CFOs lose their optimistic mojo: Inflation woes and interest rates dampen spirits

Finance executives at top British companies are displaying increasing caution due to concerns over high inflation and rising interest rates. According to a quarterly survey conducted by Deloitte, optimism levels among chief financial officers (CFOs) have sharply declined, resulting in a significant shift in sentiment. CFOs now anticipate a slowdown in hiring and pay growth as they grapple with inflationary pressures and tightening monetary policies.

The Deloitte survey revealed that CFOs’ optimism levels decreased by 35 percentage points, from a positive 25 to a negative 10, over the course of three months. Reuters cited Deloitte’s chief economist, Ian Stewart, who noted that the initial burst of business optimism seen in the spring has diminished due to inflation and rising interest rates.

Finance leaders of major UK firms expressed concerns regarding tight monetary policies, considering them the greatest threat to their businesses. The cost of credit is perceived to be the highest since the credit crunch in 2009. Geopolitical uncertainties and energy prices, which had dominated concerns in recent years, took a backseat to the perceived impact of monetary policy.

CFOs displayed a preference for employees to spend more time in the office, with a net 50 per cent predicting increased office presence in the next two years. This change in sentiment reflects a shift towards cost reduction and cash control among corporations.

Labour Market and Wage Growth

The survey also highlighted early signs of cooling in the labour market, with CFOs signaling reduced recruitment difficulties and decreased wage growth. The Bank of England, concerned about the pace of wage growth contributing to inflationary pressures, is closely monitoring the labour market ahead of its decision on whether to raise borrowing costs for the 14th consecutive time on August 3.

Focus on Tight Monetary Policy

The Deloitte survey, based on responses from 69 CFOs (including 13 from FTSE 100 firms and 21 from FTSE 250 companies), highlighted the growing significance of tight monetary policy as the primary threat to businesses. This surpasses concerns related to geopolitics and energy prices, which have dominated for the past two years.

Call for Green Growth Opportunities

In a separate report cited by Reuters, the Confederation of British Industry (CBI) emphasised the potential for green growth to benefit the UK economy. The CBI estimated that capitalizing on green growth opportunities could boost up to £57 billion ($75 billion), equivalent to 2.4 per cent of GDP, by 2030. The organization urged the government to create a clear and stable policy environment and offer investment incentives to support the realisation of this potential.

CBI Director-General Rain Newton-Smith emphasised the importance of all political parties prioritising green growth in their manifestos as a pivotal general election approach.

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