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CFOs Are Predicting a Downturn But Not a Recession, Deloitte Says

Although an economic downturn prior to 2020 appears all but certain to North American CFOs market-wide, the good news is that very few of them see that downturn becoming a full-blown recession.

Close to 85 percent of the executives surveyed for Deloitte’s quarterly CFO Signals report said they see a downturn in the U.S. economy over the next year. CFOs commonly cited U.S. trade policy, credit cycles and slowing growth in Europe and China as important factors in their lack of short-term optimism.

Unsurprisingly, retail and wholesale CFOs were the most likely to expect a slowdown, with 91 percent embracing the prediction, and were more than twice as likely to say they expected a recession, which just 36 percent foresee.

A year ago, CFOs were much more bullish about the future, Deloitte said, but the growing disarray in geopolitics and unforeseen dips in economic growth around the world has left a bad taste with financial executives across industries.

“This quarter’s findings continue the downward trend,” Deloitte researchers explained. “Assessments of the North American, European and Chinese economies all declined. Own-company optimism rebounded from last quarter’s very low reading, but still sits at its third-lowest level in three years. Expectations for revenue, earnings, domestic hiring, and wages declined (only capital expenditure rose), and all metrics sit below their two-year averages.”

The survey, featuring responses from 158 CFOs from predominantly large corporations in the private sector, also identified key differences in opinions regarding the economic health of various world regions. For example, executive opinions regarding the European and Chinese have worsened over the last quarter, with 16 percent regarding Europe’s economy as “good” (down from 23 percent in Q4 of FY18), compared to 20 percent in China (down from 24 percent).

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Majority of CFO's See a Downturn in the Near Future
Although expectations in basically every economic factor have fallen, net optimism actually rose over the last quarter.

There was some good news to come out of the survey, however. Financial executives were in near-lockstep regarding the severity of the downturn, agreeing that it was unlikely to turn into a recession and would be limited in scope. Just 15 percent of those surveyed expect an extended slump.

Still, when it came to factors that were largely under the company’s control, Deloitte found that most had little to no plan to counteract the perceived downturn. According to the report, a minority of those surveyed have already created a plan to defend their profits. The few that did simply relayed that they expected to reduce discretionary spending and either enact a hiring freeze or implement layoffs.

“More than three-fourths of CFOs say reducing discretionary spending (for supplies, travel, meetings, etc.) is one of their top responses to a downturn,” researchers said. “The next most common defensive actions involve limiting or reducing headcount, with 54% citing hiring freezes/reductions and 38% claiming headcount reductions. Twenty percent and 18% of CFOs say they have already begun to take these actions, respectively.”

Additionally, Deloitte says the coming lull may actually already be in motion, as 15 percent of those surveyed said they’ve already started to see signs of a downturn in their own companies.