European CFO Survey with Portugal Insights Eyes on Demand Spring 2019 Contents 01

European CFO Survey with Portugal insights Eyes on demand Spring 2019 Contents 01

01 02 03 03

The economic landscape Uncertainty clouds A darkening outlook Page 06 the mood Page 13 04 Page 09

04 05

Building up resilience About the European Page 21 CFO Survey Page 26

02 European CFO Survey | Eyes on demand | Foreword

Foreword 01

As part of our broader commitment to supporting business leaders across the globe in their strategic decision-making, we are pleased to present the ninth edition of the Deloitte European CFO Survey. 02

Twice a year, the survey gives a voice to over 1,000 CFOs from across It is with great pleasure that we announce the results of the 9th edition of 03 Europe, providing an overview of their hiring and investment intentions, European CFO survey with Portugal insights, including the biggest Portuguese views on critical business risks, current strategic priorities and which companies CFOs’ perspective about economic, financial and strategical issues. factors they consider vital for success. Due to its wide geographical 04 reach, the consistently high number of participants and the privileged This edition reveals an optimism slowdown regarding Portugal’s economic viewpoint of CFOs, it provides a reliable indicator of business sentiment perspectives with more CFOs feeling that there is a downturn for the country’s in Europe across a range of different markets. economy waiting in the following year. The fact that more CFOs are not willing to take more risk into their balance sheet and intend to follow cost control strategies 05 As the external environment becomes more uncertain economic as a priority shows that appetite for risk remains low, compared to previous concerns predominate among European businesses. In addition, deep semesters. structural changes are taking place – and they can be expected to speed up rather than slow down during a period of economic difficulty. Following our last survey’s questions, the shortage of skilled professionals points The typical cost-reduction approach on which many companies rely as risk as well as cyber risk, increasing regulations and matters around geopolitics. during an economic downturn may not be sufficient to cope with these Despite high concerns around economic outlook, CFOs revealed considerable challenges. optimism on the unlikelihood of a recession not only in Portugal, but also in the Euro area and the US. Following last survey predictions, Portuguese CFOs plan In this edition we therefore report on the steps European companies on taking future actions, highlighting strategic acquisitions, the use of advanced are taking to become more resilient. We hope you will find that the views technologies and the strength the current customer basis. set out in the report are informative and bring an interesting dynamic to your discussions, triggering further debate. To discuss any specific We believe that the results contained in this report represent not only the voice aspects of this report, please contact one of our Deloitte leaders, whose of the financial leaders of companies in Portugal but also in other European email addresses are given at the end of this document. countries and will be a useful source of information for our clients and readers.

Christopher Nuerk Jorge Marrão Managing Partner, Clients & Industries Partner, CFO Programme Portugal leader

03 European CFO Survey | Eyes on demand | Key findings Portugal

Key findings Portugal 01

Economic outlook overview Upcoming risks 02 This semester’s survey reveals a significant In this semester, respondents have once 45% a decrease in positivity (from 70% to 45%) 74% again shared their views on factors most of CFOs in Portugal feel surrounding the Portuguese economic outlook of the surveyed likely to pose a significant risk to their for the next 12 months and an increase in CFOs believe this businesses, and a clear risk arises with that the country’s pessimistic responses (from 9% to 24%) where 82% of CFOs believing economic outlook/ 03 economic outlook CFOs feel the there is a downturn for the is currently not growth are likely to pose a significant risk is positive country’s economy waiting in the following year. a good time to to their companies in the next year. These figures are especially relevant when be taking Other top risks, with likelihood of noticing that you have to go back to the end of greater risks into around ~50%, can be seen on matters 04 2016 to find a worse outlook. The general belief around geopolitics, shortage of skilled that the world’s economy faces a looming cool their balance sheets professionals, cyber risk and increasing down may account for this drop. regulations. 74% 05 of respondents are not expecting a recession to occur in the next 18 months

Are you ready? In this semester’s special question, the inquired CFOs 85% revealed considerable of CFOs in Portugal name cost optimism on the unlikelihood of a reduction as a priority for their recession not only in business in the next year Portugal, but also in the Euro area and the Strategic priorities US. As is noticed every semester, once again Nonetheless, CFOs have there will be a focus on lean operations, already set in motion some i.e. promoting cost control and cost mitigating actions towards a reduction activities. Growth initiatives potential slowdown, highlighting the establishment of new such as introducing new products/ credit facilities, diversifying financing sources and focusing on services and organic growth are next in high margin customers or shifting focus to different regions. respondent preferences. It should be CFOs in Portugal also plan on taking further measures in noted however, that the gap between the future, with top mentions for strategic acquisitions, defensive and growth strategies has increased use of advanced technologies and narrowed, even as the pessimistic strengthening the current customer basis. feeling deepens. 04 European CFO Survey | Eyes on demand | Executive summary

Executive summary 01

Building resilience will be the main focus for the CFOs, as they face the ‘new mediocre’ in terms of growth. 02

