Risks posed by higher interest rates have overtaken concerns about rising wage bills and elevated energy prices among UK corporations.

Confidence among finance leaders of the UK’s largest firms dipped in the second quarter, according to the latest Deloitte CFO Survey, partially unwinding the sharp rise in sentiment seen in the first three months of this year. A net negative 10% of CFOs are more optimistic about their firm’s financial prospects now compared to three months ago, down from a net positive 25% in the first quarter.

There was an increase in uncertainty amid growing concerns over persistent price pressures and the potential implications of further interest rate rises. Almost half of respondents (45%) rated the levels of external financial and economic uncertainty facing their businesses as high or very high, up from 39%.

READ MORE: Easing pay pressure will not halt rising interest rates

Tight monetary policy was rated as the top threat to businesses, outweighing the concerns around geopolitics and energy prices that have dominated for the last two years. With recruitment difficulties and supply chain pressures easing significantly since the beginning of 2023, labour and supply shortages have slid down the CFO risk list.

“The burst of business optimism seen in the spring has faded under the weight of inflation and rising interest rates," Deloitte chief economist Ian Stewart said. "Corporates have responded with an increasing focus on cost reduction and cash control.

Views on hybrid working

 

The CFOs surveyed estimated that employees in their organisations who can work remotely split their time evenly between the office and home, working on average 2.6 days from the office per week. CFOs say they would prefer this to rise to approximately three and a half days in the office every week.

More than half (56%) believe that employees will be spending more time in the office in two years’ time, while 38% think the current balance will continue, and only 6% expect to see a further reduction in time spent in the office.

“Businesses have negotiated a series of major challenges in the last four years, including the UK’s departure from the EU, the pandemic and supply shortages. The legacy of those earlier shocks, in the form of inflation and high interest rates, is now the central challenge.”

The 69 CFOs surveyed between June 15 and June 27 reported a sharpening focus on cost reduction and increasing cash flow. The emphasis on these defensive strategies is now greater than the long-term average, with 55% rating corporate cost reduction and 46% rating increasing cash flow as a strong priority for their business in the next 12 months.

CFOs have raised their interest rate expectations and predict that the Bank of England’s base rate wil be at 4.5% in a year’s time, up from an expected 3.75% in the first quarter of this year.

They also reported tighter credit conditions, with a net 86% rating new credit as costly. On this measure, the cost of credit is at a 14-year peak – its highest level since the credit crunch.

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There were some early signs of softening in the labour market, with a net 43% of those surveyed expecting UK corporates to decrease hiring during the next 12 months.

Finance leaders also report a continued easing of recruitment difficulties and labour shortages, with 13% rating recruitment difficulties faced over the last three months as "significant" or "severe’" down from 18% previously. They expect some further improvement over the next 12 months and "significant" or "severe" recruitment difficulties to ease to negligible levels in two years’ time.

Consistent with this softening, CFOs expect a slowdown in wage growth in their own businesses from 6.3% over the past 12 months to 4.7% in the next year.