Uncertainty over post‑election policy change represents the greatest threat to UK business according to the Chief Financial Officers of the UK’s largest companies. CFOs rank a referendum on EU membership as the second greatest risk facing their businesses, followed by concerns over weakness and political instability in the euro area.

Risk appetite appears to have decoupled from its usual drivers, the economic outlook and equity market performance. Sentiment about growth in the US, UK and the euro area has improved since the previous CFO Survey in December. And the FTSE100 rose by 14% between mid‑December and late March to reach an all‑time high.

Yet political worries and the threat of a renewed euro crisis seem to have offset the impact of generally good economic news and buoyant equity markets, dragging down corporate risk appetite to a two‑year low. CFO expectations for investment spending have also dipped.

Last September, as CFO risk appetite reached its peak, a majority of CFOs rated government policy as being appropriate across ten separate areas.

The highest levels of satisfaction, with scores of 90% or more, went to monetary policy, the labour market and taxation. On average 77% of CFOs rated policy as appropriate, up from 67% in 2012.

Q1 2015

Election casts a long shadow

The Deloitte CFO Survey

April 2015

Chart 1. Risk to business posed by the following factorsWeighted average ratings on a scale of 0 – 100 where 0 stands for no risk and 100 stands for the highest possible risk

35 40 45 50 55 60 65

A bubble in housing and/or other real and financialassets and the risk of higher inflation

The prospect of higher interest rates and a generaltightening of monetary conditions in the UK and US

Weakness and or volatility in emerging markets andrising geopolitical risks in Middle East/Ukraine

Deflation and economic weakness in the euro area,and the possibility of a renewed euro crisis

A future UK referendum on membership of the EU

The May 2015 UK General Election andthe risk of policy change and uncertainty

2015 Q1 2014 Q3

5850

5650

5049

4645

4547

3842

The Deloitte CFO Survey

This quarter’s survey shows that CFOs think the General Election poses risks to what is seen as a benign policy environment. A clear majority of CFOs see the potential for adverse changes on regulation and taxation. And, on balance, the expectation is that post‑election changes will be negative for fiscal, monetary and labour market policies. Meanwhile the risk of a future referendum on EU membership ranks not far below the General Election itself as a threat.

The Deloitte CFO Survey

Corporate hiring and investment has led the recovery in the last two years. Yet this quarter’s CFO Survey demonstrates that business‑hostile policy change remains a potent threat to the recovery. The last seven years have provided ample evidence of the corrosive effects of uncertainty on corporate behaviour. A weakening of corporate risk appetite and investment intentions provides an ominous reminder that the business recovery is not assured.

AuthorsIan StewartChief Economist020 7007 9386istewart@deloitte.co.uk

Debapratim DeSenior Economic Analyst020 7303 0888dde@deloitte.co.uk

Alex ColeEconomic Analyst020 7007 2947alecole@deloitte.co.uk

Contacts

Ian StewartChief Economist020 7007 9386istewart@deloitte.co.uk

Mark FitzPatrickVice Chairman and CFO Programme Leader020 7303 5167mfitzpatrick@deloitte.co.uk

For current and past copies of the survey, historical data and coverage of the survey in the media and elsewhere, please visit:

www.deloitte.co.uk/cfosurvey

The Deloitte CFO Survey

CFO perceptions of economic and financial uncertainty rose again in the first quarter.

63% of CFOs now rate the level of uncertainty facing their businesses as above normal, high or very high – the highest reading in almost two years.

Chart 2. Uncertainty% of CFOs who rate the level of external financial and economic uncertainty facing their business as above normal, high or very high

45%

55%

65%

75%

85%

95%

2015Q1

14Q4

14Q3

14Q2

14Q1

13Q4

13Q3

13Q2

13Q1

12Q4

12Q3

12Q2

12Q1

11Q4

11Q3

11Q2

11Q1

10Q4

2010Q3

Uncertainty up

Rising uncertainty has coincided with a continued reduction in risk appetite, which is now at a two‑year low.

51% of CFOs say that now is a good time to take greater risk onto their balance sheets, down from a record high of 72% six months ago.

0%

10%

20%

30%

40%

50%

60%

70%

80%

2015Q1

2014Q3

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2013Q3

2013Q1

2012Q3

2012Q1

2011Q3

2011Q1

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2010Q1

2009Q3

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2007Q3

Chart 3. Risk appetite% of CFOs who think this is a good time to take greater risk onto their balance sheets

Uncertainty up

This fall in risk appetite appears to be driven by CFO concerns over policy change after the General Election, as highlighted in Chart 1.

Corporates see the current policy environment as fairly benign. Last September, as risk appetite hit a record high, a majority of CFOs rated UK government policy as appropriate across ten areas.

More than 90% of them reported policy settings as appropriate for labour market, taxation and monetary policy.