The flow of worrying economic and political news optimism, risk perception, and performance Despite the gloom, the majority of CFOs across 03 that characterised the second half of 2018 has outlook for their companies. Europe do not see an imminent economic dwindled since the beginning of 2019. The US recession, neither in their own national economy In fact, something that emerges clearly in this and China reached a truce on trade and seem nor in the euro area or in the US. What CFOs in 04 to be closer to an agreement. The US Federal edition of the survey is that sentiment has Europe seem to be seeing is, rather, a return to a Reserve and European Central Bank have deteriorated much more within the euro area “new mediocre” – as the IMF’s managing director substantially revised their stance on monetary than outside it. Across all the metrics considered Christine Lagarde once defined a scenario of policy: they are now unlikely to tighten monetary in this report, the deterioration in the results disappointingly low growth.1 05 policy further for some time, and the ECB may within the eurozone was markedly bigger. become more expansionary again. The Chinese And yet the proportion of CFOs with positive Whatever may come, European businesses growth engine seems to be reviving. The Brexit expectations about the next 12 months is still are conscious they need to be ready and are negotiations became even more complicated but higher within the euro area than outside. Now favouring offensive strategies. The majority no major new political disputes emerged in the the difference between the two blocs is small. of CFOs report that they have taken or are first quarter of 2019. planning to take steps to increase the resilience Specific aspects of the economies within the of their companies to a growth slowdown. They Yet, according to the results of the latest euro area might explain the new gloomier mood. are seeking to enlarge or better define their European CFO Survey, businesses in For example, these countries might be more customer base and increase the use of advanced Europe remain wary. Expectations about directly exposed to global macroeconomic technology in order to improve efficiency. the development of key business metrics threats. But the results might also indicate that A small minority of companies is building up a deteriorated further from six months ago. unresolved problems peculiar to the eurozone pool of external workers to tap into as a way Companies are less willing to invest and add to are a cause for concern for its businesses. In to increase their resilience. Companies who their workforce. A decline in demand and weak this respect, it is interesting to note that the succeed in creating and managing an ecosystem overall economic outlook are now the main proportion of CFOs considering of alternative workers may have a competitive concerns for CFOs in Europe. a new Euro crisis as particularly likely to happen advantage in the next downturn. increased substantially compared with one The sentiment across CFOs in Portugal follows year ago. this trend, with clear downturns in overall

05 European CFO Survey | Eyes on demand | The economic landscape

The economic landscape 01

06 European CFO Survey | Eyes on demand | The economic landscape

Macroeconomic update 01

Political unrest and economic slowdown have taken their toll on confidence, but growth forecasts remain positive. 02

After an upbeat beginning 2018 turned sour The German economy was affected particularly As political uncertainty mounted, the Italian 03 towards its end. A series of pivotal economic and almost slipped into recession in the last economy ended the year in recession. and political events took place at increasing quarter of 2018. Meanwhile, widespread social unrest bubbled speed. Trade tensions between the US and up in France as so-called ‘yellow jacket’ 04 China mounted through the year and came to All this took a toll on investor confidence which protesters took to the streets. This negatively a climax in November when talks between the was further dented by concerns about an affected consumer spending and business two parties stalled. The risk of both a general untimely tightening of monetary policy in the sentiment in France, too. tariff hike and the imposition of additional US. The Federal Reserve delivered in December 05 tariffs to cover all US imports from China a fourth interest-rate increase since the end of loomed large.2 These tensions and increased the financial crisis and signalled no imminent After an upbeat beginning 2018 uncertainty caused international trade to change in policy direction. Consequently the weaken – as the sharp downturn in the WTO major global stock markets had a rough ride turned sour towards its end. Trade Outlook indicator (WTOI) shows.3 after the summer and finished the year posting losses. A series of pivotal economic At the same time signs emerged of a faster- and political events took place than-expected slowdown in the Chinese Meanwhile political unrest rose towards the end economy, with the trade conflict compounding of the year, adding to the uncertainties already at increasing speed. domestic weakness. During the last quarter being caused by Brexit. In October the Italian of 2018 the economy grew at its slowest pace government started battling with the European since the financial crisis. A number of major Commission over the country’s budget- companies in Europe and the US blamed stretching spending plans. Yields on Italian weaker demand from China and higher tariffs debt rose in response, leaving many observers for disappointing sales.4 wondering if a new European debt crisis was brewing, just a few years after the 2010-12 one.

07 European CFO Survey | Eyes on demand | The economic landscape

By contrast 2019 has been relatively quiet so far But the macroeconomic picture is certainly not There is no reason to believe that these risks 02 – apart from the erratic twists and turns of the a bed of roses. Of all the clouds that gathered will necessarily materialise and the domestic unpredictable Brexit negotiations. Italy and the in the economic landscape in 2018, only the drivers of growth in Europe – the labour market European Commission reached a compromise threat of an untimely tightening of monetary and healthy domestic demand – remain intact 03 over the budget. The weekly mobilisations in conditions seems to have gone away reliably. for the moment.5 France have continued but have become far Fiscal and monetary stimulus in China may help less forceful and disruptive, dissipating part of to shore up growth in the short term but the 04 the uncertainty. Overall, growth forecasts for structural problems of the Chinese economy Of all the clouds that gathered in the eurozone have been revised downwards, – such as its high reliance on debt – remain but remain positive. unaddressed. the economic landscape in 2018, 05 Stock markets have bolstered the better mood As for the trade war, despite all the talks and the only the threat of an untimely by rebounding vigorously worldwide since the better mood, a sustainable agreement looks beginning of the year after the Federal Reserve hard to reach. Meanwhile the threat that the US tightening of monetary conditions changed course and signalled no further will impose tariffs on European cars and parts seems to have gone away reliably. interest-rate hikes for 2019. The dovish turn looms large. of the Federal Reserve has also improved the prospects for economic recovery in emerging Within Europe, the results of the upcoming markets. Business confidence in Turkey – a European elections might spark political “Despite growing macro uncertainty Austrian country particularly affected by rising US interest instability at the national level. The current Post invests at record levels to capture the rates and fluctuating currency in 2018 – bounced Italian calm might easily be broken later in the e-commerce driven growth opportunities in back, while the Lira has been relatively stable. year, when the government will be required to parcels.” make tough choices over the budget for the In China fiscal and monetary policies to support next year. Walter Oblin the economy have raised both consumer and CFO of Austrian Post business sentiment. Meanwhile, a temporary Furthermore, the Brexit conundrum does not President CFO Club Austria truce in the trade war with the US has been seem close to a resolution. On the contrary, achieved; the talks between the two seem to be the puzzle appears to be becoming ever more making progress. intricate.

