in financial markets is heavily influenced by policy... You’ve got to have some sort of a policy response, which shifts financial markets, and that will then feed through to the corporate sector,” he said.
The announcement that the Bank of England would inject £75 billion worth of new money into the economy was not surprising, Stewart added, saying that measures to boost confidence in financial markets are needed for effects to bleed back into the corporate sector.
Some of that response will need to come from Europe, however. Policymakers in Brussels, Berlin and Frankfurt have indicated that they will find new ways to support the banking system in the single currency area and try to limit the damage from a sovereign default in Greece. However, the lack of a coherent response has caused continuing stress in markets.
”The biggest companies in the UK are becoming more defensive. they are having to operate through financial markets and through that channel are having to operate on sentiment and risk appetite,” Stewart said.
“If there is a positive story, it is that these corporates have strong balance sheets, they have reduced leverage, they have got access to capital and six months ago they were fairly positive about expansion, so I think they have the firepower to expand, but they need to have greater confidence about the outlook, and I think that’s partly for policy in this country, and as [Bank of England governor] Mervyn King said, it’s got a lot to do with creating confidence in Europe too.”