By Marcus Leach

The finance chiefs of the UK’s largest businesses see a break-up of the euro as posing the biggest single risk to their companies in 2012, according to the latest Deloitte CFO Survey.

UK corporates are unconvinced by the response of European politicians and policymakers to the crisis. On average, Chief Financial Officers (CFOs) see a 37% probability that one or more member states will leave the single currency in the course of 2012.

CFOs believe that a collapse of the euro would have a severe effect on UK businesses, causing a new credit crunch and driving major swings in asset prices and exchange rates.

“Against such a backdrop it is no surprise that a return to recession in the UK is, after the euro, the second biggest concern for CFOs in 2012," Ian Stewart, Deloitte chief economist, commented.

"CFOs are now working on the assumption that Britain will fall back into recession. They see a 54% chance of the UK suffering a ‘double dip’, up from just 27% a year ago.

"The majority of respondents (64%) expect a prolonged period of weakness lasting more than a year. Moreover, financial stress is already affecting big UK corporates, with CFOs reporting the sharpest decline in credit availability since the third quarter of 2008.”

Uncertainty is seen as another significant risk for business in 2012. The proportion of finance chiefs rating the level of external financial and macroeconomic uncertainty facing their business as being “high” or “very high” has more than doubled in the last six months to 56%, up from 26% in the summer. One CFO summed up the mood, ‘Everyone is waiting for something very bad to happen’.

“The results illustrate the corrosive effect of uncertainty on corporate spending," Ian Stewart said.

"87% of CFOs believe this is a bad time to be taking additional risk onto their balance sheet. Just as it happened in late 2008, CFOs are reacting to a tough climate by strengthening their balance sheets. The financial strategies of UK corporates have reversed in the last year.

"CFOs entered 2011 with a focus on expanding into new markets and increasing capital spending. They enter 2012 with a focus on cutting costs and increasing cash flow. By and large, big corporates in the UK have the firepower to spend. The challenge for policymakers in 2012 is to convince them that it makes business sense to do so.”

However, companies which derive a high proportion of revenues outside the UK are more optimistic and have a more expansionary stance than their UK-focussed counterparts.

“Those pinning their hopes for growth on a sharp increase in corporate spending in the UK this year may be disappointed. On balance, CFOs expect corporate hiring, investment and discretionary spending to contract in 2012," Ian Stewart noted.

“As in late 2008, the top priorities for corporates are cost control and cash flow. However, the story this quarter is not just about battening down hatches. Large UK businesses believe that troubled times also create growth opportunities. While CFOs see fewer market opportunities than they did three years ago in the early stages of the recession, almost half believe their business can profit from the current economic environment.

“Despite the uncertainties, 48% of CFOs have identified growth opportunities. One-third see opportunities to acquire undervalued assets; 30% think weaker competition provides a chance to expand market share; 19% believe that a difficult economy gives them a chance to implement overdue changes to their businesses. Some foresee new sources of demand, with 12% of CFOs planning to develop new offerings to meet needs created by a difficult macro environment.

“Once again, overseas facing businesses are much more likely to be interested in pro-growth strategies such as increasing capital expenditure and bringing in new products. For companies deriving more than 70% of revenues from outside the UK, the top priority is introducing new products or services. But, on the whole, cost control and boosting cash flow are the top priorities for big UK corporates as we go into 2012.”

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