08 European CFO Survey | Eyes on demand | Uncertainty clouds the mood

Uncertainty clouds the mood 01 02

09 European CFO Survey | Eyes on demand | Uncertainty clouds the mood

Confidence globally unchanged but different patterns across the 01 region emerge

Whether considering the economic outlook for the Chart 1 Financial prospects over time net balance 02 country or for their own companies’, this survey reveals a Compared to three months ago, how do you feel about the ﬁnancial prospects for your company?* considerable drop in optimism by CFOs in Portugal. The net 40 balance between CFOs who are more optimistic about the 03 financial prospect for their companies and those who are 35 less optimistic is now 0%. This figure stood at 26% last Spring. 30 This downturn seems prompted by a lack of optimism in the 04 portuguese economic outlook as CFOs that believe it to be 25 positive fell from 70% to 45% in the last six months. 20 Globally, sentiment among European businesses remains 05 15 subdued. CFOs who are less optimistic about the financial prospects for their company still outnumber the optimistic 10 and the negative net balance remains at its lowest since the inception of the European CFO Survey in the spring of 5 2015. However, the index remained substantially unchanged 0 compared to six months ago. Specifically, about half of the respondents report unchanged levels of optimism, while 5 one out of four feel less optimistic. The lull in the unfolding of potentially disruptive economic and political events since 10 the beginning of the year seems to have provided European 15 businesses with some room to breathe. 20 The average trend masks two different developments in rn Amn rn Amn rn Amn rn Amn rn countries inside and outside the euro area. Confidence 2015 2015 2016 2016 2017 2017 2018 2018 2019 outside the euro area actually rebounded, driven by substantial improvements in the net balances in some eed aerae Ero area Conres osde e ero area countries (particularly Turkey and Russia) which more than counterbalanced the drop in confidence in other countries o eore e ress onry y onry ease ew e nerae ras a wwwdeoeomeroeanfosrey (particularly Iceland and Switzerland).

10 European CFO Survey | Eyes on demand | Uncertainty clouds the mood

Optimism levels in the UK remain particularly Chart Financial prospects net balance 02 low, although the net balance improved by Compared to three months ago, how do you feel about the ﬁnancial prospects for your company?* 6pp compared to six months ago. However, rather than an increase in the proportion of Sweden Finland Russia 03 12 13 19 CFOs feeling more optimistic, it is an increase Norway Iceland in the proportion of CFOs whose optimism 28 37 is unchanged that is the main driver of the Denmark 04 improvement. The lack of clarity around the 14 Brexit process has obviously taken a toll on Netherlands business confidence. It seems, however, as 23 though CFOs are almost getting used to and Belgium 05 learning to cope with the high level of political 3 uncertainty. UK By contrast, optimism dropped in almost all 24 countries within the euro area. Three of the five Ireland countries showing a negative net balance on this 10 Luxembourg metric are from the eurozone. Compared to the 2 autumn 2018 edition, the proportion of CFOs Germany feeling less optimistic increased by 7pp (from 12 Spain 19 per cent to 26 per cent) while the proportion 7 of those feeling more optimistic slipped further Portugal down (from 27 per cent to 23 per cent). For the 0 first time in four years, the net balance is now negative. Greece Turkey Switzerland 3 29 11 Austria Italy Poland 6 13 0

1 14 to 4 to 4 to 14 1 to 4 *Note: In Denmark, Finland, Norway, Italy and Poland the question speciﬁed a six-month period

11 European CFO Survey | Eyes on demand | Uncertainty clouds the mood

High uncertainty dampens risk appetite 01

CFOs across Europe continue to rate the among CFOs in the euro area than outside. 02 overall level of external financial and economic Compared to six months ago, uncertainty as high, and Portugal is no exception, Taken together, the results on optimism, uncertainty and risk appetite paint a quite the share of CFOs considering as 60% of the inquired rate it as high or very high 03 (rising from 56% in the Spring survey). consistent picture, with the overall sentiment of this a good moment to take more CFOs operating within the euro area worsening However, the gap that opened up at the end slightly more than that of CFOs operating outside risk dropped further. of 2017 between the perceptions of CFOs it. Specific aspects of the economies within the 04 inside and outside the euro area reversed. A euro area might explain the gloomier mood. For substantial drop in perceived uncertainty among example, these countries might be more directly “I keep emotions and opinions out of all CFOs in Turkey is one of the main drivers of exposed to global macroeconomic threats. But financial dispositions. The facts and figures 05 this trend. The proportion of CFOs in Turkey the results might also indicate that unresolved considering uncertainty high was half that of the problems peculiar to the eurozone are a cause are what count, and our digital infrastructure previous survey and the net balance dropped for concern for its businesses. In this respect, it helps me collect and analyse the right data. by 55pp. Although inflation remains high (20 is interesting to note that the proportion of CFOs But there must also be a risk factor because per cent) and the currency still carries risks of considering a new eurozone crisis as particularly opportunity lies in the risk. Nonetheless, volatility, CFOs seem to believe that the worst is likely to happen increased substantially everything starts with the team and the right over. compared with one year ago (see Break out box: people. People are what make the difference.” Likelihood and impact of global risks). In general, however, looking across all countries, Marika Fredriksson the vast majority of CFOs (63 per cent) continue CFO of Vestas to consider the current level of financial and economic uncertainty as high or very high, a small upward increase compared to six months ago. Thus, perhaps unsurprisingly, CFOs do not show much appetite to take on more risk. Specifically, compared to six months ago, the share of CFOs considering this a good moment to take more risk dropped further to a historical low of 20 per cent. Again, the drop was steeper

