July 11, 2011 12:04 am

UK finance chiefs’ optimism tumbles

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The squeeze on consumer spending power has sent optimism among finance directors of Britain’s largest companies tumbling at its fastest rate since the collapse of Lehman Brothers in 2008.

Confidence among finance chiefs about prospects for profits and sales has sunk to its lowest since 2009, when the economy was in recession, according to a survey by Deloitte, the professional services firm.

Hopes that the economic recovery can be sustained have also taken a knock, with finance chiefs seeing on average a 33 per cent probability of a double dip recession, up from 29 per cent in the previous quarter.

Most believe the recovery in profit margins is set to go into reverse. Big exporters continue to pursue expansionary strategies, but for UK-focused companies the emphasis is firmly on cutting costs and increasing cash flow. Optimism is especially low among consumer facing businesses.

Deloitte surveyed 131 chief financial officers in June, including those of 34 FTSE 100 and 44 FTSE 250 companies.

Margaret Ewing, Deloitte’s vice-chairman, said: “The continued squeeze on UK consumer spending power seems to be weighing on corporate sentiment. Over the last year, real disposable incomes have fallen by 2.7 per cent, the fastest rate of decline since 1976.

“The mood of caution is reflected in a tilt in the balance sheet strategies employed by finance chiefs. CFOs are placing more emphasis on cost control and increasing cash flow than at any time in the last year.”

Ian Stewart, chief economist, said whereas a year ago most thought profit margins were on the rise, today the balance of opinion was that margins were set to narrow and that the period of strong profit growth was drawing to an end.

The Office for National Statistics reported last week that the net rate of return for non-financial corporations reached 12.7 per cent in the first quarter, the highest since 2008, but the rise was entirely due to oil and gas companies. Profits for service companies and manufacturers fell.

Mr Stewart said while finance officers had become more cautious, this had not dented their willingness to take greater risk on to their balance sheets.

“Risk appetite remains close to the three-and-a-half-year high seen last quarter, which seems to reflect the strength of corporate balance sheets, the availability of capital at a relatively low cost, and a perception that, while uncertainties abound, the current environment also presents opportunities for profitable growth,” he said

Top priorities for finance directors remain the introduction of new products and services, or expanding into new markets. Expanding by acquisition and raising capital expenditure also remain prominent priorities.

Companies that derive a high proportion of their revenues from overseas had a higher level of risk appetite and were pursuing more expansionary strategies than their UK-facing counterparts.

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