The International Association of Financial Executives Institutes (IAFEI) and a group of partners including Duke University and Grenoble EM survey CFOs across the world. For the first quarter 2018, the survey ran from February 13 to March 2, 2018. Key findings include:
Firms are only slowly adapting to advances in financial technology even when they know it will affect their business models.
There is record optimism among CFOs, fuelled notably by tax reform in the United States. Past results show the CFO Optimism Index is an accurate predictor of hiring plans and overall GDP growth.
CFO optimism is up around the world
This quarter the optimism index in the United States increased to 71 on a 100-point scale, an all-time high, in part because of recently passed corporate tax reform. Our analysis of past results shows the CFO optimism index is an accurate predictor of future economic growth and hiring.
Optimism in Europe remains at 67 this quarter, while UK CFOs had lower optimism at 54. Capital spending is expected to grow at about 5% in 2018, and employment should remain flat. For the third consecutive quarter, and only the third time ever, the top concern among European CFOs is attracting and retaining qualified employees, followed by regulatory requirements, government policies and economic uncertainty. More than 25% of European CFOs say the lower US tax rate makes the country a more attractive place to invest.
Optimism in Asia fell from 66 last quarter to 61 this quarter. Economic uncertainty, access to capital, difficulty attracting qualified employees, low employee morale, and currency risk are top concerns in the region. Capital spending is expected to grow about 10% and employment 3%, in 2018.
Latin American optimism continues to rebound in most countries, up to 70 in Mexico, 69 in Chile and 62 in Brazil. Optimism fell to 54 in Peru. Economic uncertainty is the top concern among Latin American CFOs, with 54% of firms listing it as a top four concern. Other concerns include weak demand, government policies and productivity. Capital spending is expected to grow 6% and employment 3% in 2018.
Business optimism in South Africa jumped to 59 this quarter, up from 42 last quarter. Nigerian optimism remained relatively flat at 62. Median capital spending and median employment should each increase by about 5% in 2018. The biggest concerns for African CFOs are economic uncertainty, governmental policies, currency risk, volatility of the political situation, and access to capital.
Average global business outlook
Tight labour market, top concerns
The proportion of firms indicating they are having difficulty hiring and retaining qualified employees remains at a two-decade high, with 45% of CFOs calling it a top concern, up from 43% last quarter. The median US firm says it plans to increase employment by a median 3% in 2018. The tight labour market continues put upward pressure on wages. Wage inflation is now listed near the top half dozen concerns of US CFOs.
US companies expect to pay higher wages, with median wage growth of about 3% over the next 12 months. Wage growth should be strongest in the tech, energy and service/consulting industries.
After difficulty finding the right employees, the next largest concern among US CFOs is the cost of benefits, with health care costs expected to rise by more than 7% next year. Concern about government policies, regulations, and data security are the next biggest concerns.
Corporate America slow to respond to fintech
Many CFOs say innovations in financial technology such as cryptocurrencies and the blockchain that underpins them will not affect their businesses. Among those who do see disruption ahead, few are responding quickly.
The blockchain is widely expected to disrupt many business models over the next decade as a means of verifying ownership and allowing instant, secure, and low fee transactions. But 78% of US CFOs say they don’t expect to be affected or aren’t sure how they’ll be affected by the blockchain. 17% say their firms will be affected but haven’t yet adapted their business model in response. Another 4% say they are working to adopt blockchain, and only 1% say they have already adopted blockchain technology. Only 3% of CFOs said they had a professional understanding of blockchain.
More CFOs said they have a good or professional understanding of big data (53%), advanced analytics (52%) and artificial intelligence (48%). 27% of firms said they have already reduced finance workforce or will within 5 years. However, more than 70% of firms said they do not expect to cut finance employees because of fintech advances.
In the rest of the world, nearly 20% European CFOs say they understand blockchain technology well, up from only 8% who said they did two years ago. 37% say they are working on or already conduct big data analysis, about the same as two years ago. 13% of Asian CFOs say they understand blockchain technology well, and 36% say they are working on or already conduct big data analysis. One in five Latin American CFOs say they understand blockchain technology well, and 30% say they are working on or already conduct big data analysis. Only 5% of African CFOs say they understand blockchain technology well, while 35% say they are working on or already conduct big data analysis.
Large effects from US tax reform
Sixty-six percent of US CFOs say corporate tax reform is helping their companies, with 36% saying the overall benefit is medium or large. Some benefits of tax reform are already being felt, while others will unfold over the next several years. Among other things, US companies say tax reform will lead to greater profitability, investment, hiring, and wages. Forty-four% of US companies plan to increase wages more than they would have without tax reform. Thirty-eight% plan to increase employment and 36% will increase domestic investment. Thirty-one% will increase cash holdings. Among companies with defined benefit pensions, 29% will increase pension contributions.
Among companies that plan to increase investment, 53% say the reduced corporate income tax rate is the reason why. Another 44% indicate immediate expensing of investment will fuel investment. The immediate expensing of investment only lasts for five years, however, and 37% of companies indicate they will shift investment so it will occur within the next five years, hence a portion of the increased investment is ‘borrowing from the future’.
Due to tax reform, the effective (or average) tax rate for US companies is expected to fall by about 5%, from 24% to 18.8%.
Table 1: During the past quarter, which items have been the most pressing concerns for your company’s top management team?
Table 2: Relative to the previous 12 months, what will be your company’s percentage change during the next 12 months? (mean by region)
About the survey: This is the 88th consecutive quarter the Duke University/CFO Global Business Outlook survey has been conducted. The survey concluded Mar. 2 and generated responses from more than 600 CFOs, including nearly 300 from North America, 63 from Asia, 106 from Europe, 86 from Latin America and 47 from Africa.