12 European CFO Survey | Eyes on demand | A darkening outlook

A darkening outlook 01

13 European CFO Survey | Eyes on demand | A darkening outlook

Expectations for revenues stagnate, those for margins drop 01

In line with subdued overall sentiment, CFOs’ outlook Chart 3 Revenues let pane and margins right pane over time net balance 02 for the next 12 months on the evolution of revenues n yor ew ow are reenesmarns for yor omany ey o ane oer e ne 12 mons and operating margins in their companies is darker 80 80 than six months ago. For both metrics the net 03 balance is at a historical low although on average it 70 70 remains positive, meaning that more CFOs expect an improvement than a deterioration in company 60 60 performance. 04

50 50 In Portugal, even though a new historical low has not been reached, there was also a reduction in positive 40 40 05 sentiment for both metrics with 63 per cent of CFOs considering their revenues are likely to increase (a 30 30

9 pp drop from six months ago) and 34 per cent Margins Revenues feeling their operating margins are likely to increase 20 20 (dropping 5pp from six months ago).

10 10 A solid majority of CFOs in the euro area (67 per cent) expect their revenues to increase. However, 0 0 the share of CFOs forecasting a decline in revenues increased by 5pp, to 16 per cent. Among CFOs 10 10 outside the euro area, exactly the opposite trend is true, so that the gap in expectations within the 20 20 two regions is now smaller than six months ago. rn Amn rn Amn rn Amn rn Amn rn rn Amn rn Amn rn Amn rn Amn rn 2015 2015 2016 2016 2017 2017 2018 2018 2019 2015 2015 2016 2016 2017 2017 2018 2018 2019 Expectations for operating margins deteriorated by a wider extent (-6pp), particularly within the euro area eed aerae Ero area Conres osde e ero area (-14pp). With revenues expected to stagnate or fall, oe n e CFOs were ased ow are reenesmarns for ororaes ey o ane oer e ne 12 mons oil prices increasing since the beginning of the year o eore e ress onry y onry ease ew e nerae ras a wwwdeoeomeroeanfosrey and still heading higher at present, and companies in Europe unable to reduce labour costs easily, it is unsurprising that the outlook for profits looks bleak.

14 European CFO Survey | Eyes on demand | A darkening outlook

Revenues and margin expectations within industries 01

A look at the expectations about revenues Chart 4 Revenues and margins expectations by sectors over time net balance and margins within different sectors provides 02 90 additional detail on the whole picture. It seems 80 that the overall decline in expectations about 70 revenues and margins is mainly driven by the 03 automotive and industrial products and services 60 sectors. These are the only sectors where the 50 net balances for both metrics dropped by two 40 Revenues 04 digits for the second time in a row (Chart 4). The 30 evolution in expectations for the automotive 20 sector is particularly telling: it has moved 10 05 from being one of the most bullish sectors 0 Aomoe Consron Consmer Enery Fnana ndsra fe ea ransor on revenues in the spring 2018 edition to the oods es seres rods senes oss one with the lowest net balance in the current mnn seres 50 survey. It is also the only sector with a negative net balance on expectations for margins. For 40 the automotive industry the environment is 30

particularly tough, as short-term and cyclical 20

challenges (such as the threat of tariffs on 10

automobiles) are adding to the challenges Margins 0 posed by long-term secular trends, such as the introduction of new technologies and changing 10 consumer needs that require a rethink of the 20

entire current business model. 30 Aomoe Consron Consmer Enery Fnana ndsra fe ea ransor oods es seres rods senes oss In the retail and consumer goods sectors, by mnn seres contrast, expectations for revenues and margins rn 2018 Amn 2018 rn 2019 have improved compared to six months ago. This is encouraging as it might indicate that consumer oe Ony ress for seors w more an 50 resondens n ea edon sown eors w wo onsee denes n e ne aanes of eeaons ed demand will prove sustained.

15 European CFO Survey | Eyes on demand | A darkening outlook

Investments and hiring expectations further deteriorate 01

Compared to six months ago, the outlook for both capital Chart Capital expenditure let pane and number o employees right pane over time net balance 02 expenditure (CAPEX) and employment has deteriorated. n yor ew ow are aa eendresnmer of emoyees for yor omany ey o ane oer e In the euro area the net balances remain positive but have ne 12 mons declined more than outside the euro area. An increase in 60 60 03 the number of CFOs planning to decrease their CAPEX and head count is the main driver of the drop in the net balance. 50 50 The proportion of CFOs expecting a decline in CAPEX expenditure jumped from 12 per cent in autumn 2018 04 to 19 per cent now. For hiring intentions, the proportion 40 40 moved from 15 to 23 per cent. 05 Portugal shifts accordingly in a net balance perspective. 30 30 Although the percentage of inquired CFOs expecting to decrease CAPEX has dropped 4 pp from the last survey, the 20 20 ones expecting it to increase also dropped, and in a larger Hiring intentions scale, from 60 per cent to 43 per cent. Hiring intentions CAPE intentions 10 10 moved softly and also trending down with a net balance of 24 per cent between CFOs signalling an increase in hiring and those signalling a decrease (28 per cent six month ago). 0 0