Uncertainty up

0 20 40 60 80 100

General levels of regulation affecting business

Infrastructure

Energy policy

Education & training

Urban and town planning

Financial regulation

Public expenditure

Taxation policy

Labour market

Monetary policy (including interest rates, inflationand the availability of credit)

58%

59%

64%

70%

71%

82%

89%

90%

94%

97%

2014 Q3

Chart 4. Policy appropriateness index% of CFOs reporting that policy settings in the following areas are appropriate for the long-termsuccess of businesses in the UK

Net negative effect Net positive effect

Chart 5. Effect of policy changeNet % of CFOs who see policy change in the following areas, after the General Election, as having a positive effect on their business

-80-70-60-50-40-30-20-10 0 10 20 30 40

Infrastructure

Education and training

Urban and town planning

Energy policy

Labour market

Monetary policy (including interest rates,inflation and the availability of credit)

Fiscal policy (government borrowingand debt)

Financial regulation

Taxation

General levels of regulation affectingbusiness

%

-66%

-50%

-40%

-31%

-25%

-20%

-15%

4%

15%

28%

CFOs believe that the General Election poses risks to what is seen as a generally benign policy environment. A clear majority of CFOs see the potential for adverse changes on regulation and tax. And, on balance, the expectation is that post‑election changes will be negative for fiscal, monetary and labour market policies.

At the same time, CFOs anticipate that changes to policy on infrastructure, education and training, and urban and town planning would be beneficial for their businesses.

Policy change key concern

The rise in uncertainty over UK economic policy is also reflected in an uptick in press references to economic policy uncertainty.

Chart 6. Economic Policy Uncertainty IndexNews-based index of UK economic policy uncertainty index (four-month quarter moving average)

050

100150200250300350400450

2015

2014

2013

2012

2011

2010

2009

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2006

2005

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Policy change key concern

Chart 7. Probability of Greek defaultThe percentage probability of a Greek sovereign default, based on credit default swap prices

50%

60%

70%

80%

90%

100%

Apr15

Dec14

Aug14

Apr14

Dec13

Aug13

Apr13

Dec12

Aug12

Apr12

Dec11

Aug11

Apr11

Dec10

Aug10

Apr10

Source: Fathom Consulting, Thomson Reuters Datastream

Developments in Europe have also weighed on corporate risk appetite.

Despite recent improvements in the economic outlook for the euro area, political wrangling over Greek austerity and debt repayments has kept the euro crisis in the headlines.

The probability of a Greek default – as inferred from the cost of insuring against this event – has risen sharply this year.

Policy change key concern

Chart 8. Corporate priorities in the next 12 months% of CFOs who rated each of the following as a strong priority for their business in the next 12 months

0% 5% 10% 15% 20% 25% 30% 35% 40%

Reducing leverage

Disposing of assets

Raising dividends or share buybacks

Expanding by acquisition

Increasing capital expenditure

Introducing new products/services orexpanding into new markets

Reducing costs

Increasing cash flow

2015 Q1 2014 Q4

33%33%

37%28%

31%20%

23%16%

22%

14%16%

7%6%

6%8%

29%

Defensive strategies – increasing cash flow and reducing costs – remain the top priorities for CFOs.

Compared to the fourth quarter of last year CFOs are placing less emphasis on expansionary strategies such as introducing new products or services, expanding by acquisition and capital expenditure.

Defensive strategies in favour

CFOs have scaled down their expectations for growth in capital spending.

A net 53% expect UK corporates to increase capital expenditure over the next 12 months, down from a peak of 80% a year ago.

Chart 9. Outlook for capital expenditureNet % of CFOs who expect UK corporates’capital expenditure to increase over the next 12 months

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

15Q1

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10Q4

10Q3

Incr

ease

Dec

reas

e

Defensive strategies in favour

Chart 10 compares the effect of nine key factors on corporate investment plans between the first quarter of last year and now. The further a coloured line in the chart is from the centre, the more the factor acts to support investment.

Uncertainty is the biggest, and a growing, depressant on investment.

The main drivers of investment are easy access to external financing, a strengthening UK recovery and rising demand for businesses’ products and services.

CFOs’ assessment of the effect of each of the following factors on their investment plans:On a 10-point scale where 0 implies the most negative effect and 10 the most positive

Chart 10. Factors affecting corporate investment plans

23

01

456789

10

Availability of internal finance

2015 Q12014 Q1

Uncertainty about the economic and financial environment

Fiscal consolidation in the UK (tax rises, cuts in public spending)

Actual or expected levels of economic activity/GDP growth in theeuro area

Actual or expected levels of economicactivity/GDP growth in emergingmarkets

Mor

e po

siti

ve

Actual or expected levels ofeconomic activity/GDP growth in

the rest of the world (including the US, Japan and Asia-Pacific)

Cost and availability of external finance

Actual orexpected levels

of economicactivity/GDP

growthin the UK

Secular or long-termgrowth for your products

or services

Uncertainty weighing on investment plans

Strong fundamentals

Despite rising uncertainty, expectations for revenues and operating margins have softened modestly and remain well above their long‑term averages.

