Inflation, supply chain and labor issues are top concerns
While CFOs on balance remain more optimistic than pessimistic when asked about the outlook for the US economy over the next six months, net optimism is down 12%, from 69% to 57% while net pessimism has almost doubled, from 11% to 21%. Inflation is one major cause for concern.
It is worth noting that the Q4 survey was completed just as news of the Omicron variant was breaking and likely doesn’t fully reflect its effect on CFO outlook. The number of businesses expecting a negative impact from a new COVID-19 variant was essentially unchanged (52% in Q3 versus 51% in Q4), but Omicron may well have further eroded CFO optimism.
“In Q1 and Q2, with vaccines being rolled out and COVID numbers falling, there was a sense we would put the pandemic behind us more quickly,” says Enzo Santilli, National Managing Partner of Transformation at Grant Thornton LLP. “CFOs now see the fallout from the pandemic dragging on far longer and are adjusting both their outlook at their responses accordingly.”
Q4 results reflect those adjustments. When asked what actions they will pursue to address evolving disruptions, 52% of CFOs chose increased focus on cash flow, liquidity and bolstering cash reserves as their first choice—up from 35% in Q3. Almost all other options, like new or updated disruption scenarios (down 11 points), changes to operating models (down 7 points) and changes to debt or capital structure (down 7 points), declined.
Most CFOs no longer see inflation as a short-term reaction to pandemic disruptions. More than half (53%) expect inflation to continue to impact their businesses for at least six months, while 33% expect it to persist for more than a year. Larger companies (respondents with more than $1 billion in revenue) are most concerned about inflation, with 41% expecting it to continue for more than 12 months.
Grant Thornton Chief Economist Diane Swonk thinks businesses need to brace for the Fed’s reaction to inflation. “In December, the Consumer Price Index was up 7% from one year ago, the biggest jump since June 1982,” says Swonk. “The Fed and other central banks now view variants as inflationary rather than disinflationary given the havoc they reap on supply chains. Economic growth for 2021 will easily come in at the fastest pace since 1984, with inflation also back to 1980s levels. This is the first time since the 1980s that the Fed has chased inflation instead of trying to preempt it. CFOs should be prepared for rate hikes starting as soon as March.”
In our Q4 survey, when we asked CFOs for the three biggest challenges facing their business, supply chain jumped 14 points from 32% to 46%, taking over from cybersecurity risks as CFOs top concern. And, when asked which business issue was most likely to have a negative impact on their business, supply chain edged into a tie with workforce shortages, with both at 53%.