If investment and consumption soften over the next 10 month, economic growth in the euro area will rely more 10 heavily on exports and will therefore be more vulnerable to possible negative geopolitical developments, such as a 20 20 Amn rn Amn rn Amn rn Amn rn Amn rn Amn rn Amn rn Amn rn worsening of trade tension with the US. 2015 2016 2016 2017 2017 2018 2018 2019 2015 2016 2016 2017 2017 2018 2018 2019

Among the countries outside the euro area there is a clear eed aerae Ero area Conres osde e ero area divide between Turkey, Russia and Denmark – where CFOs’ oe n e CFOs were ased ow are aa eendrese ooo for rn for ororaes ey o ane oer e ne 12 mons expectations with regard to all indicators have improved o eore e ress onry y onry ease ew e nerae ras a wwwdeoeomeroeanfosrey markedly – and other countries, where the outlook for CAPEX and hiring somewhat deteriorated.

16 European CFO Survey | Eyes on demand | A darkening outlook

Economy now the principal concern 01

Besides the UK, where the net balances Demand fears are now among the top three Chart Perceived businesses risks in Spring 1 and 02 dropped for the second time in a row, CAPEX concerns in half of the countries, compared to Autumn 2019 (number of countries where speciﬁc risks and hiring intentions also declined substantially about one third of the countries in the autumn rank in the top three Which of the following factors are likely to pose a signiﬁcant in Iceland and Poland. 2018 edition of the report. This is the steepest rs o yor sness oer e ne 12 mons 03 increase for all the risk factors. More broadly, In the weaker environment they foresee CFOs concern about weaker demand is now one of 12 also expect inflation to be softer than they did the top five risk factors in 19 of the 20 countries six months ago. On average, CFOs in the euro covered. A deeper look at the results reveals 04 10 area expect an average inflation rate of 1.63 per that CFOs are increasingly worried about cent over the next 12 months. That represents weakening foreign demand. CFOs in seven a fall of 0.41pp from the autumn but remains countries mention this risk as one of their top 8 05 slightly higher than the annual inflation rate of five concerns – six months ago it was a top five 1.4 per cent recorded in March, suggesting that risk factor in just one country. CFOs are expecting a rebound in prices. 6 Although less prominent, a shortage of skilled Economic concerns predominate labour continues to rank high among the 4 When asked which factors are most likely concerns of CFOs, being one of the top three to pose a significant risk to their businesses concerns in nine of the 20 countries (45 per over the coming months, CFOs point to the cent). It is likely that even if the labour market 2 economy. Growth and the overall economic softens in coming months, reflecting an outlook are named as the top risk in Portugal economic slowdown, the gap between 0 and in about one third of countries. In Europe, desired and available skills will continue Amn 2018 rn 2019 this top concern replaced the shortage of skilled to preoccupy CFOs. ed aor sorae Eonom ooorow labour as the factor that most often ranks edon n demand eooa rss number one. Geopolitical risks comes next in the list of likely threats for CFOs in Portugal, confirming that the overall national and global economic concern are responsible for their drop in optimism.

17 European CFO Survey | Eyes on demand | A darkening outlook

Likelihood and impact of global risks 01

In this edition of the survey we asked CFOs’ opinions Chart 7 Views about the likelihood and the impact o risk events net balance 02 about a series of downward risks to the global Over the next 12 to 24 months, how do you rate these risks to the global economy? Should one of the economy, both in terms of the likelihood that the following scenarios materialise, how would you rate the magnitude of its impact on the financial prospects of your company? event will materialise and the intensity of its impact 03 on the company’s financial prospects, should it Low probability, high impact High probability, high impact rn 2018 rn 2019 occur. ne n asse res leading to a financial crisis 04 As in the spring 2018 edition, CFOs remain relatively Inflationary surge in western confident. Most of the events that would have a eonomes Untimely tightening of major negative impact on financial prospects are monetary policy considered relatively unlikely, whereas those most 05 rae de rss n a maor likely to occur are perceived as having a probable economy modest impact – with just a few notable exceptions. de rss n a maor economy Compared to a year ago a greater number of CFOs ard Bre consider a new eurozone crisis likely – and it would

have a major impact on their company’s financial Major cyber-attack prospects, a majority of CFOs believe. Although those outside also see the risk as having increased, se n roeonsm the change in the perceived likelihood of this event Rise of polarisation/ osm is particularly marked among CFOs operating within the euro area. oa rmo

Eroone rss Specifically, 46 per cent of CFOs in the euro area Low probability, low impact High probability, low impact now consider a new euro crisis very likely compared to just 27 per cent one year ago. Furthermore, As the attention of CFOs focuses more on these by 15pp and 18pp respectively, from a year ago. a greater number of CFOs than in spring 2018 economic and political events, the threat of a major While it is understandable that geopolitical factors consider political turmoil likely to materialise, and cyberattack has become less visible. Both the net are currently more present in CFOs’ minds, cyber the net balance of the perceived impact has also balance of CFOs who consider an attack likely and threats should not be forgotten, as a lack of increased slightly. the balance of CFOs considering the event would awareness could prove costly. represent a major impact has declined,

