The folks with the keys to the corporate cash boxes are keeping the lid down.
A new survey has found our nation’s chief financial officers are feeling gloomy about our economic future.
What makes CFOs gloomy is uncertainty. And there is uncertainty all around us.
Where will China’s slowdown take our economy? Can we remain shielded from the woes of Europe? And which political party will be in charge one year hence?
Should we care about what CFOs are thinking?
Yes, according to Keith Skinner, the chief operating officer of accounting firm Deloitte, which publishes the quarterly survey of CFO sentiment. This CFO survey – covering quarter three, 2012 – is subtitled “Proceed with caution”.
“Over the last three years, since we began doing The CFO Survey, we have found it is a reliable indicator, both lagging and leading, of what is happening in the economy.”
There were 71 CFOs who participated in the survey, conducted between September 13 and 28, 2012. Collectively, they represented businesses with a combined market value of about $454 billion, or 35% of the Australian quoted equity market.
Convergence in levels of optimism
A slight uptick in optimism from some respondents was offset by the falling optimism of about the same number. Most (55%) remained unchanged from the last survey, which was a record low. Ouch.
What is interesting is that optimism levels have converged with those of CFOs in the United Kingdom and North America. Early this year, our CFOs were markedly upbeat, compared to those in the UK and the US.
Skinner says: “The Australian economy still doing a lot better, so why do CFOs have that concern?”
Skinner took his question to the analysts from his firm’s economic research unit, Deloitte Access Economics. “What they see happening is the part that was going well, the high-growth energy and resources sector, is slowing,” says Skinner. “But the other sectors aren’t picking up.”
Behind the gloom
The Deloitte analysts pinpoint the uncertainty about whether the rest of the economy can pick up the slack from the slowing resources sector, with 2014 representing the crunch time.
“We’re currently in the midst of the biggest structural shift our economy has seen in the last 30 years,” the report says. “Our research shows that the resource-driven regions are surging ahead with growth levels that have outpaced China, while the south-eastern corner of the country is stalled on economic growth rates of less than 2%.
This imbalance has presented a huge challenge for a large portion of the economy so far but we believe the capital investment from the resources sector, that has been the primary driver of Australia’s economic growth in recent years, will flatten out by 2014 with a steady decline expected in the following years. After that, we will need to see significant growth from the non-resource sectors.”
Some economists believe a significant fall in corporate capital expenditure is the primary factor leading to a recession.
On the score, the news is not so bad.
In the coming 12 months, 52% of CFOs are planning to increase capital expenditure. The majority of that group (29%) is planning to spend significantly more.
In the longer term – two to three years – 51% will increase capital expenditure and 31% of those will increase the spend significantly.
This suggests that it is the next 12 months that will be most painful.
Most CFOs are itching to start investing in growth; they are sitting on large cash balances created by capital raisings during the global financial crisis.
The majority cannot justify doing it yet, however, with only 14% saying now is a good time to be taking greater risks on their balance sheet.
Caution reigns supreme.
While 65% of CFOs expect revenue to increase (up from 51% last quarter), the majority (64%) are expecting organic growth. They don’t want to borrow money to fund growth.
Says Skinner: “Two thirds are not going to change their leverage, so they are trying to expand without borrowing money.”
On the other hand, 41% are looking to introduce new products or services, or intending to expand into new markets, and 45% are planning to increase merger and acquisition activity. Unfortunately, this represents a fall from the previous quarter.
The crystal ball
The figures are gloomy, but not despairing: most CFOs can see an end to the uncertainty. In this quarter’s survey, Deloitte added a question about how long the CFOs expect the uncertainty to last.
Fifty-nine per cent expect the uncertainty to last between one and two years, and only a little over 7% believe it will last longer than three. Four per cent are convinced that uncertainty is the name of the game, seeing no end to it.