Survey shows CFOs fear stagnation

The state of the world’s major economies continues to cause concern among North America’s chief financial officers, even as they report an improved level of optimism for their companies’ prospects compared to the final quarter of 2012, according to Deloitte’s Q1 CFO Signals survey.

Concerns have largely shifted from the possibility of economic crisis or collapse to fears of further stagnation, leading to restrained expectations for sales and domestic hiring this year.

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The quarterly survey which tracks the thinking and actions of CFOs representing North American companies averaging more than $5 billion in annual revenue, reported an increase in net optimism (the percentage difference between CFOs expressing rising optimism and those expressing falling optimism) after two dismal quarters.

Led by CFOs in the United States, net optimism rose from -11 last quarter to +32 this quarter. Canadian CFOs were however more modest in their expectations, with net optimism recovering only slightly, to +7 from -6 last quarter and still well below the peak of +57 at the same time last year.

“Canadian CFOs have traditionally expressed higher net optimism than their U.S. counterparts, so this quarter’s findings mark a significant change from the past,” said Bill Cunningham, co-leader of Deloitte Canada’s CFO program. “Although sales growth expectations in Canada continue to outpace those in the United States and earnings growth expectations are roughly the same, Canadian CFOs are more muted when it comes to such things as dividend growth and capital investment.”

Tax policy a major drag

Public policy uncertainty seems to be a major drag across North America at the moment, with more than 90% of CFOs saying current and recent policy decisions and debates — ranging from debt ceiling and sequestration policies to possible defence cuts — are having at least some impact on their company plans.

But tax policy appears to be having the most substantial impact across industries, with some 75% of CFOs claiming at least some impact and 40% indicating substantial or strong impacts.

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The potential detrimental impact of government actions on a stagnating global economy tops the list of most worrisome risks for CFOs, particularly the possible effects of the government’s taxing and spending policies on consumer demand and the broader economy.

More than half of all CFOs surveyed see the current state of the North American economies as the main driver of growth, but a quarter of them also consider it the top impediment. The economic situation in Europe is also seen as an impediment to growth by 23% of CFOs, a figure offset by a similar level of optimism about the positive effect of economic growth in China.

Cuts expected in domestic hiring

Canadian CFOs raised their expectations for year-over-year earnings growth to 11.8% in line with North American expectations of 12.1% while their expectations of a 7.4% jump in sales outpaced the North American figure of 5.4%. But Canadian CFOs were much more restrained with regards to capital spending, predicting a 9.4% drop from last year compared to the expected 10.9% increase in the United States.

Domestic hiring expectations did recover significantly among Canadian CFOs however, improving to 3.5% from just 0.2% last quarter, even as a substantial proportion – 27 % – of North American CFOs now expect cuts in domestic hiring.

“Many of these estimates have rebounded from survey lows seen in 2012, but they are still for the most part below their longer-term survey averages,” said Dick Cooper, Deloitte’s co-leader of the CFO program. “As net optimism recently has tended to peak in the first quarter only to decline in subsequent quarters, this survey may suggest that CFOs believe the North American economy still has some way to go before they consider this a sustainable recovery.”

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