18 European CFO Survey | Eyes on demand | A darkening outlook

Reducing costs is increasingly a strategic priority, 01 but CFOs remain tilted toward growth-oriented strategies 02 As in previous surveys, and once again suggesting a in first place. Similarly, ‘increasing cash flow’ is now notably cautious course of action among European one of the top three priorities in four countries The importance of digitalisation countries, Portugal shows a preference for compared to two countries in the autumn 2018 as a top strategic priority has 03 defensive strategies. Two in the top three selected edition. strategies are cost reduction and working capital risen steadily in the past four By the same token, the majority of expansionary efficiency. This may be due to the recent memory of 04 the particularly harsh adjustment period under the strategies are now slightly less prominent with editions of the survey. IMF, ECB and the European Comission. one major exception, namely ‘digitalisation’. This is now one of the top three strategic priorities in Globally, CFOs remain tilted towards growth- almost one third of the countries, six out of 20. 05 oriented strategies. In the majority of countries The importance of digitalisation as a top strategic (12 out of 20) CFOs included more expansionary priority has risen steadily in the past four editions than defensive strategies among their top three of the survey, despite the fact that CFOs have priorities. However, compared to the spring edition become increasingly concerned about economic of the survey, the focus was more defensive. In eight and geopolitical worries. It seems that despite the countries – two more than six months ago, reducing growing macro uncertainty European businesses costs ranks as the top strategy over the next 12 are keeping their focus on digital transformation – in months, making this the strategy most often ranked order to be fit for the future.

“The CFO, with the privilege of having a holistic view of the organization and its financials should become a major contributor to the business strategy. Today the CFO has the tools and the insights to act as a challenger to the decisions and processes, and also the potential to become a “transformation officer” assisting the organization to face the new disruptive changes in a riskless and profitable way.”

Ioannis Pantoleon CFO of Olympia Group

19 European CFO Survey | Eyes on demand | Building up resilience

Building up resilience 01

20 European CFO Survey | Eyes on demand | Building up resilience

CFOs in Europe do not expect a recession soon 01

Despite the gloomier mood and less optimistic Chart Proportion o CFOs expecting a recession Chart Proportion o CFOs expecting a recession 02 expectations for the future, CFOs in Europe to happen within the next 18 months in diﬀerent within the next 1 months in their own country do not expect a recession soon either in the regions yes yes o yo ee a reesson wo onsee arers o yo ee a reesson wo onsee arers eurozone or the US, where they expect better of neae row o aen wn e ne 18 of neae row o aen wn e ne 03 prospects than in the eurozone (Chart 8). mons n e foown reons 18 mons n yor onry When asked to look at their own national markets, CFOs’ opinions vary widely with CFOs 04 in Portugal strongly confident that will not be a recession (74 per cent of the inquired). In the 3 majority of countries surveyed the proportion 05 of CFOs expecting a recession is well below 50 Ero area F per cent. But in Turkey, Italy, Russia and Iceland E a majority of CFOs foresee a recession in the near future. In Turkey and Italy this may be a reflection of the current economic weakness: in both countries GDP contracted at the end of A the past year. But for Russia and Iceland CFOs E might be sensing bumpier times further ahead. BE In most countries, however, CFOs do not see a recession as being on the cards, at least in the E short term (Chart 9).

C While Europe is still growing, many warning signs are flashing on the horizon and business leaders need to think ahead and prepare their companies for the next economic slowdown. E That is still more the case given that deep O structural changes are taking place. 0 10 20 30 40 50 60 70 80 90 100 s eson was no ased n enmar and e ned ndom o eore e ress onry y onry ease ew e nerae ras a wwwdeoeomeroeanfosrey

21 European CFO Survey | Eyes on demand | Building up resilience

A recent study analysing how the two most 02 recent downturns (the dotcom bust in 2001 Companies who failed to reposition during the crisis and the Great Recession in 2008) affected the were even more exposed when the market revived. consumer found that the degree of change 03 in the industry not only continued unabated during the downturns but actually accelerated. In consequence those companies who failed “In the next five to ten years, the industry will encounter new players to reposition during the crisis were even more holding significant competitive positions in certain sections of the value 04 exposed when the market revived.6 chain. Banks must adapt to capitalise on their competitive advantages and translate them into higher growth and market penetration. The special question in this edition of the 05 European CFO survey, therefore, focused on the steps that companies across Europe are Big data and increased computing power are key elements: we will taking to become more resilient in the face of a improve predictive tools to better understand our clients and thus meet their slowdown in global growth. needs. Undertaking this transformation means having an organisational structure that is ready for change, dynamic and able to attract the new talent required to drive the change.”

