Tuesday, January 3, 2012

effect of euro collapse on UK businesses

effect of euro collapse on UK businesses ; Finance chiefs of Britain’s largest businesses see a euro break-up as the biggest risk to their companies in 2012 and expect the UK to return to recession.

They believe a euro collapse would have a severe effect on UK businesses, causing a new credit crunch and big swings in asset prices and exchange rates, according to a survey by Deloitte, the professional services firm.

On average, finance chiefs see a 37 per cent probability that one or more member states will leave the single currency this year.

Ian Stewart, Deloitte chief economist, said: “Against such a backdrop it is no surprise that a return to recession in the UK is, after the euro, the second-biggest concern for CFOs in 2012. CFOs are now working on the assumption that Britain will fall back into recession.”

CFOs see a 54 per cent chance of the UK suffering a “double dip”, up from 27 per cent a year ago. The majority of respondents – 64 per cent – expect prolonged weakness lasting more than a year.

Financial stress is already affecting companies, the survey found, with CFOs reporting the sharpest decline in credit availability since the third quarter of 2008.

Deloitte surveyed 94 chief financial officers, including those of 32 FTSE 100 and 32 FTSE 250 companies

The proportion rating the level of external financial and macroeconomic uncertainty facing their business as “high” or “very high” has more than doubled to 56 per cent from 26 per cent in the summer. One CFO said: “Everyone is waiting for something very bad to happen.”

Uncertainty is having a corrosive effect on corporate spending, with 87 per cent of CFOs saying it was a bad time to take additional risk on to their balance sheet.

Mr Stewart said: “Just as it happened in late 2008, CFOs are reacting to a tough climate by strengthening their balance sheets. The financial strategies of UK corporates have reversed in the last year. CFOs entered 2011 with a focus on expanding into new markets and increasing capital spending. They enter 2012 with a focus on cutting costs and increasing cash flow.

“By and large, big corporates in the UK have the firepower to spend. The challenge for policymakers in 2012 is to convince them that it makes business sense to do so.”

However, companies which derive a high proportion of revenues outside the UK are more optimistic and expansionary than UK-focused counterparts.

Mr Stewart said anyone pinning their hopes for growth on a sharp increase in corporate spending may be disappointed because CFOs expect hiring, investment and discretionary spending to contract.

“As in late 2008, the top priorities for corporates are cost control and cash flow. However, the story this quarter is not just about battening down hatches. Large UK businesses believe that troubled times also create growth opportunities.”

While CFOs see fewer market opportunities than they did three years ago in the early stages of the recession, almost half believe their business can profit from the current economic environment. For the latest updates on the stock market, visit Stock Market Today
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