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Business Outlook Survey

What holiday cheer? Confidence among CFOs is plummeting in the face of credit and currency concerns.

As in Shakespeare’s “Richard the Third,” CFOs have entered a winter of discontent. The economic pessimism of finance chiefs in Europe and the US is plunging to new depths, according to our latest global survey of more than 1,200 senior finance executives conducted in conjunction with Tilburg University in the Netherlands and Duke University in the US. When it comes to prospects for the European economy, pessimists outnumber optimists by more than four to one. Only 13% of CFOs are more optimistic than they were in the previous quarter, compared with 56% that predict darker days ahead. The number of optimists fell by more than half compared with the previous quarter’s poll, while the pessimists grew by 50%. Optimism in Europe is at its lowest level since the second quarter of 2003.

As usual, CFOs are more optimistic about the state of their own companies than they are about the broad economy. Still, even this confidence is waning, with the share of optimists (37%) now just edging out the pessimists (34%).

The silver lining, if you can call it that, among this quarter’s dismal set of results is that Europe’s CFOs have not reached the depths of despair of their American colleagues. When it comes to the US economy’s prospects, pessimists outnumber optimists by eight to one, with 37% of CFOs predicting a recession in 2008.

Contagion from recent credit market turmoil appears to be spreading throughout the economy, with a third of US-based CFOs saying that their companies are directly affected by the credit crunch. The decreased availability of credit is the top concern in this regard, although plenty of CFOs are also smarting from a rise in the cost of credit. Finance chiefs in our survey say that the cost of credit has increased by 83 basis points, on average, since the summer. A similar share of European finance chiefs say that the credit turmoil also directly affects them, but they worry much less about the availability of credit, while the average rise in the cost of credit — 35 basis points — is much more modest than what American CFOs are dealing with.

The prolonged depreciation of the dollar is another issue of global concern. Two-thirds of CFOs in the US think that the dollar’s slide is a cyclical, temporary phenomenon. In sharp contrast, half of European finance chiefs and 60% of CFOs in Asia think that the devaluation is a long-term condition. In response, more than twice as many CFOs in Europe and Asia say they are increasing hedging activities than finance chiefs in the US.

For his part, Stephen Jen, chief currency economist at Morgan Stanley, reckons that “the costs of a weaker dollar are quickly catching up to the benefits for most countries.” However, CFOs in Asia — no fans of a devalued dollar — remain relatively optimistic in their regional economy’s prospects, with 53% more optimistic than they were in the previous survey. Should the grave concerns in the West persist, CFOs will redouble their efforts to tap growth opportunities in the East before the economic tragedy at home reaches Shakespearean proportions.

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