CFOs brace for a long and deep recession – in the UK

With the UK recession looming, leverage is highly unattractive for CFOs.

Some countries will be hit harder by a recession than others as the global economy is expected to contract this year, but the UK is struggling. A financial times A poll released on Monday found Britain is facing a “deeper and more prolonged recession” than any other nation in the G7, a global policy forum representing seven of the world’s most advanced economies. wealth reported. About four-fifths of economists said the UK will experience a much longer recession than its peers. They predict a tough 2023 and a possible return to normal by 2024.

“Britain is suffering from an energy shock as bad as Europe, an inflation problem… as bad as the US and a unique labor shortage problem from the combination of Brexit and the NHS crisis,” said Ricardo Reis, a surveyed economist and professor at the London School of Economics said in the report.

According to the latest Weil European Distress Index, the UK business crisis has accelerated faster than the rest of Europe, reaching a two-year high.

A key finding from Deloitte’s UK CFO Q4 2022 survey, released on Tuesday, found that CFOs view bank borrowing and debt issuance as the least attractive since the financial crisis. With interest rates at 3.5%, CFOs are pricing loans at their most expensive since 2009, according to the report.

“When interest rates were at very low levels, leverage easily displaced equity as a source of funding,” said Ian Stewart, Deloitte’s chief economist, in a statement. “CFOs now see them roughly on an equal footing.”

70 percent of CFOs rate credit as expensive, while 45 percent say new credit is hard to come by. Only 28% say they expect their company’s demand for credit to increase over the next 12 months. However, Stewart also noted that the CFO’s concerns “regarding energy supplies and prices have receded,” he said. The results are based on a survey of 78 CFOs who took part, including those from FTSE 100 and FTSE 250 companies.

The Office for National Statistics reported last month that the UK inflation rate was 10.7% in November, down from a 40-decade high of 11.1%. On average, CFOs believe inflation will fall to 5.8% a year from now. Over the next two years, however, they expect a return of 3.3%, which is above the Bank of England’s target of 2%.

Market turmoil hit the UK in late September after the government’s proposed tax cut plans sent bond and currency markets into turmoil. If UK markets are any indication, this macro environment could see the end of the era of introducing fiscal stimulus, tax cuts and largely compensating for lost income without inflation or rising interest rates being a major concern.

Deloitte’s report on North American CFO sentiment for the fourth quarter, released December 14, found that CFOs’ net optimism about their own companies fell for the third straight quarter, hitting the lowest level since the second quarter of 2020 . The talent shortage also remains a major concern.

Each quarter, Deloitte tracks a range of metrics around CFO expectations for revenue, earnings, dividends, cap spend, domestic hiring and domestic wages, Steve Gallucci, Deloitte’s global and US head of CFO programs, said recently Month. “If you look at the fourth quarter of 2022 versus the third quarter of 2022, all of those measures fell off,” he said. The biggest declines, according to the report, were year-over-year growth expectations for revenue and earnings, down 4.2% and 2.9%, respectively, from 6.2% and 6.4% in the third quarter.

“Cost management into 2023 will be key given the ongoing uncertainty surrounding inflation,” Gallucci said.

In the US, consumer prices rose 7.1% yoy in November, after 7.7% in October and a peak of 9.1% in June. In December, the Federal Reserve announced a half-percentage-point rate hike, its seventh rate hike, to tame inflation. The minutes of the Fed meeting of 13-14. December was published on Wednesday. “Participants stressed that the committee’s ongoing monetary tightening, to achieve a sufficiently hawkish stance to bring inflation back to 2 percent, is essential to ensure that longer-term expectations remain well anchored,” it said Document.

CFOs around the world are no doubt preparing for a roller-coaster year that many are predicting.

See you in the morning.

Sheryl Estrada
[email protected]

Big thing

The burden of debt repayments has increased for US companies in the third quarter of 2022, according to a new report from S&P Global Market Intelligence. The median interest coverage ratio fell from 8.98 to 8.19 in the third quarter of 2022. This metric measures companies’ ability to meet interest payments on their debt by dividing earnings before interest and taxes by the cost of debt interest payments for companies rated BBB – or higher by S&P Global Ratings. The decline breaks “a near-steady rise” in the ratio since the second quarter of 2020. This suggests “companies are feeling the effects of rising borrowing costs and a weaker economy,” according to S&P Global Market Intelligence.

go deeper

Willis Towers Watson’s (WTW) annual analysis of the funded status of the country’s largest occupational pension plans found that the 10-year march toward full funding in 2022 has lost momentum. Funded status ended 2022 at 95%, the same level as at the start of the year Weak investment returns are offsetting lower pension liabilities created by higher interest rates, according to WTW. The coverage ratio has increased steadily since 2012, when it was 77%. The results are based on an analysis of pension plan data from 356 Fortune 1000 companies that sponsor defined benefit plans in the US with fiscal year-ends ended in December. Total investment returns are estimated to average -19% in 2022, although returns varied significantly across asset classes, WTW noted.

leaderboard

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Zahir Ibrahim has been appointed CFO of BARK, Inc. (NYSE: BARK), an e-commerce and content company for dog lovers, effective immediately. Most recently, Ibrahim served as CFO and Chief Administrative Officer at startup Do Good Foods LLC. Prior to that, he was CFO of KIND LLC, a healthy snack company. Ibrahim also previously served as CFO at Annie’s Inc., a natural and organic food company. He also held several positions at Molson Coors Brewing Company, most recently as VP, Controller and Chief Accounting Officer. Earlier in his career, Ibrahim held senior finance positions at CML Innovative Technologies, Elementis Specialties and Pirelli Tyres.

overheard

“The environment remains challenging and our customers are taking a more measured approach to their purchasing decisions. With this in mind, we have made the very difficult decision to reduce our workforce by approximately 10%, primarily over the coming weeks.”

—Salesforce co-founder and CEO Marc Benioff wrote in an email to employees on Wednesday: wealth reported. US-based employees affected by the layoffs will be eligible for five months’ salary, insurance, career resources and other benefits during their transition.