Chief financial officers in both the U.S. and Europe are concerned about the financial prospects for their own companies as well as global economic conditions, according to a new survey.
The most recent Quarterly Global CFO Outlook Survey, from Financial Executives International and Baruch College’s Zicklin School of Business, found that the slowdown in the European economy topped the list of concerns among the CFOs polled. CFOs expressed doubts there would be a resolution in the imminent future. The result is cautious spending, along with a pause in the momentum towards improved business and economic confidence among CFOs.
This quarter, 56 percent of CFOs in Europe and 35 percent of CFOs in the U.S. said that they are approaching capital spending with caution, compared with a third of U.S. (33 percent) and a fifth of EU CFOs (22 percent) who reported spending at normal rates. Out of those U.S. CFOs with capital expenditure plans, 73 percent said they are most interested in technology investments. In contrast, 38 percent of European CFOs with capital expenditure plans focused on technology, with expansion into new and emerging markets and R&D following close behind.
Europe’s sluggish economy and reform policies in China are the global crises that are having the most substantial impact on the economy and companies, according to CFOs. More than half (55 percent) of EU CFOs and a third (32 percent) of U.S. CFOs thought the European economy would have the biggest impact on long-term economic conditions in their respective countries.
Asked which crisis would have the most impact on the global economy, 31 percent of EU CFOs and 29 percent of U.S. CFOs selected the European economy, while 33 percent of U.S. CFOs and 24 percent of EU CFOs selected China’s reform policies as their top choice.
CFO perspectives differed by region when it came to selecting the event most directly affecting their company: The greatest majority (79 percent) of EU CFOs pointed to a slowdown in Europe’s economy, while 42 percent of CFOs in the U.S. expressed concerns about immigration issues. No European CFO thought that the rise of ISIS would have the biggest impact on their country or company, while nearly 29 percent of US CFOs thought ISIS would greatly impact the U.S. and nine percent their company.
In further examining the European economy, EU CFOs indicated that they believe the EU economic recovery is far into the future. More than a third of EU CFOs (35 percent) do not expect a recovery in the European economy until 2017 or beyond. A fifth (20 percent) of U.S. CFOs said they think a recovery is feasible by the second half of 2015, and about a third (31 percent) predicted one for 2016.
CFOs on both sides of the Atlantic shared a high level of worry over the future of the Eurozone when asked about their concern on a scale of one to five (five being the highest). More than three quarters of CFOs (76 percent in Europe and 79 percent in the U.S.) ranked their concern about the Eurozone at three or higher.
CFOs also believe that the most likely impact of the European Central Bank's quantitative easing program on the European economy would be the encouragement of banks to increase lending to finance business expansion in the EU (61 percent in Europe and 43 percent in the U.S.), or the reduction of exchange rates and increase of EU exports (41 percent in Europe and 37 percent in the U.S.).
“CFOs in Europe and the U.S. had markedly different attitudes about the impact of global crises on their economies and businesses,” said Linda Allen, Professor of Economics and Finance for the Zicklin School of Business at Baruch College. “European CFOs were far more concerned about the standoff between Russia and Ukraine, ranking this crisis in the top three with regard to implications for the European economy, the global economy and their own businesses. In contrast, U.S. CFOs were more concerned about the rise of ISIS and immigration/refugee issues than were their European counterparts. However, all respondents ranked the slowdown in the European economy as a top concern for the future.”
The optimism index for U.S. CFOs for the global economy this quarter averaged 55.78, up only modestly from the previous quarter (54.96) and their confidence in the U.S. economy saw similar movement (65.26 from 64.17 in the previous quarter).
While EU CFO optimism in the U.S. economy increased to an average of 65.73 from 64.72, their confidence in the global economy sank nearly five points to 49.48 from 54.80.
CFOs in Europe also demonstrated a decline in optimism toward the financial prospects for their company, which dropped five points to 54.52 on the index this quarter (from 59.79). U.S CFO optimism for their company’s financial prospects dropped to 70.41, down slightly from the 72.05 average reported last quarter.
Despite their decline in economic and business confidence, as reflected in a slowdown in the growth rate of revenues expected over the next year by U.S. CFOs, wage levels and employment expectations for CFOs remained stable this quarter. Thirty eight percent of U.S. CFOs stated that the levels they are paying are about the same as the levels they paid this time last year. Furthermore, 61 percent of U.S. CFOs and 32 percent of EU CFOs reported that wage levels are rising when compared with the same time last year. Sixty eight percent of U.S. CFOs and 42 percent of EU CFOs plan to hire employees within the next six months; a somewhat higher percentage of CFOs in Europe (53 percent) are not hiring. The majority of CFOs (84 percent in the U.S. and 59 percent in Europe) stated that they have not been forced to reduce their company’s headcount in the past year.
“With the myriad of economic and business issues facing CFOs, hiring, wages and headcount appear to be the one of the more positive areas this quarter,” said FEI president and CEO Marie Hollein. “A good percentage of CFOs have plans to hire and more importantly, most have not been forced to make severe headcount reductions. So far, their macro-economic concerns have not impacted the size of their workforce or their ability to hire new talent.”
U.S. CFOs by and large expressed dissatisfaction with the current U.S. tax rates and want the U.S. government to take action. When asked about their confidence in the ability of Congress to reform the U.S. tax law on a scale of one to five (five being the highest), 97 percent responded only a one or two.
When asked about the specific solutions that the U.S. government should pursue to discourage U.S. businesses from taking advantage of tax inversion strategies, 70 percent of CFOs believed that the government should reduce U.S. corporate tax rates. While 30 percent believed that the U.S. should shift to a territorial tax format, the majority of U.S. CFOs (92 percent) said that they have not considered changing their firm's country or state of incorporation to reduce their tax obligation.
U.S. CFOs also predicted a potential recession to be more than two years away. When asked when they believe the U.S. would enter another economic recession, 46 percent responded that it would not happen until 2017 or beyond. Only 19 percent felt a recession could occur in 2016 and about a third (35 percent) were uncertain of the timing.
On average, U.S. CFOs stated said that their company has experienced a 6 percent increase in related costs as a result of the Affordable Care Act in the past six months. This percentage of related costs is up from four percent a year ago. Most commonly, 63 percent of the respondents anticipate an increase in the employee co-pay as a likely impact on insurance coverage as a result of the health care regulations.
