CFO Survey: European economic recovery along American lines

There has been a strong increase in the number of CFOs who are positive about the economic prospects compared with the previous quarter, however this has not managed to translate itself into a higher level of optimism. That is shown by the CFO Survey Europe, globally the longest running quarterly survey among CFOs, carried out by TIAS School for Business and Society (Tilburg) and Duke University (North Carolina, US).

Furthermore, three quarters of the European CFOs forecast no further increase in debt financing costs. Also, half of the European CFOs expects the current debt burden for companies to influence future investment opportunities.

Policy and regulations as the key for economic recovery

The number of financial directors who are in a positive mood about the economic prospects has improved significantly during the last quarter of 2016. At the moment, 40% say that they are more positive about the economy whereas in the previous quarter only 28% were more optimistic compared with the quarter before that. The larger number of optimists now only needs to translate into an actual improvement in the average level of optimism. At 56.6 (measured on a scale of 100) this is virtually the same as the level over the third quarter. When prompted, besides economic uncertainty, European CFOs particularly named current public policy and regulations in as a couple of the biggest issues for concern on the agenda.

That effective policy and regulations - and even the prospect thereof - are the best means for activating economic recovery, is underscored by the prevailing sentiment among American CFOs. As a consequence of Trump's recent victory, the number of optimists among US financial top managers has never been so high for a decade. Whereas in previous quarters, no more than 26% took a positive view about the economic prospects, in this last quarter that share has risen to at least 64%. The average level of optimism also rose significantly, from 60.6 (on a scale of 100) in the third quarter to 66.5 in this last quarter.

So more than half of the American financial directors is positive about the financial perspectives of their own company. This optimism mainly reflects the plans announced by Trump to drastically lower taxes and to reduce or simplify regulations. Although the details of these plans are still far from clear, 20% of the CFOs now say that they want to take on more personnel and that they will invest more. Another 16% want to raise company expenditure. 

Current debt financing undermines future investment opportunities

On the other hand, there has been little change in the number of European CFOs who are positive about the financial outlook for their own company. The trend set at the start of 2016 will also be maintained in this last quarter, with only 39% being in a positive mood, while the average optimism concerning the own company has fallen to 60.6 (on a scale of 100) compared with 63.4 in the previous quarter. 

Almost one third of those surveyed are convinced that companies in their sector are now far too exposed to the financial risks of the debts that they have concluded during the past three years. Of the financial directors, 45% indicate that this debt financing has been primarily spent on activities focused on productivity and economic growth, such as taking on personnel and facilitating capital investments and acquisitions. Yet in the fourth quarter, companies have severely cut back their planned company expenditure for the coming twelve months. 

'Adjusting their expenditure downwards will in the long term not favor economic growth,' says Kees Koedijk, dean and director of TIAS Business School. 'For instance, anticipated growth in capital investments during the past three quarters has fluctuated between 6% and 10%, whereas it now averages just 2.7%. This quarter we see expected growth in expenditure for technology halved to just 2.1% and that of marketing and R&D average 1.7% and 2.1% respectively. We cannot expect any significant improvement for the time being. In fact, more than half of the financial directors expect that the accrued debt burden for companies will probably undermine future investment opportunities for those same companies.'