Surrounded by a myriad of global issues and threats, Chief Financial Officers both in the United States and Europe are concerned about the financial prospects for their own companies as well as global economic conditions. According to the most recent Quarterly Global CFO Outlook Survey conducted by Financial Executives International (FEI) and Baruch College's Zicklin School of Business, topping their mounting list of worries is the slowdown in the European economy and continued threats to the future of the Eurozone, with CFOs doubtful of a resolution in the imminent future. The result is cautious spending, coupled with a pause in CFOs' momentum towards improved business and economic confidence.
The recent CFO Quarterly Global Outlook Survey, which polls CFOs of public and private businesses in the U.S. and Europe on their economic and business confidence, reported that the optimism index for U.S. CFOs for the global economy this quarter averaged 55.78, up only modestly from the previous quarter (54.96) and their confidence in the U.S. economy saw similar movement (65.26 from 64.17 in the previous quarter). While EU CFO optimism in the U.S. economy increased to an average of 65.73 from 64.72, their confidence in the global economy sank nearly five points to 49.48 from 54.80. CFOs in Europe also demonstrated a decline in optimism toward the financial prospects for their company, which dropped five points to 54.52 on the index this quarter (from 59.79). U.S CFO optimism for their company's financial prospects dropped to 70.41, down slightly from the 72.05 average reported last quarter. This quarter, 56 percent of CFOs in Europe and 35 percent of CFOs in the U.S. said that they are approaching capital spending with caution, compared with a third of U.S. (33%) and a fifth of EU CFOs (22%) who reported spending at normal rates. Out of those U.S. CFOs with capital expenditure plans, 73 percent said they are most interested in technology investments. In contrast, 38 percent of European CFOs with capital expenditure plans focused on technology, with expansion into new and emerging markets and R&D following close behind.
Europe's sluggish economy and reform policies in China are the global crises that are having the most substantial impact on the economy and companies, according to CFOs. More than half (55%) of EU CFOs and a third (32%) of U.S. CFOs thought the European economy would have the biggest impact on long-term economic conditions in their respective countries. With regard to the crisis that would most impact the global economy, 31 percent of EU CFOs and 29 percent of U.S. CFOs selected the European economy, while 33 percent of U.S. CFOs and 24 percent of EU CFOs selected China's reform policies as their top choice. CFO perspectives differed by region when it came to selecting the event most directly impacting their company: The large majority (79%) of EU CFOs pointed to a slowdown in Europe's economy, whereas 42 percent of CFOs in the U.S. expressed concerns about immigration issues. Interestingly, no European CFO thought that the rise of ISIS would have the biggest impact on their country or company, while nearly 29 percent of US CFOs thought ISIS would greatly impact the U.S. and nine percent their company.
In further examining the European economy, EU CFOs believed that EU economic recovery is far into the future. More than a third of EU CFOs (35%) do not expect a recovery in the European economy until 2017 or beyond. A fifth (20%) of U.S. CFOs said that they think a recovery is feasible by the second half of 2015, and about a third (31%) predicted one for 2016. Still, CFOs on both sides of the globe shared a high level of worry over the future of the Eurozone when asked about their concern on a scale of one to five (five being the highest). More than three quarters of CFOs (76% in Europe and 79% in the U.S.) ranked their concern about the Eurozone at three or higher. CFOs also believed that the most likely impact of the European Central Bank's (ECB's) quantitative easing program on the European economy would be the encouragement of banks to increase lending to finance business expansion in the EU (61% in Europe and 43% in the U.S.), or the reduction of exchange rates and increase of EU exports (41% in Europe and 37% in the U.S.).
"CFOs in Europe and the U.S. had markedly different attitudes about the impact of global crises on their economies and businesses. European CFOs were far more concerned about the standoff between Russia and Ukraine, ranking this crisis in the top three with regard to implications for the European economy, the global economy and their own businesses," said Linda Allen, Professor of Economics and Finance for the Zicklin School of Business at Baruch College. "In contrast, U.S. CFOs were more concerned about the rise of ISIS and immigration/refugee issues than were their European counterparts. However, all respondents ranked the slowdown in the European economy as a top concern for the future."
Despite their decline in economic and business confidence, as reflected in a slowdown in the growth rate of revenues expected over the next year by U.S. CFOs, wage levels and employment expectations for CFOs remained stable this quarter. Thirty eight percent of U.S. CFOs stated that the levels they are paying are about the same as the levels they paid this time last year. Furthermore, 61 percent of U.S. CFOs and 32 percent of EU CFOs reported that wage levels are rising when compared with the same time last year. Sixty eight percent of U.S. CFOs and 42 percent of EU CFOs plan to hire employees within the next six months; a somewhat higher percentage of CFOs in Europe (53%) are not hiring. The majority of CFOs (84% in the U.S. and 59% in Europe) stated that they have not been forced to reduce their company's headcount in the past year.
