Uncertainty about a potential war in the Middle East is causing much consternation among finance chiefs. In fact, CFOs are gloomier about the short-term economic prospects for the United States than they’ve been since December 2001, when the specter of recession loomed.
According to our quarterly Global Confidence Survey of finance executives, 58 percent of U.S. respondents say that their attitude toward the domestic economy in the next year is either “concerned” or “very pessimistic.” That’s up from the 50 percent who held a negative view last quarter. The CFOs are even more concerned about the global economy, where only 9 percent hold a positive outlook for the next year.
They also don’t expect things to turn around soon. Almost half of U.S. finance chiefs (47 percent) predict that the economy will not begin a broad recovery until 2004 or later. That’s a departure from last quarter, when 64 percent of respondents thought the economy would turn around this year. Even the long-term optimistic attitude toward the economy has waned. While 19 percent of respondents are “very optimistic” about the U.S. economy over the next five years, that number is down from 28 percent the last quarter.
Clearly, the level of concern about a war with Iraq has deepened as the likelihood has increased. Last quarter, 11 percent said that such a war would have a “very negative” impact on the economy. Now, 17 percent of CFOs think a war would have a significant effect on the financial landscape, and another 44 percent say it would have a “slightly negative” consequence. The respondents rank a potential war with Iraq as their second-greatest business concern after weakness in the U.S. economy. And the chance of war has forced some companies to stand pat on large initiatives. Twenty percent of respondents say they are delaying strategic initiatives or large capital outlays because of uncertainty about the Middle East.
Similar sentiments are being felt overseas. The threat of war ranks second among the concerns of Europe’s CFOs. And CFOs in Asia look on a possible war even more bleakly than do their counterparts in the United States. A full 78 percent say an Iraqi war would have a harmful effect on the economy.
The survey shows that the current inclination among CFOs is to make few changes. Most are not planning big strategic moves; almost half say they would not tap capital markets, pursue mergers, or make divestitures. And 37 percent of CFOs say they will make no changes to capital spending over the next year. However, there are still cuts on the horizon.
As for President Bush’s tax plan, CFOs are generally supportive, with 55 percent agreeing that it would have a positive impact on the economy. Indeed, 7 percent of respondents say they are considering increasing dividends to take advantage of Bush’s proposal to reduce the tax on them. Still, 20 percent of CFOs say the tax proposal could have a negative impact on the economy.
CFO Global Confidence Survey Results