UK finance directors brace for recession and higher inflation

UK company finance directors are bracing for a recession and a doubling of interest rates in their most pessimistic outlook since 2008, according to a survey conducted by Deloitte.

The consulting firm's quarterly survey of executives at leading companies found respondents think there's a 63 per cent chance of recession in the next year. An additional 86 per cent expect the benchmark lending rate will surpass 2.5 per cent by July 2023. Almost half expect inflation will remain above 3.5 per cent in 2 years.

The findings are alarming because they indicate expectations about where inflation is headed are breaking away from the Bank of England's 2 per cent target. Policymakers led by governor Andrew Bailey have said they're prepared to act "forcefully" in raising interest rates to keep the outlook about prices anchored around their goal.

"Finance leaders have edged towards more defensive balance sheet strategies, particularly cost control and building up cash," said Ian Stewart, chief economist at Deloitte.

A record 86 per cent of CFOs expect inflation to top 2.5 per cent in 2 years, up from 78 per cent in the first quarter.

The Bank of England forecasts inflation will hit 11 per cent this year, and business leaders expect the sharpest monetary policy tightening since the 1980s.

Companies remain optimistic about business productivity, increasing their investment in skills, assets and technology in the next 3 years. More than half of respondents expect business revenue to rise next year.

"CFOs are not in batten down the hatches mode," Stewart said. "Risk appetite is only slightly below average levels, and well above the lows seen in the financial crisis."

A separate report from Lloyd Banking Group found an increase in the number of UK firms reporting a growth in output, in spite of waning consumer demand. They also reported a softening in the pace of increase for input costs, reducing pressure on companies to raise their own prices.

"Despite cost pressure escalating, firms across a range of sectors chose not to increase their prices in June, perhaps for fear of weakening demand further," said Jeavon Lolay, head of economics and market insights at Lloyd's Bank Corporate and Institutional Banking. BLOOMBERG

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