Conflict, quake and inflation push optimism to two-year low

Optimism among chief financial officers is at its lowest level for two years, according to the latest CFO Survey from Deloitte, published today.

In a further sign that prospects are looking gloomy for the economy, CFOs think there is a 29 per cent probability of a double dip. In the last quarterly survey – published at the turn of the year – the corresponding figure was 27 per cent.

The mood has darkened following higher-than-expected levels of inflation and concerns about the effects of fiscal tightening. Global catastrophes have also depressed sentiment, says Margaret Ewing, Deloitte partner and vice-chairman.

"Reduced optimism among finance chiefs seems to be influenced by external events, such as conflict in the Middle East and the earthquake in Japan, and movements in financial markets," Ms Ewing said.

Consumers are also facing an unprecedented squeeze from high inflation and weak earnings growth, according to the latest forecasts to be published by the Centre for Economics and Business Research (CEBR) consultancy this morning.

This year will see a whopping 2 per cent drop in households' real disposable incomes, the biggest drop since the 1930s when taken together with last year's 0.8 per cent fall. The result is £27.3bn less spending power in 2011 than in 2009, equivalent to £910 per household, the CEBR says.

The impact is already being felt on the high street. HMV, Halfords and Carpetright, all issued profits warnings last week. And former Asda boss Andy Bond predicted two years of misery ahead. "You're kidding yourself if you think the worst is over and we've had a consumer recession – it's ahead of us," Mr Bond told the Retail London conference.

It is not only retailers feeling the pinch. The price of manufactured goods unexpectedly climbed at their fastest rate for two-and-a-half years last month, while on Friday oil soared to $125 a barrel for the first time since August 2008.

Confidence among consumers is already at a low ebb, with the biggest monthly drop for 20 years in January and showing little sign of recovery since, according to polls by GfK NOP. And that was before last week's "Worse-Off Wednesday", when Coalition cuts and tax changes left the average household around £200 worse off.

The Deloitte research reveals that Britain's biggest firms are continuing to maintain a strong focus on controlling costs and increasing cash flow. However expansion is the top priority for CFOs.

"CFO optimism has taken a knock, but large corporates do expect revenues to rise over the next 12 months and are increasingly seeking growth opportunities through expansion, raising capital spending and acquisitions," Ian Stewart, the chief economist at Deloitte, said.

"However, with inflation at current levels, profit margins are unlikely to expand at the heady rates seen in 2010," Mr Stewart warned.

On average, CFOs expect the UK fiscal squeeze to reduce UK corporates' potential profits by 7 per cent this year. Some 83 per cent see the fiscal squeeze reducing 2011 profits.

When asked about interest rate rises, two-thirds of finance directors said they expect the Bank of England to raise rates by September. In total, 86 per cent of CFOs surveyed expect UK interest rates to rise by the end of the year. Just one in 25 expect base rates to stay at their current level of 0.5 per cent for more than a year.