Chart 11. Outlook for corporate revenues and marginsNet % of CFOs who expect UK corporates’ revenues and margins to increase over the next 12 months

-80%-60%-40%-20%

0%20%40%60%80%

100%

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Incr

ease

Dec

reas

e

Revenues

Operating margins

Strong fundamentals

Financing conditions remain benign for the large corporates on our survey panel. The cost of credit has hit a seven‑and‑a‑half‑year low this quarter and availability remains close to a seven‑year high.

CFOs also rate debt finance – bank borrowing and bond issuance – as the most attractive source of external funding.

Compared to the average reading from our sister surveys across 13 major European countries, a significantly larger proportion of UK CFOs rated debt finance as an attractive source of funding.

Chart 12. Cost and availability of creditNet % of CFOs reporting credit is costly and credit is easily available

-100%-80%-60%-40%-20%

0%20%40%60%80%

100%

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14Q3

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13Q3

13Q1

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07Q3

-100%-80%-60%-40%-20%

0%20%40%60%80%

100% Cred

it is availableC

redit is hard to get

Availability of Credit (RHS)

Cost of credit (LHS)

Cre

dit

is c

ostl

yC

red

it is

che

ap

Strong fundamentals

A majority of UK CFOs expect inflation to hover around the Bank of England’s 2.0% target rate in two years’ time.

However, a growing proportion expect lower inflation, with more than a third anticipating it to be between zero and 1.5%.

Chart 13. Inflation expectations% of CFOs who expect consumer price inflation in the UK to lie between the following ranges in two years’ time

0%

10%

20%

30%

40%

50%

60%

70%

80%

2.6% – 3.5%1.6% – 2.5%0 –1.5%Below zero

2014 Q4 2015 Q1

0% 0%

21%

36%

58%

8% 5%

71%

The macroeconomic backdrop to the Deloitte CFO Survey Q1 2015Global equity markets rose 4.5% in the first quarter and yields on developed economy sovereign bonds fell. The price of oil stabilised somewhat although at a significantly lower level than its 2014 peak. Lower oil prices provided a boost to consumers across the globe through lower inflation and a rise in disposable incomes. Financial markets reacted positively to the launch of the European Central Bank’s (ECB) quantitative easing programme, with risk assets rallying in Europe and equities hitting a record high in Germany. European bond yields also fell and Spanish and Italian yields hit record lows.

Despite renewed concerns over a euro area break‑up following the election of anti‑austerity party Syriza in Greece, a number of euro area economic indicators showed signs of improvement. The ECB upgraded its euro area growth forecast for 2015 to 1.5% from 1.0%. Economists also upgraded growth forecasts for the UK. The FTSE 100 continued to perform strongly, breaking through the 7,000 mark for the first time, with markets buoyed by the prospect of UK and US interest rates remaining lower for longer.

CFO Survey: Economic and financial context

Quarter-on-quartergrowth

Year-on-yeargrowth

201520142013201220112010200920082007-7

-6

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4 Forecasts

UK GDP growth: Actual and forecast (%)

Source: ONS, consensus forecasts from The Economist and Deloitte calculations

UK recovery steady

CFO Survey: Economic and financial context

CFO Survey: Economic and financial context

FTSE 100 price index

Source: Thomson Reuters Datastream

3000

3500

4000

4500

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5500

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6500

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20152014201320122011201020092008

The FTSE 100hit record highs

Private sector hiring outpacing public sector job cuts

Private sector

UK private and public sector job growth (thousands)

Source: Thomson Reuters Datastream

Public sector

-300

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-100

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CFO Survey: Economic and financial context

CFO Survey: Economic and financial context

February CPI inflationlowest on record

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9

UK annual CPI inflation (%)

Source: Thomson Reuters Datastream

1990

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Two‑chart summary of key survey messages

0%

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80%

Risk appetite% of CFOs who think this is a good time to take greater risk onto their balance sheets

2015

Q1

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Net negative effect Net positive effect

Effect of policy changeNet % of CFOs who see policy change in the following areas, after the General Election, as having a positive effect on their business

-80 -60 -40 -20 0 20 40

Infrastructure

Education and training

Urban and town planning

Energy policy

Labour market

Monetary policy (including interest rates,inflation and the availability of credit)

Fiscal policy (governmentborrowing and debt)

Financial regulation

Taxation

General levels of regulationaffecting business

%

-66%

-50%

-40%

-31%

-25%

-20%

-15%

4%

15%

28%

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About the surveyThis is the 31st quarterly survey of Chief Financial Officers and Group Finance Directors of major companies in the UK. The 2015 first quarter survey took place between 6th and 23rd March. 108 CFOs participated, including the CFOs of 21 FTSE 100 and 45 FTSE 250 companies. The rest were CFOs of other UK‑listed companies, large private companies and UK subsidiaries of major companies listed overseas. The combined market value of the 72 UK‑listed companies surveyed is £380 billion, or approximately 16% of the UK quoted equity market.

The Deloitte CFO Survey is the only survey of major corporate users of capital that gauges attitudes to valuations, risk and financing. To join our panel of CFO respondents and for additional copies of this report, please contact Anthea Neagle on 020 7303 0116 or email aneagle@deloitte.co.uk.