The Economy

Business Outlook Survey

Confidence is in short supply among CFOs. Sputtering economies, persistent inflation and the rising cost of credit are the reasons for the gloom.
Jason KaraianJuly 7, 2008

From tailwinds to headwinds. That’s how analysts at Morgan Stanley recently described the “new inflation regime” taking hold in economies around the world.

Deregulation, globalisation and strong productivity growth kept a lid on inflation for 20 years, allowing central bankers to hold interest rates at historically low levels. Now, the analysts note, “re-regulation and protectionism are making a comeback, globalisation has turned inflationary, and productivity growth has ebbed,” according to their June report. To keep inflation within target ranges, most central banks would have to engineer “severe recessions,” which few can stomach.

Queasiness extends to corporate boardrooms, according to our latest global survey of more than 1,000 senior finance executives, conducted in conjunction with Tilburg University in the Netherlands and Duke University in the US. CFOs around the world are gloomy about economic prospects, and nowhere more so than in Europe. When it comes to confidence in European economies, pessimists outnumber optimists by more than eight to one. Pessimism rules in the US and Asia as well, but not to the same degree. (See “Les Misérables” and “Batten Down the Hatches” at the end of this article.)

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Finance chiefs’ optimism about their companies’ ability to buck the prevailing economic trends is also waning. For the first time since 2005, when we started asking European CFOs about confidence in their own firms, the pessimists outnumber optimists. Appropriately enough, the concern rising fastest up finance chiefs’ list of worries is inflation. The “immense pressure” on prices is the first thing Robert Carlén, CFO of Bergendahl & Son, a SKr8.2 billion (€875m) Swedish retail group, mentions when explaining why his overall optimism is on the wane.

“Suppliers are not passing all of their additional costs to us, because they think that we cannot carry it all, and we are not passing everything on to our customers, because we don’t think that they will accept the full price adjustment,” he notes. So there are simmering inflationary pressures that have “not yet reached the statistics.” What’s more, with many of Bergendahl’s supermarkets outside city centres, he fears that further increases in petrol prices may dampen shoppers’ enthusiasm for travelling to shops.

“We are still expanding and building new stores,” Carl&n says. “We are optimistic about our business overall, but more cautious than before.”

Unlike Carlén, more than 30% of European CFOs surveyed say that they have delayed, reduced or cancelled new investment plans over the past six months. And more than 40% expect to do the same over the next six months. Capital spending will grow by 3% over the coming year, according to our survey, down from growth of 4% projected last quarter. Hiring plans are also on hold. In fact, finance chiefs say that they expect to trim domestic payrolls by more than 1% over the next 12 months. (See “Les Misérables” and “Batten Down the Hatches” at the end of this article.)

As the Credit Crunches

The soaring cost of fuel and raw materials are not the only things worrying CFOs. Around a third of finance chiefs in Europe say that their companies have been directly affected by the credit crunch, with an increase in the cost of credit as the main problem. Among those affected, the average company has experienced a 60 basis-point increase in its cost of borrowing since last summer.

For António Casanova, “there is no shortage in the supply of money from our traditional bankers, but the problem is cost.” Sumolis, a €172m Portuguese drinks group where he is CFO, hatched a plan to take over a domestic rival of similar size, Compal, more than two years ago. As the negotiations dragged on, credit conditions turned sharply worse. Now awaiting the Portuguese competition authority’s blessing on the deal, Casanova is concerned about the terms he will receive on the debt and equity the company will issue to finance the takeover, especially compared with what he could have achieved back when the deal was first announced.

It could be worse. A sizeable share of CFOs in our survey, nearly 40%, say that credit is scarce at any cost, with almost 10% having already experienced difficulty initiating or renewing a bank credit line.

Like Carlén of Bergendahl, Casanova’s concerns about the credit market are compounded by widespread inflation. “The price of plastic bottles, cans, sugar, transportation…it is all rising,” he sighs. “Prospects are quite dark. We are facing tough times.”