Jaime Sáenz de Tejada CFO of BBVA

22 European CFO Survey | Eyes on demand | Building up resilience

European businesses focus on their customer base and on advanced 01 technologies to become more resilient 02 The results reveals that there are three main Chart 1 Proportion of CFOs selecting a specific strategy to make the company more resilient to an areas on which CFOs are concentrating at the economic downturn: steps already taken, or still in the planning phase moment, common for Portugal and the rest of the of e foown aons ae yo aready aenare annn o ae o mae yor omany more resen aans a oena sowdown n oa row oer e ne 12 o 18 mons 03 surveyed countries. However, it is curious to point out that although the preferences are aligned, Enare e somer asssf e fos o different regions or market segments the percentage of CFOs that have taken or are 04 planning to take mitigating steps is considerably nrease e fos on marn somers larger in Portugal than the European average. nrease e se of adaned enooes to improve efficiency The first area relates to the company’s customers. renen e rren somer ass 05 Companies are seeking to enlarge their customer Diversify financing sources base – including by shifting the focus to different regions or market segments (57 per cent in Esas new red faes mroe e fos of e maren sraey Europe and 65 per cent in Portugal); or they are and e maren m increasing the focus on high margin customers ae or reonsder srae asons (46 per cent in Europe and 66 per cent in Portugal). ere derede eerae

eeaaeads sy an arranemens The second area is increasing the use of advanced technologies to improve efficiency (45 per Osore nonsrae fnons cent in Europe and 68 per cent in Portugal). A es ndererformn assesdsons recent study shows that companies who are Increase ﬂexibility in investment strategy/reduce more advanced in the use of information and onerm nesmen ommmens communication technologies were better able Build up a pool of ﬂexible workers to tap no freeaners worers to withstand the economic crisis in 2008-9, Oer not only because they were more efficient oesn ay we do no see e need but also because they were better able to o ae era aon introduce process innovations that boosted their 0 10 20 30 40 50 60 competitiveness. Aready aen annn o ae

s eson was no ased n enmar and e ned ndom Answers for werand no nded as e eson was ased n an oenend forma o eore e ress onry y onry ease ew e nerae ras a wwwdeoeomeroeanfosrey 23 European CFO Survey | Eyes on demand | Building up resilience

Slightly behind come actions that relate to that are not working well frees up financial 02 financing, like diversifying the credit sources (44 resources. Companies who are more per cent in Europe and 66 per cent in Portugal) In addition, very few CFOs mention “build up a advanced in the use of and establishing new credit facilities (43 per cent 03 in Europe and 67 per cent in Portugal). Adequate pool of flexible workers” as a strategy they are information and communication access to capital is of vital importance for a currently pursuing or planning to pursue. That company in a downturn and even more so in a might be a strategic mistake. Freelancers and technologies were better able 04 recession. Thus, it is sensible to secure new lines external workers can be an asset in difficult to withstand the economic crisis of credit and diversify financing sources when economic times, as they can provide the company economic conditions are still favourable. However, with the required talent in a flexible way. However, in 2008-9. less than 40 per cent (60 per cent in Portugal) to be effective, alternative workers need to be 05 of respondents are looking at reducing debt to well integrated into the company, exposed to build resilience. Several analyses find that highly its culture and to the forms of assessment used leveraged companies perform substantially worse for traditional employees. Few companies today during recessions. Furthermore, other measures manage the ecosystem of alternative worker that could improve the financial position of the in an optimal way. Setting up such processes company – such as divesting unproductive assets takes time. Companies with a solid pool of or outsourcing non-core functions – are less flexible workers already well integrated into their popular. Such decisions are generally difficult to structure could have a competitive advantage in make, but exiting from investments and activities the next downturn.

“In an uncertain economic environment it becomes even more important to promote the company’s agility and to ensure its ability act. In this respect, the CFO has an important role to play, securing a risk-compatible financing, steadily improving processes and ensuring a high degree of transparency - which allows to take the right decisions in a timely manner.”

Adrian Widmer CFO of Sika Gruppe

24 European CFO Survey | Eyes on demand | About the European CFO Survey

About the European CFO Survey 01 02

25 European CFO Survey | Eyes on demand | About the European CFO Survey

About the European CFO survey 01

The European CFO Survey is part of a global European CFO Survey cohort of surveys benchmarking the current Author 02 and future intentions, sentiment and opinions Michela Coppola of European Chief Financial Officers. The survey Senior economist, European CFO Survey Lead, in its fifth year represents the views of1,473 Deloitte GmbH 03 CFOs based in 20 European countries: Austria, +49(0)89 29036 8099 Belgium, Denmark, Finland, Germany, Greece, [email protected] Iceland, Ireland, Italy, Luxembourg, Netherlands, 04 Norway, Poland, Portugal, Russia, Spain, Contact Sweden, Switzerland, Turkey and the United Sanford A. Cockrell III Kingdom. Managing Partner, Global Leader, CFO Programme, Deloitte DTTL 05 Acknowledgements +1 (212) 492 3840 We would like to thank all participating CFOs [email protected] for their support in completing this survey. We would also like to thank the CFO Survey Teams European CFO Survey in each of the countries that collected the data with Portugal insights from local CFOs. All data management was Contact done by Ram Sahu. Nelson Fontainhas Partner, CFO Survey Lead, Deloitte Portugal +351 2135 67100 [email protected]

Jorge Marrão Partner, CFO Programme Portugal leader, Deloitte Portugal [email protected]

26 European CFO Survey | Eyes on demand | About the European CFO Survey

The data Sample composition by Sample composition by industry 02 The findings discussed in this report were geographic location Industry collected from 1,473 CFOs between March and Country Manufacturing 23% April 2019. Some of the charts in the survey Austria 5% Consumer Business 23% 03 show results as an index value (net balance). Belgium 4% Financial Services 14% This is calculated by subtracting the percentage Denmark 9% of respondents giving a negative response Construction 9% from the percentage giving a positive response; Finland 2% Energy, Utilities, Mining 8% 04 responses that are neither positive nor negative Germany 12% Technology, Media & Telecommunication 8% are deemed to be neutral. Due to rounding, not Greece 3% Life Sciences 5% all percentages shown in the charts will add up 05 Iceland 5% Business & Professional Services 3% to 100. Ireland 2% Public Sector 1% For further information and a more detailed Italy 7% Others 7% analysis please visit www.deloitte.com/ Luxembourg 3% Sample composition by business size europeancfosurvey. Netherlands 3% Annual revenues Norway 6% To contact us please email us at Less than 100 million euro 34% [email protected]. Poland 1% Between 100 and 999 million euro 43% Portugal 6% 1 billion euro and more 22% Russia 4% Spain 7% Sweden 6% Switzerland 7% Turkey 2% United Kingdom 6%

