Business confidence rebounds

Business confidence rebounds

Please join me for our annual spring economic update webinar next week, on Wednesday, 26 April, at 13:00 BST, where I’ll assess the economic outlook and discuss how business can navigate the challenges ahead. Register at: https://deloitte.zoom.us/webinar/register/WN_UWI8VQo7SGSPt9b_mEGzJg

• Our latest UK Chief Financial Officers Survey, released overnight, shines light on the plans of Britain’s largest corporates. The full report is available at: https://www2.deloitte.com/uk/en/pages/finance/articles/deloitte-cfo-survey.html

• The results from the survey are strikingly upbeat, with sentiment among the Chief Financial Officers of the UK’s largest firms improving significantly since the start of the year. The survey, which took place between 21 March and 3 April, shows the largest increase in CFO confidence since the UK economy was emerging from lockdowns in the autumn of 2020. Having run significantly below average throughout last year business confidence has risen to a two-year high and is now well above its long-term average.

• The failure of Silicon Valley Bank on 10 March and pressures on some regional US banks seem to have had little if any impact on CFO sentiment. On the contrary, CFOs’ perceptions of external financial and economic uncertainty have fallen at the fastest rate since we first asked this question more than 12 years ago. Moreover, respondents report little change in credit conditions, suggesting that March’s events in the US banking system have not affected the pricing and availability of credit for UK corporates.    

• The general picture from the survey is of things turning out rather better than CFOs feared at the start of this year. Worries around Brexit and high energy prices have eased and CFOs have become more optimistic about the outlook for inflation.

• The announcement on 27 February of the Windsor Framework, which aims to improve the flow of goods between Britain and Northern Ireland, is likely to have reduced CFO concerns around Brexit which are now close to the lowest level in over six years.  Falling energy prices, with wholesale gas prices down by almost 70% since we surveyed CFOs in December, and the absence of power cuts over the winter, seem to have bolstered confidence.  The survey also shows an improvement in CFO sentiment about the US economy that is consistent with recent upgrades to consensus, or market, forecasts for US GDP growth this year. Meanwhile CFOs report a marked easing of supply chain and recruitment problems while expectations for inflation in one year’s time have declined from 5.8% to 4.2%.  

• The findings of the survey chime with a slightly improved picture for the global economy, helped by lower energy prices, easing inflationary pressures and a rebound in growth in China.

• Things may be looking up, but they’re hardly rosy. Despite the shift in sentiment CFOs remain in defensive mode. Risk appetite is below normal levels and CFOs are heavily focussed on cost control and building up cash. Forecasters are also cautious. After more than a year of stagnant activity most think that UK activity will flatline or contract this year. Last week the IMF warned of the risks of financial instability and warned of a “rocky” road for the global economy.

• Yet for all the ‘ifs and buts’ after a pretty grim start to the year the latest CFO survey paints a surprisingly positive picture.

PS: When Russia slashed the supply of natural gas to Europe last year, the EU set a target to reduce natural gas consumption by 15% over the winter to avoid shortages. Europe was successful in hitting its target, helped by an unusually mild winter. The Economist has built a model to determine how much of the fall in gas consumption was due to the weather. The model showed that after accounting for the weather, Europeans reduced their gas use by around 12% with the Netherlands, Britain and Germany cutting back the most. Demand mainly fell due to higher prices hitting energy-intensive industrial output and causing households to scale back their energy use. Improved efficiency and switching energy sources played a smaller role. The painful adjustment made by households and businesses highlights Europe’s need for long-term solutions, but the extent to which the continent has managed to cope with the collapse of Russian supply (previously 40%-50% of Europe’s natural gas imports), even after accounting for the warmer weather, is an example of remarkable resilience.

For the latest charts and data on health and economics, visit our Economics Monitor:
https://www2.deloitte.com/uk/en/pages/finance/articles/covid-19-economics-monitor.html

OUR REVIEW OF THE LAST WEEK’S NEWS

This week’s news stories include some carried over from the Easter week. The UK FTSE 100 equity index closed the week up 2.7% at 7,872. The index has risen more than 7% from the lows reached in the light of the failure of SVB and the merger of Credit Suisse and UBS

 Economics

• The IMF forecasts that the UK economy would shrink by 0.3% this year, which would make it the lowest economic growth in the G7
• IMF managing director Kristalina Georgieva said that prospects for medium-term global growth were the weakest since 1990
• The Fund warned that a “hard landing” for the global economy may be on the horizon if inflationary pressures persist
• UK banks reported a 14% increase in defaults of loans and mortgages by households and businesses in the three months to February due to higher borrowing costs 
• US annual consumer prices fell to 5%, the lowest level in over two years
• New York Fed president John Williams and Fed governor Christopher Waller signalled their support for a further increase in US interest rates
• The International Energy Agency said that the growing shortfall between energy output and energy demand triggered by OPEC output cuts risks fuelling inflation
• US weekly jobless claims rose to 230,000, above economists’ expectations, signalling a cooling in the US labour market
• US retail spending fell for the second month adding to signs of waning consumer demand
• S&P 500 US companies are expected to face the biggest decline in profits since the pandemic with analysts expecting a 6.8% fall in earnings in the first quarter of 2023
• Eurozone monthly industrial production grew at the fastest pace in six months easing recession fears
• Brent crude oil prices rose last week on the news of a contraction in US production, adding further pressures after the OPEC+ production cuts announced earlier this month

 Business

• The FT reports that US companies have committed more than $200bn to US manufacturing projects since Congress offered extensive subsidies through the Inflation Reduction Act last year
• Delta Air Lines posted a positive profit outlook for the next quarter due to the strong demand for travel this summer
• Tesco announced a 50% fall in annual profits as inflation increased supplier costs eroding margins
• JPMorgan Chase ordered its managing directors to work in the office five days a week, in a decisive reversal of the hybrid work model
• Bank of England governor Andrew Bailey warned that the UK deposit protection scheme may need radical reform following the banking turmoil in recent weeks
• Banks such as Citigroup, Wells Fargo and JPMorgan Chase reported better than expected profits in the first quarter of the year despite the recent turmoil

 Global and political developments

• French president Emmanuel Macron reiterated France’s commitment to Taiwan after he has been criticised for suggesting that Europe should distance itself from US-China tensions over the island
• Israeli prime minister Benjamin Netanyahu reinstated defence minister Yoav Gallant following protests and a general strike following his dismissal
• The FBI arrested Jack Teixeira, a member of the Massachusetts Air National Guard, following an investigation into the leak of highly classified US intelligence documents
• The German government granted Poland permission to transfer five MiG-29 fighter jets to Ukraine 
• G7 member states criticised Japan’s climate strategy to use ammonia as low-carbon energy as its production heavily relies on fossil fuels
• Finland formally joined NATO. Sweden’s membership bid is being held up by Turkey and Hungary
• China conducted military manoeuvres around Taiwan as tensions rise following the visit of Taiwanese president Tsai Ing-Wen to the US
• A trade deal between the EU and Brazil, Argentina Uruguay and Paraguay has been held up by disagreement over binding commitments to prevent rainforest deforestation, the FT reports
• Saudi Arabia and Iran held official talks for the first time in seven years

 And finally… North Norfolk News reported last week that Cromer Pier has been voted the second-best pier in the country for the third year running – pier review