According to Deloitte’s biannual CFO Sentiment survey, Australian CFO optimism bounced back from a severe COVID-induced shock, with the strength of the country’s economic recovery supporting a return to more positive sentiment after a confronting 2020.
The survey, which covers the second half of 2020, noted that:
- More than 70% of CFOs feel “optimistic” or “highly optimistic” about the financial prospects of their companies, and more than half are even willing to take more risk onto their balance sheets. But they also appreciate that challenges remain for some sectors, as COVID restrictions such as border closures impact some more than others.
- 62% feel “optimistic” about the financial prospects of their company, and a further 13% are highly optimistic;
- Net optimism compared to six months ago increased significantly to +62% from -30%, the biggest bounce in the survey’s history;
- Net uncertainty about economic conditions was 87%, only slightly lower than the record 92% from mid-2020;
- 54% think Australian businesses are optimally geared, while 27% think they are under-geared;
- 65% see environmental, social and corporate governance (ESG) including climate-change considerations as important when it comes to most parts of their business, and 49% see value creation potential in the longer-term;
- 71% expect their M&A activity to increase over the next 12 months, with a focus on acquisitions;
- Flexible working (62%) and digital opportunities (55%) are top business recovery priorities for 2021.
Commenting on the results, Deloitte partner and CFO Program leader, Stephen Gustafson said: “When we surveyed Australian CFOs early 2020, before COVID had hit, there was evidence of a positive business sentiment turning-point. When we went back to them mid-2020, things changed significantly. The COVID-induced global economic downturn, and Australia’s first recession in nearly 30 years, struck the country and CFO optimism, hard. They were under no illusions that there would be major challenges to confront, but also that those challenges would present opportunities for those who had built true resilience and agility into their businesses.
“But 2021 points to a marked shift in Australia’s economic performance and a fairly remarkable V-shaped recovery. With nine-out-of-ten jobs lost through the pandemic already returned, and consumer confidence at a decade-long high, it’s no real surprise that Australian CFOs have their mojo back.
“That doesn’t mean COVID no longer poses risks to the economic outlook, and it’s not a one-size-fits-all recovery – tourism, accommodation and international education, for example, remain severely impacted by border closures. But Australia is one of only a handful of nations that can lay claim to entering 2021 well-placed, and positive CFO sentiment is significantly up on the back of this.”
The confidence and uncertainty conundrum
“This bounce-back in confidence still needs to be seen in the context of extremely high levels of uncertainty, and the risks that go with that, playing on many CFOs’ minds,” Gustafson continued. “Fortunately it appears CFOs are adapting to high levels of uncertainty as a ‘new normal’ they have to factor into business strategy and operations.
“So, in spite of uncertainty, confidence has not been held back, and record low borrowing costs, combined with strong economic momentum, can be seen as a recipe for an increased appetite for taking on balance sheet risk, and pursuing opportunity and growth.”
A recent Deloitte Access Economics report, entitled ‘A new choice: Australia’s climate for growth’ noted that if climate change goes unchecked, Australia’s economy will be 6% smaller and have 880,000 fewer jobs by 2070. But there’s a AU$680 billion dividend, and 250,000 more jobs if we do rise to this challenge.
Citing this report, Gustafson added: “Australian business are increasingly focused on environmental impact and opportunity – by desire as well as necessity, with more than 75% of our CFO survey respondents factoring ESG impacts into their planning and decision-making.
“While a focus on nearer-term business issues and demands is the largest barrier to fully integrating ESG into core planning and operations, CFOs also recognise these issues could be much greater sources of both risk and value in the longer-term when it comes to achieving strategic business objectives and capital allocation.”
Flexible working, digital opportunities top priorities
“One of the most visible impacts COVID had on Australian businesses – big and small – was the increased need for flexible working arrangements,” Gustafson noted. “As CFOs look to 2021 as a year of recovery, incorporating ongoing employee demand for flexibility around work location and hours is the most common opportunity identified to support their recovery.
“When COVID first hit, physical attendance at workplaces dropped sharply, but as restrictions ease, it still remains 20% lower than pre-pandemic. This suggests there will continue to be ongoing demand for flexible working arrangements for some time, both because COVID has not yet gone away, and to accommodate shifting worker preferences. Accordingly, many CFOs are prioritising this.
“Technology, including AI and digital transformation are also high on the agenda, as CFOs look to refresh parts of their business strategy. This has likely been driven by the prioritisation of flexible working arrangements, with better technology making different ways of working more efficient and viable.”
“Navigating uncertainty in the pursuit of opportunities and growth is a key focus for CFOs in 2021 and beyond,” Gustafson concluded. “In accordance with Reserve Bank guidance that the cash-rate will likely stay at its record low level for at least another three years, most are expecting interest rates to remain that way 12 months from now, and this will drive the renewed impetus to invest and seek pursue acquisitions.
“That said, 10% of CFOs also still think it’s possible that interest rates could be higher than their current level a year from now, a possibility given the RBA will be watching closely for signs of inflation and/or distortions in asset markets.
“As one of the factors shown to have a positive impact on optimism for many CFOs, interest rates remaining low should certainly help support continued confidence growth in Australian business activity more generally.”