27 European CFO Survey | Eyes on demand | About the European CFO Survey

Endnotes 01

1. Lagarde Christine, “Lift Growth Today, Tomorrow, Together“, 2015, Speech at the Atlantic Council https://www.imf.org/en/News/ 02 Articles/2015/09/28/04/53/sp040915

2. Bloomberg, “Trump Signals U.S. Likely to Go Ahead With China Tariff Increase”, November 2018, https://www.bloomberg.com/news/ articles/2018-11-26/trump-signals-u-s-likely-to-go-ahead-with-china-tariff-increase 03

3. World Trade Organization, “WTO trade indicator points to slower trade growth into first quarter of 2019”, February 2019. https://www.wto.org/ english/news_e/news19_e/wtoi_19feb19_e.htm 04

4. BBC News, “China’s economic slowdown: How worried should we be?, January 2019 https://www.bbc.com/news/business-46755158

5. Deloitte, “Eurozone: Slowing economic dynamics while Brexit casts its shadow”, 2019 https://www2.deloitte.com/insights/us/en/economy/emea/ 05 eurozone-economic-outlook.html

6. Deloitte, “The next consumer recession. Preparing now.”, 2018 https://www2.deloitte.com/content/dam/Deloitte/us/Documents/consumer-business/ us-the-next-consumer-recession.pdf

7. Berteschek Irene, Polder Michael, Schulte Patrick, “ICT and Resilience in Times of Crisis: Evidence from Cross-Country Micro Moments Data”, 2017, ZEW Discussion Paper 17-030. http://ftp.zew.de/pub/zew-docs/dp/dp17030.pdf

8. Deloitte, “The next consumer recession. Preparing now”, 2018 https://www2.deloitte.com/content/dam/Deloitte/us/Documents/consumer-business/ us-the-next-consumer-recession.pdf; Reeves Martin, Whitaker Kevin, Ketels Christian, “Companies need to prepare for the next economic downturn”, 2019, Harvard Business Review. https://hbr.org/2019/04/companies-need-to-prepare-for-the-next-economic-downturn

9. Deloitte, “Global Human Capital Trends”, 2019 https://www2.deloitte.com/insights/us/en/focus/human-capital-trends.html

28 European CFO Survey | Eyes on demand | Contacts

Contacts 01

Austria Germany Italy Portugal Switzerland Guido Eperjesi Alexander Boersch Riccardo Raffo Nelson Fontainhas Michael Grampp 02 Director, Clients & Industries Director, Head of Research Partner, CFO Programme Lead CFO Survey Lead Chief Economist, Head of Deloitte Austria Deloitte GmbH Deloitte Italy Deloitte Portugal Research +43 1 537 00 2522 +49 89 29036 8689 +39 028 332 2380 +351 2135 67100 Deloitte AG [email protected] [email protected] [email protected] [email protected] +41 582 796 817 03 [email protected] Belgium Greece Luxembourg Russia Thierry Van Schoubroeck Panagiotis Chormovitis Pierre Masset Lora Nakoryakova Turkey 04 Partner, Finance Partner, Financial Advisory Partner, CFO Service Lead Research Centre Lead Cem Sezgin Transformation Services Deloitte Luxembourg Deloitte CIS CFO Services Lead Deloitte Belgium Deloitte Greece +352 451 452 756 +7 495 787 0600 Deloitte Turkey +32 2 749 56 04 +30 210 6781 316 [email protected] [email protected] +90 212 366 60 36 05 tvanschoubroeck@deloitte. [email protected] [email protected] com Netherlands Spain Iceland Frank Geelen Nuria Fernandez UK Denmark Haraldur Ingi Birgisson CFO Programme Lead Partner Senior Manager, CFO Ian Stewart Kim Hendil Tegner Clients & Industries Lead Deloitte Netherlands Programme Chief Economist CFO Programme Lead and Deloitte Iceland +31 882 884 659 Deloitte Spain Deloitte LLP head of CFO Services +354 580 3305 [email protected] +34 9143 81811 +44 2070 079 386 Deloitte Denmark Haraldur.Ingi.Birgisson@ [email protected] [email protected] +45 30 93 64 46 deloitte.is Norway [email protected] Andreas Enger Sweden EMEA Research Centre Ireland Head of Monitor Deloitte Henrik Nilsson Michela Coppola Finland Daniel Gaffney Deloitte Norway Partner, CFO Survey Lead European CFO Survey Lead Tuomo Salmi Partner, S&O Finance +47 901 31 228 Deloitte Sweden Deloitte GmbH Partner, CFO Programme Lead Transformation [email protected] +46 73 397 11 02 +49 89 29036 8099 Deloitte Finland Deloitte Ireland [email protected] [email protected] +358 207 555 381 +353 1 417 2349 Poland [email protected] [email protected] Justyna Starosielec CFO Programme Marketing Lead Deloitte Poland +48 696 687 110 [email protected]

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