"With the myriad of economic and business issues facing CFOs, hiring, wages and headcount appear to be the one of the more positive areas this quarter," said Marie Hollein, President and CEO, Financial Executives International. "A good percentage of CFOs have plans to hire and more importantly, most have not been forced to make severe headcount reductions. So far, their macro-economic concerns have not impacted the size of their workforce or their ability to hire new talent."
U.S. CFOs by and large expressed dissatisfaction with the current U.S. tax rates and want the U.S. government to take action. When asked about their confidence in the ability of Congress to reform the U.S. tax law on a scale of one to five (five being the highest), 97 percent responded only a one or two. When asked about the specific solutions that the U.S. government should pursue to discourage U.S. businesses from taking advantage of tax inversion strategies, 70 percent of CFOs believed that the government should reduce U.S. corporate tax rates. While 30 percent believed that the U.S. should shift to a territorial tax format, the majority of U.S. CFOs (92%) said that they have not considered changing their firm's country or state of incorporation to reduce their tax obligation.
U.S. CFOs also predicted a potential recession to be more than two years away. When asked when they believe the U.S. would enter another economic recession, 46 percent responded that it would not happen until 2017 or beyond. Only 19 percent felt a recession could occur in 2016 and about a third (35%) were uncertain of the timing.
Other findings from the CFO Quarterly Global Outlook Survey include:
Cybersecurity: While the majority of U.S. respondents (81%) have not experienced a cyber-attack on their IT systems within the past six months, U.S. CFOs are paying close attention to the growing number of major companies and organizations that have faced cyber-attacks in the past few years. More than three quarters (78%) of U.S. CFOs stated that they considered increasing their company's budgets in order to improve their cyber security, up from 67 percent who said they were making this consideration in Q4 2013. In a separate question, half (50%) of U.S. CFOs said that they are currently directing their investments toward cyber security. The percentage of U.S. CFOs who stated they are taking specific steps to protect against cyber-attacks increased by eight percent since Q4 2013 (from 75% to 81%). These CFOs are most commonly upgrading security software and/or encryption protections (72%), implementing a cyber-security/IT plan (59%), establishing off-site backup systems/plans (54%), and hiring outside consultants to review systems (42%).
Interest Rates: The majority of CFOs (67% of U.S. CFOs and 50% of EU CFOs) forecast that the Fed will raise interest rates in the first or second half of next year. CFOs also shared a low to moderate concern over interest rates this quarter: Seventy eight percent of U.S. CFOs and 76 percent of EU CFOs ranked their concern at a three or lower (on a scale of one to five). When asked when they believe the ECB will reverse its current easy money policy and raise interest rates, a portion of CFOs (21% in the EU and 28% in the U.S.) were unsure. However, 43 percent of U.S. CFOs felt a reversal could occur by the first half of 2016, while 29 percent of EU CFOs did not believe it could happen until 2017 or beyond.
Inflation/Deflation: When asked to rate their concern over the threat of inflation or deflation, 83 percent of U.S. CFOs and 93 percent of EU CFOs responded with a three or lower (on a scale of one to five) toward inflation. U.S. CFOs also shared a similar lack of concern toward deflation (95% rated their concern at a three or lower), compared with EU CFOs who were slightly more worried (64% rated their concern at a three or higher). Eighty three percent of U.S. CFOs and 53 percent of EU CFOs stated that their level of concern had remained the same since last quarter, but a third of EU CFOs (35%) said that their concern was heightened from last quarter.
Cash/Capital: On average, U.S. CFOs responding to the survey said the capital structure on their company's balance sheet was comprised of 56 percent equity and 31 percent long term debt obligations – EU CFOs averaged 47 percent of equity and 32 percent of long term debt. CFOs most often sought banks (58% of U.S. CFOs and 38% of EU CFOs) and equity (35% of U.S. CFOs and 52% of EU CFOs) as sources for accessing capital. The majority of U.S (80%) and EU CFOs (67%) did not feel that their company was capital constrained in terms of access to credit either from banks or from capital markets.
Healthcare: On average, U.S. CFOs stated that their company has experienced a six percent increase in related costs as a result of the Patient Protection and Affordable Care Act in the past six months. This percentage of related costs is up from four percent a year ago. Most commonly, respondents anticipate an increase in the employee co-pay (63%) as a likely impact on insurance coverage as a result of the healthcare regulations.
International Coalition: This quarter, U.S. CFOs were also asked about the Obama Administration's emphasis on the importance of building international coalitions to address global crises. The majority (55%) believed that the U.S. should more forcefully extol the international community to create coalitions to address crises militarily, compared with only seven percent who felt that the U.S. should take preemptive military action alone. Only three percent of respondents felt that the U.S. and E.U. should refrain from any action.
Full survey results and historical data comparisons are available at www.financialexecutives.org or from Nicole Madison at This email address is being protected from spambots. You need JavaScript enabled to view it.. The study is also available online at the Financial Executives Research Foundation bookstore and on the Baruch College home page at www.baruch.cuny.edu.
