Laser-like focus on costs amid Brexit turmoil
*The latest Deloitte survey of UK Chief Financial Officers released today shows that uncertainty over Brexit is driving a marked shift towards defensive strategies among British businesses. With the UK’s growth prospects heavily dependent on the so far uncertain nature of its exit from the EU, corporates are cutting back on capital expenditure and hiring. Cost reduction is the top priority for CFOs who are placing a greater emphasis on it now than at any time in the last nine years.
*CFOs continue to be pessimistic about the long-term effects of Brexit, with more than three-quarters expecting it to lead to a deterioration in the business environment. Domestic risks seem to be the dominant concern for CFOs, Brexit rated as the biggest threat to business by far, followed by greater US protectionism and weak demand in the UK. Despite slowing global growth leading to a weaker external environment, CFOs rate emerging market and euro area weakness among the bottom three risks to their businesses.
*After a long period of easy access to cheap credit, funding conditions have begun to tighten for the large corporates on our survey panel. CFOs report that the cost of credit for their businesses has risen to its highest level in almost six years and availability has dropped to a two-year low. Rising interest rates have also brought a renewed focus on corporate leverage. For the first time in eight years, a net balance of CFOs rate UK corporate balance sheets as overleveraged.
*The survey reveals a divergence of opinion between economists and CFOs on the likely nature of Brexit. The latest consensus growth forecasts suggest that economists expect a transition deal, but corporates are positioned for the hardest Brexit, with risk appetite at recessionary levels and an intense focus on cost control. Businesses seem to be increasingly pricing in a worst-case outcome. Anything better, including a delay or a deal, could deliver a Brexit bounce in sentiment.
*To read the full report and download the survey data please click on the link below:
https://www2.deloitte.com/uk/en/pages/finance/articles/deloitte-cfo-survey.html
PS: In last week’s briefing we highlighted the risk posed by Italy’s high level of government debt, yields on which rose sharply last year. Italy’s populist coalition government is committed to boosting public spending but had to scale down its plans to avoid EU sanctions for breaching European budgetary rules. Now, with the latest economic data showing that Italy was in recession in the second half of last year, its government is likely to face increased pressure to raise spending, which could further strain its relations with the EU.
OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 3.1% at 7,020. Global equities rose on a dovish statement by the US Federal Reserve, suggesting that US interest rates will be staying on hold. UK blue-chip stocks were also supported by a fall in sterling, which inflates the value of overseas earnings.
Economics and business
* The US Fed puts further interest rate rises on hold, citing risks to global growth and weaker inflationary pressures in the US
* The US economy added more jobs than expected in January and maintained robust wage growth despite the partial government shutdown
* US manufacturing activity rebounded in January, beating expectations after a sluggish end to 2018
* Euro area GDP grew by just 1.2% year-on-year in the fourth quarter, the slowest rate of growth since 2013
* Euro area business confidence fell to a two-year low in January
* The US charged Chinese tech firm Huawei with corporate espionage, wire fraud, the obstruction of justice and other crimes
* UK fintech company World First discontinued its US operations to prevent US regulators from stopping its £700m takeover by China’s Ant Financial
* UK consumer borrowing rose at its slowest pace since 2014 last year
* UK house prices remained flat in January, according to the Nationwide House Price Index
* The EU has accused eight banks of collusion in the trading of euro area government bonds since 2007
* UK high street bank branches suffered more net closures than any other type of retailer last year, bank branch transactions also fell 23% and digital transactions increased by 99%
* UK wine retail chain Oddbins has gone into administration, blaming tough high street conditions and economic uncertainty created by Brexit
Brexit and European politics
* UK factories are stockpiling inputs at the fastest pace since survey began nearly three decades ago, according to IHS Markit
* Prime Minister Theresa May sets out to renegotiate the Irish border backstop with Brussels following discussions with MPs
* Nissan reversed its decision to build the new X-trail at its UK plant in Sunderland. The company cited the decline in diesel sales as reason for the change of plan and said that Brexit uncertainty was “not helping” business planning
* European Council president Donald Tusk said the EU is not willing to negotiate a change to the UK’s withdrawal deal
* European president Jean Claude Juncker said the UK’s attempt to renegotiate with little time left risks a disorderly Brexit and the EU ought to “prepare for the worst”
* The UK Parliament voted down the Yvette Cooper amendment that would have allowed an extension of Article 50 if a deal weren’t reached by the end of February
* Research by the UK’s Institute of Directors found that a fifth of their members have set up overseas operations as a result of Brexit
* Federal Reserve chairman Jerome Powell said the central bank is monitoring Brexit and a no-deal scenario would have an impact on the US economy
And finally… a type of durian fruit, known for its rarity and pungent smell, the J-Queen, is on sale in West Java, Indonesia for 14m rupiah, roughly three times the average monthly salary – fruit of labour