Reports from the boardroom: is Europe heading for recession?

Worldwide optimism among CFOs has deteriorated drastically. In the United States and Europe almost two CFOs in three were more pessimistic about economic trends. Over half the European CFOs think the situation in the United States is just as serious as in Europe. So far the United States seems able to head off a recession. Whether the same is true of Europe is a very different matter. Four indicators present a disturbing picture. The above emerges from the latest Tilburg University - Duke University CFO Survey.

Optimism among CFOs has been severely dented in the last quarter. The previous quarter’s deterioration seems to have continued in the third quarter. As many as 64% of European CFOs express diminished optimism about their own economy. In the United States 65% say they are more pessimistic. In Asia and China too, the number of optimists has fallen sharply. The greatest concerns shared by all are weak consumer demand, intense price pressure and global economic instability. Negative sentiment of this kind could herald a recession.

However, the situation in the United States and Asia is not yet as bad as in Europe. There are still expectations of marginal growth in employment, investment and profit. If CFOs in these markets expected a recession, this would be reflected in a negative growth in investments and permanent employment contracts. However there are no such signs.

Recipe for European recession: production, employment, investments and profit under pressure

In Europe in particular, matters are also less favorable for individual companies than in the last quarter. Over forty per cent expressed greater pessimism about their own firm’s prospects. More than half the European CFOs stated that they had no plans to call on cash reserves in the coming 12 months. The economic uncertainty and difficult credit markets are causing firms to accumulate massive financial reserves, at the expense of potential economic growth. More than 40% of the CFOs reported having scaled down investment plans in the past three months.

The capacity utilized within the European production companies to the end of this quarter remained almost the same as at the end of 2010, at 74%. No improvement in utilization is foreseen. The forecast in the first quarter for production capacity utilization was still to be up to 80.6% at the end of 2011. This forecast was adjusted in the second and third quarters down to 78.9% and 73.9%, respectively.

Until recently, CFOs in Europe also remained very positive about their own firms’ profit forecasts. After a tumultuous 2008, which was accompanied by extremely negative profit forecasts, sentiment improved conspicuously from mid 2009. Remarkably little of this improvement now remains. Whereas for the last two years the predicted growth in profit on average has remained around 8% (for listed companies in the survey), the figure for this quarter has declined drastically to a forecast fall in profit of 0.8%.

Recruitment and selection plans have also been cut severely. Over 36% said they would be hiring fewer workers. The expected growth in full-time employees and temporary employees for the coming twelve months is -0.5% and -5.4%, respectively. This forecast may have repercussions on a firm’s growth opportunities. Companies explain an inability to initiate investment projects by pointing, among other things, to shortages of staff and time to manage the project and a lack of expertise.

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Quaterly Report of Q3 2011, CFO Survey (2011)