Deloitte’s latest survey of UK Chief Financial Officers (CFOs) shows that business optimism fell to a two-year low in the fourth quarter. A net 26% of CFOs reported feeling more pessimistic about the prospects of their business than three months ago, marking the first time sentiment has tipped into negative territory since the second quarter of 2023. Nonetheless, confidence is well above the lows seen in 2020 and 2022.

Key Findings:

• CFOs are responding to the upcoming rise in employer NICs by cutting costs;

• UK corporates expected to cut capex, discretionary spending and hiring over the next 12 months, reporting the sharpest fall in hiring expectations since the pandemic;

• Finance leaders expect the Bank of England to reduce interest rates to 4.0% by the end of 2025;

• Business optimism has fallen but remains well above the lows seen in 2020 and 2022;

• CFOs rate the UK as a more attractive destination for investment than ‘developed Europe’.

CFOs are entering 2025 with a sharp focus on cutting costs. When asked how they plan to respond to the forthcoming rise in National Insurance Contributions (NICs), CFOs chose cutting costs as their top strategy. Raising productivity and prices for customers were rated as lesser, but important, strategies for dealing with the increase.

Finance leaders rate cost reduction as the top priority (52% rating it as a strong priority) for their business for the 11th consecutive quarter. They see this as part of a broader corporate sector squeeze on spending, with a net 58% expecting UK corporates to cut discretionary spending, and a net -64% expecting increases in hiring, which is a four year low.

Employment expectations have seen the sharpest fall since the start of the pandemic in early 2020. Only 18% of finance leaders on the panel think that now is a good time to take additional risk onto their balance sheets, the weakest appetite for risk in five quarters.

Ian Stewart, chief economist at Deloitte, said: “With cost control to the fore in the wake of the Budget, CFOs have trimmed expectations for corporate investment, discretionary spending and hiring in the next 12 months. But despite a fall in business confidence, we expect to see UK growth picking up over the summer on the back of easy fiscal policy and interest rate reductions, with GDP growth likely to exceed the 2024 outturn and the performance of the euro area.”

High Inflation And Interest Rate Worries Fade

CFOs see wage pressures easing over the next year and expect the Bank of England to reduce interest rates by 75 basis points to 4.0% by the end of 20254. Although CFOs reported a very modest increase in the cost of credit in the fourth quarter, credit conditions remain much better than in 2023. A net 41% rated credit as available, while a net 49% rated it as costly.

Wage increases are slowing, with the CFOs reporting that average wages rose by 4% at their business over the past 12 months, down from 4.6% in the previous edition of the survey. They expect the pace of wage increases to slow further, to 3.2% over the next 12 months.

Geopolitics Tops External Risk List Again, As Uncertainty Rises

Geopolitics (rated at 655) tops the CFOs’ risk list6 for businesses for the tenth time in the last 12 quarters. Concerns over competitiveness in the UK economy (rated at 55) have edged up, having been running above the long-term average for the past two years. This quarter saw a notable drop in worries over US growth (rated 44, down from 53 last quarter).

Finance leaders described an increase in economic uncertainty in the fourth quarter, with the proportion saying their business faced a high or very high level of external uncertainty rising to 40%. Although this is a one-year high, it remains below the post-EU-referendum average (51%).

US Most Attractive When It Comes To Investing

This quarter’s survey included a special question on the attractiveness of different destinations for business investment. UK CFOs rate the US as by far the best destination for investment, with a net 59% rating it as an attractive investment proposition.

While investing in the UK (net -12% attractive) remains more attractive than in other ‘developed European economies’ (net -36% attractive), it has seen the sharpest deterioration in attractiveness of any major region, with a net -63% saying that its attractiveness has improved over the past ten years. Meanwhile, India and major Middle Eastern economies are seen as having become much more attractive over that period, performing strongly in the rankings (net 16% and 7% attractive respectively and improvement over the last 10 years by net 42% and 34% respectively).

Ian Stewart added: “The UK ranks as a more attractive location for investment than the euro area, but overall, the US ranks by some margin as the most attractive destination for business investment highlighting the competitive challenge posed by a fast-growing US economy. 2025 seems likely to be a year of continued if modest UK growth."

"Looking ahead, a continued emphasis on policies to unlock the UK’s potential remain key to shifting the trajectory of activity.”