The extent of planned capital expenditure (capex) cuts by listed companies in the UK adds further weight to RSM’s earlier prediction of a protracted recovery, and its concern over what it called the Bank of England’s (BoE) overly optimistic economic outlook last month.
The BoE’s chief economist recently estimated that the UK economy was on track for a short V-shaped recession. However, analysts this week estimated that £23bn had been slashed from capex budgets of large listed UK companies for the coming year as more and more CFOs take on a ‘wait and see’ approach to spending.
Simon Hart, partner and head of international at leading audit, tax and consulting firm RSM, comments: ‘Capex accounts for almost a tenth of UK GDP so cuts as significant as this should not be taken lightly when trying to predict the future health of the UK economy. We voiced concern earlier in the month when the BoE announced what we felt was an overly positive economic outlook at a time when businesses need to be ‘hoping for the best yet planning for the worst’ to give themselves a fighting chance of survival. The BoE’s latest move to pump £100bn of stimulus into the economy, whilst welcome, would also suggest that the severity of where we are, might not support their earlier prediction.
‘Cash preservation appears to be a top priority for many CFO’s across the UK and not just at the listed level. The consequences of this will naturally funnel into the middle market, and their suppliers and infrastructure plans. Animal spirits or spontaneous optimism are qualities that some middle market firms can benefit from, unlike the larger institutions, but the severity and uniqueness of what’s happened means that leaders need to be on their guard.
‘The recovery curve will more resemble the Nike swoosh than a V shape, we believe. Markets will remain volatile in the medium term with a possible double spike in insolvencies, as we exit the lockdown, and then again in say 6-12 months’ time.’
On the prospects of middle market businesses, Hart says: ‘Firms had done much already to scale back in preparation for the challenges presented by Brexit, so the shift in strategy will not be as great as it could have been in some respects. Nonetheless, businesses should be prepared for a more extreme and protracted form of contraction and consolidation in the short term. How passive, conservative or brave firms choose to be in the medium to long term will depend not only on the sectors in which they operate, but on their agility in the way that they prepare for future change. Just how businesses look to reactivate and reimagine their operating environments post-lockdown, whilst also considering, strategizing and investing in the ‘new normal’ will be crucial.’
Simon Hart and Joe Brusuelas, chief economist at RSM, will present a ‘Global Economic Update’ at the upcoming Global Trade Conference hosted by the Great Birmingham Chambers of Commerce at 2pm on 24 June 2020.