Britain's CFOs are focussed on cost control
Among chief financial officers of the UK’s largest companies, cost reduction is emerging as the main response to the forthcoming NIC increase.
The latest Deloitte CFO Survey, conducted between 3 and 16 December, among chief financial officers of the UK’s largest companies shows a decline in business optimism although it remains well above the lows experienced in 2020 and 2022.
CFOs enter 2025 with a focus on cost control and with cost reduction emerging as the main response to the forthcoming increase in National Insurance Contributions (NICs). Raising productivity and prices emerge as lesser, though important, strategies for dealing with higher NICs.
With cost control to the fore, CFOs have trimmed expectations for corporate investment, discretionary spending and hiring, in the next 12 months. Employment expectations have seen the sharpest fall since the start of the pandemic in early 2020.
The worries about high inflation and interest rates that dominated CFO thinking for much of the last four years have faded. CFOs see wage pressures easing over the next year and expect the Bank of England to reduce interest rates by 75bp in 2025, to 4.0% by the end of the year. An easier monetary environment is feeding through to credit conditions, with CFOs reporting that credit is more available than it has been for most of the last five years.
Geopolitics tops CFOs’ list of external risks to their businesses for the sixth consecutive quarter. But energy prices, which were a major concern for CFOs a year ago, have dropped down the risk list, in part, perhaps because oil prices fell in 2024 despite ongoing conflicts in the Middle East and Ukraine.
The decline in CFO optimism seen in the latest survey has not been accompanied by the sort of sharp rise in perceptions of uncertainty that was seen during the pandemic and, in 2022, as inflation surged. Indeed, CFOs’ perceptions of uncertainty are running well below the levels seen in most of the last six years. Although they face increased costs in the form of higher NICs, CFOs are no longer contending with the endemic uncertainty, high inflation and tight credit conditions of recent years.
This quarter’s special question examines CFOs’ views on the attractiveness of countries and regions as destinations for business investment. The UK is seen as offering a better location for investment than the euro area or China. But the US ranks by some margin as the most attractive location, highlighting the competitive challenge Europe faces from a fast-growing US economy.
Stepping away from the CFO Survey, the big development in financial markets in recent weeks has been a steep rise in yields, or interest rates, on government bonds, driven by developments in the US.
Last Friday’s US job numbers came in far above expectations testifying to the strength of the US economy. The new US administration, which comes into office later this month, seems set on raising tariffs and is expected to increase levels of government borrowing. Bond markets around the world have reacted badly to the prospect of faster US growth, inflationary tariff increases and more government borrowing. Yields, or interest rates, on US government debt have risen to the highest level since 2007 triggering sharp increases in borrowing costs for other western nations.
Yields have risen across Europe and particularly in the UK. This can be seen in the spread, or differential in borrowing costs between the UK and its European peers. That UK borrowing costs have risen relative to Germany, where growth and inflation are weak and public borrowing is low, is unremarkable. More surprising is that against France and Spain, countries with relatively high debt levels, and, in the case of France, a budgetary crisis, UK spreads have also widened.
Markets fret that higher borrowing costs could wipe out the UK chancellor’s £10bn of headroom built into the government’s budget arithmetic. UK public debt is running at levels last seen in the early 1960s and the government will need to borrow an additional £300bn in the next fiscal year.
Over the weekend, Reeves said that the government’s fiscal rules were non-negotiable and The FT reported that Reeves would, if necessary, cut public expenditure to meet them. Building on this theme Darren Jones, the chief secretary to the Treasury, wrote in the Daily Telegraph on Saturday, of “rooting out waste across the public sector. Departments… must find savings and efficiencies across their programmes.”
What is clear is that, despite significant increases in planned public expenditure announced in last October’s UK budget, the government still faces hard decisions on what to prioritise. Higher bond yields accentuate the challenge.
The wider message is that strong US growth and worries about tariffs and higher US government borrowing are spilling over into borrowing costs for governments around the world.
A personal view from Ian Stewart, Deloitte's Chief Economist in the UK.
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