Against a backdrop of rising inflation and intensifying economic headwinds, almost two-thirds of finance leaders expect a recession within the next year, according to Deloitte’s UK CFO Survey Q2 2022. Over two-thirds (68%) believe high inflation will continue, anticipating it to remain higher for longer and to exceed economists’ expectations.

The majority of CFOs (86%) now expect inflation to exceed 2.5% in two-years’ time (up from 78% in Q1) – the highest reading on record. More than a third (39%) think inflation will settle between 2.6% and 3.5% in two-years’ time and almost half (47%) expect it to remain above 3.5%.

CFOs’ expectations for interest rate rises have also sharply increased. They now anticipate rates to double over the next 12 months with the Bank of England’s base rate reaching 2.5% in a year’s time (up from 1.5% in Q1).

The survey asked CFOs how they are responding to the highest levels of inflation seen in 40 years. The top three corporate responses to rising costs are passing on price rises to customers, improving cash flow management and absorbing higher inflation through a reduction of margins.

Ian Stewart, chief economist at Deloitte, says: “The CFOs of the UK’s largest companies are braced for a recession. Finance leaders have edged towards more defensive balance sheet strategies, particularly cost control and building up cash. And yet, CFOs are not in ‘batten down the hatches’ mode. Risk appetite is only slightly below average levels, and well above the lows seen in the financial crisis, at the time of the EU referendum and during the pandemic.”

Over a third (40%) of finance leaders report that their businesses have faced significant or severe recruitment difficulties in Q2 – a slight increase from Q1 (35%). CFOs anticipate labour shortages will persist, with a third saying these will be significant or severe in a year’s time.

In Q2, 31% of CFOs reported significant or severe levels of supply chain disruption. A modest improvement in conditions is expected, with around a fifth of CFOs (22%) anticipating similar levels of disruption in a year’s time.

The majority of CFOs (61%) say that the level of uncertainty facing their business is high or very high. Geopolitics, further interest rate rises, rising inflation and persistent labour shortages, respectively, rank at the top of the list of CFO concerns.

However, increasing capital spending remains a strong priority for 19% of CFOs, remaining above the five-year average of 14%. CFOs are optimistic about medium-term prospects for investment and most expect business productivity, spending on skills and investment in digital technology and assets to speed up in the next three years.

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