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CFOs preparing for revenue decline as unparalleled global recession underway

The economic cost and corporate cost of the fallout from the COVID-19 pandemic continues to become more apparent, the further into the crisis we progress. Fitch Ratings has made further large cuts to global GDP forecasts in its latest Global Economic Outlook (GEO) in response to coronavirus-related lockdown extensions and incoming data flows.

“World GDP is now expected to fall by 3.9% in 2020, a recession of unprecedented depth in the post-war period,” said Brian Coulton, chief economist at Fitch Ratings. “This is twice as large as the decline anticipated in our early April GEO update and would be twice as severe as the 2009 recession.”

The decline in GDP equates to a US$2.8 trillion fall in global income levels relative to 2019 and a loss of US$4.5 trillion relative to Fitch’s pre-virus expectations of 2020 global GDP. Fitch expects eurozone GDP to decline by 7%, US GDP by 5.6%, and UK GDP by 6.3% in 2020.

The biggest downward revisions are in the eurozone, where the measures to halt the spread of the coronavirus have already taken a very heavy toll on activity in Q1 2020. Italy’s 2020 GDP forecast has been cut to -8% following official indications that GDP already fell 5% in Q1 2020 and after a recent extension of the lockdown there. Official estimates also point to France and Spain experiencing near 5% declines in GDP in the quarter, with the Spanish outlook hit particularly hard by the collapse in tourism. Even allowing for a slightly less negative outlook for Germany - where the headroom for policy easing is greater and the benefits of a recovery in China will be felt more directly - eurozone GDP is expected to shrink by 7% this year.

No country or region has been spared from the devastating economic impact of the global pandemic. Fitch says it now anticipates that GDP in both the US and the UK - where lockdowns started a little later than in the eurozone - will decline by more than 10% (not annualised) in Q2 2020, compared to forecasts of around 7% in its early April update. This will result in annual GDP declines of around 6%, despite aggressive macro policy easing.

A notable feature of this update is sharp further downward revisions to GDP forecasts for emerging markets (EM). Falling commodity prices, capital outflows and more-limited policy flexibility are exacerbating the impact of domestic virus-containment measures; Mexico, Brazil, Russia, South Africa and Turkey have all seen big GDP forecast adjustments. With China and India both now expected to see sub-1% growth, Fitch says it expects an outright contraction in EM GDP in 2020, a development unprecedented since at least the 1980s. The ratings agency expects supply responses and a relaxation of lockdowns to help oil prices to recover in the second half of the year from current lows, which are being  exacerbated by storage capacity issues in the US and elsewhere.

Several major economies recently have extended lockdown measures, and Fitch says it now needs to incorporate national lockdowns of around eight or nine weeks as a central case assumption for most major advanced economies. This contrasts to its previous assumption of around five weeks. An extra month of lockdown would, all else being equal, reduce the annual flow of income (GDP) by around 2 percentage points.

In addition, incoming data - including official ‘flash’ GDP estimates for Q1 2020, monthly activity indicators for March and weekly labour market data - point to a daily loss of activity through lockdown episodes of closer to 25% than the 20% assumed previously. This is consistent with the recently released outturn for growth in China when GDP declined by 10% quarter-on-quarter in Q1 2020, a period encompassing entry to and exit from a five-week lockdown.

“Macro policy responses have been unprecedented in scale and scope and will serve to cushion the near-term shock,” added Coulton. “But with job losses occurring on an extreme scale and intense pressures on small and medium-sized businesses, the path back to normality after the health crisis subsides is likely to be slow. Our forecasts now show US and eurozone GDP remaining below pre-virus (Q4 2019) levels through the whole of 2021.

Over half of CFOs expect 30% revenue decline in 2020

Bearing in mind the scale of the downturn, it is understandable that corporates are bracing themselves for a major revenue hit this year. As such, a Gartner survey of 145 CFOs and senior finance leaders on 12 April 2020 has revealed 51% of respondents said they were preparing for a revenue contraction of up to 30% this year due to the coronavirus pandemic. Some 28% of respondents believe the impact to their organisation’s revenue could be even higher than 30%.

“Most CFOs have told us they are using the most severe downside scenarios to inform their decisions right now,” said Alexander Bant, practice vice president, research, for the Gartner Finance Practice. “This is leading CFOs to consider drastic cost management actions across April and May. When CFOs were asked how these downside scenarios are impacting their ability to fund long-term growth investments, 70% of CFOs said they are now showing caution in this area.” 

While 15% of CFOs were planning to completely suspend all or most long-term investments, half (50%) said they were suspending them on a selective basis. An additional 30% said they had no plans to suspend most investments, and the remaining 5% said they are already replacing previous long-term investments with new investments.

“We know from studying companies that were successful during prior business cycle turns, that investing in growth bets ahead of curve is vital to come out on top,” said Bant. “Right now, we see CFOs clamping down on funding for these growth bets. The companies that emerge as leaders in their industry will quickly pivot and replace previous long-term growth investments with new ones. Currently though, only 5% of companies appear to be making these changes.”

For CFOs to guide the business through rethinking these investments, they need a solid theory of how their customer is changing. In normal conditions, the most effective CFOs spend between 5-10% of their time with customers. In crisis mode, Gartner recommends CFOs to spend more time on the front line listening to how their key customers are modeling out the recovery and what things will change.

CFOs also indicated in the poll that most expect little or no delay to closing their books at the end of Q1 2020. Just 3% expected a delay of more than three days, 65% expected no delay, and 28% expected a delay of three days or less.

“These results show that the finance function is generally coping well with remote working and is able to carry out a lot of work as usual,” said Bant. “In fact, recent data from another Gartner poll showed CFOs warming to the idea of remote working as a cost management tactic.”


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