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Covid-19 drives CFO optimism to all-time low

By John Graham, D Richard Mead Jr. Family Professor of Finance, The Fuqua School of Business, Duke University, and Phillipe Dupuy, Associate Professor, Accounting, Law and Finance, Grenoble Ecole de Management. From IAFEI Quarterly June 2020.

IAFEI and a group of partners among which duke university and Grenoble EM survey CFO’s across the world. For the fourth quarter 2019, the survey was running from 25th February to 3rd April 2020.

The new coronavirus drove CFO business optimism to an all-time low over the two weeks ending April 3rd.

The results document the week by week impact of Covid-19 on businesses around the world.

The CFO survey has been conducted for 96 consecutive quarters and spans the globe, making it the world's longest-running and most comprehensive research on senior finance executives. Results are for the US unless stated otherwise.

Business optimism index

The CFO Optimism Index fell to 42 (on a scale from 0 to 100) in the second half of March, which is more pessimistic than at the depth of the 2008 financial crisis.

The Optimism Index was at 58 in the first half of March before plummeting to the low 40s in the second half of the month. The index has proven to be a good predictor of future GDP and unemployment, suggesting that the economy will perform more poorly in 2020 than during the great recession.

We have already seen a bigger jump in unemployment in the two weeks ending April 4th then during the entire great recession, so there is good reason why optimism has fallen. CFOs are fighting their own war for the survival of the companies.

Spending and hiring plans

The dramatic drop in the optimism index indicates that CFO’s was surprised by the large and sudden effects of the new coronavirus on business prospects. Prior to March 15, US businesses planned to increase payrolls by more than 4% and increase spending by nearly 5%. After March 15, they plan to reduce employment by 1.2% and reduce spending by 1.4%.

Things could get worse. Even with the pessimism expressed during the second half of March only about one-third of us firms believe that they face large financial risk due to cove at 19, while about half said they faced medium-risk. Should more companies realise that they in fact face large financial risk due to the virus, hiring and spending numbers will get even worse.

The survey asked CFOs about their revenue forecasts in a “very bad” scenario. Sales revenues are expected to fall by 13.3% in a very bad scenario, as opposed to a 1.4% reduction in the most likely scenario.

Global Optimism

As noted, US optimism before/after March 15 was 58/40 to on a scale of zero to 100. In other regions of the world, the Optimism Index after March 15 also fell to near all-time lows: Europe (50/35), Latin America (59/42), and Africa (57/37). In Asia (44/39), optimism was already low before March 15, consistent with parts of Asia already feeling the effects of the new coronavirus.

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