Firms hit by 'sharpest fall in confidence for five years'

Companies are being hit by the sharpest decline in confidence since 2007 – with a new round of cost-cutting on the cards, according to a new survey.

The latest Deloitte CFO Survey reveals the third major dip in optimism in the last five years, while chief financial officers and finance directors see a 36 per cent probability of one or more countries leaving the euro by the end of 2012.

Meanwhile, 80 per cent of CFOs say it is not a good time to take further risk onto their balance sheet, while major UK corporates are stepping up preparations for a break-up of the euro.

The survey says: “Economic uncertainty and the outlook for demand are the two biggest influences on changes to investment decisions being made by large UK-based corporates.

“Access and pricing of external finance are seen as lesser issues, with just four per cent of CFOs citing them as influencing factors.

“Large UK companies entered 2012 with the view that a break-up of the euro posed the biggest threat to their business. CFOs now see a 36 per cent probability of one or more countries leaving the Single Currency by the end of this year, up from 26 per cent last quarter.

“Major UK-based corporates have stepped up their preparations for the possibility of a break-up of the euro. 28 per cent say their own plans for coping with a break-up are ‘made’ or ‘at an advanced stage,’ compared to 18 per cent in Q1.

“Business confidence has also been hit by the UK’s return to recession. After optimism briefly rallied in the first quarter, CFOs and finance directors now see an almost one-in-two chance of the recession continuing to the end of this year or for the economy to hit a ‘triple dip’ recession within the next two years.”

Guy Thomas, partner at Deloitte in Birmingham, said: “As when the economy slid into recession in late 2008, corporates are reacting by cutting costs and bolstering cash flow. “Companies are more focused than they were 12 months ago on defensive balance sheet strategies, such as reducing leverage and disposing of assets.

“They are less likely to be making acquisitions or undertaking capital expenditure. On balance, CFOs see hiring, capital spending and discretionary spending declining.”

Ian Stewart, Deloitte chief economist, said: “95 per cent of CFOs rate the current financial and economic uncertainties facing their business as being above normal. Economic uncertainty has had a corrosive effect on risk appetite.”