How CFOs approach risk in a recession

The Office of National Statistics brought some relief in its most recent update on UK inflation: the nation’s annual CPI inflation rate in January 2023 stood at 10.1%.

If you know much about inflation, you might know that the UK and its closest neighbours aim for an inflation rate of roughly 2% to maintain growth but avoid price spikes. So why would an otherwise eye-watering figure elicit a sigh of relief from anyone? The main reason is that the announcement marks the third straight month that the inflation rate has fallen in the UK. And while the figure isn’t falling as quickly as it rose in the first half of 2022, CPI inflation is down a full percentage point from its peak in October 2022.

This should be encouraging for UK finance chiefs, though it still may not indicate a quick recovery. CFOs expressed something like cautious optimism in the 2022 Gartner survey cited below. More than half of UK finance chiefs expected inflation rises to be significant and also thought high inflation would be more than transitory. But less than 10% believed that high inflation would last more than three years and nearly a third expected it to fall within 12 months.

Inflation aside, UK businesses have had to come to terms with unrelenting economic uncertainty, generally. CFOs’ medium-term outlook for their business has steadily declined for almost two years, as data from Deloitte shows. Looking at a few specific indicators, in Q4 2022 87% of finance chiefs expected reduced operating margins in the next 12 months, 84% believed financing costs would increase and 67% expected a reduction in hiring. Overall, reducing costs was a priority for 93% of finance leaders.

Unsurprisingly, for an overwhelming majority of CFOs, now is not the time to take more risk on to the balance sheet. Instead, the majority (67%) expected a reduction in capital expenditure in 2023, and even more (80%) expected a reduction in discretionary spending. Another 45% were prioritising a reduction in leverage, and although 88% were still looking to expand organically, less than half (42%) expected to grow through new acquisitions.

Finance decision-makers are responding to economic uncertainty and the associated risks in different ways. Although there will be a marked reduction of capital expenditure for the majority of companies, unfortunately for us consumers, most CFOs plan to make up for cost increases by simply raising the prices of their goods and services.

Finally, despite the general expectation among CFOs that expenditure will decline, there is a notable minority that sought to increase investments in risk and compliance last year.

While CFOs are maintaining a decidedly sober outlook on the medium-term economic prospects for UK plc, the most recent survey data shows some small improvements - albeit, after almost two years of declining confidence. But small improvements are improvements nonetheless, and several quarters of small improvements start to add up. We’ll soon know how the outlook has shifted after Q1 of this year, but for now, finance leaders can look with hope to the small improvements.