NEW YORK (Reuters) - A majority of middle market chief financial officers have a positive outlook regarding economic growth in 2018, but confidence in the ability of the current administration to achieve policy change is mixed, according to Citizens Commercial Banking’s inaugural national survey of 300 middle market CFOs.
The bank surveyed CFOs at companies with annual revenue between US$25m and US$2bn. The survey was conducted at the end of the third quarter and the results were published Thursday.
Half of the respondents expect economic growth to improve in 2018 while another 30% believe economic growth will remain the same. Only 20% expect the growth trajectory to worsen.
Optimism about the direction of the economy also translates into confidence about corporate growth, with more than half of the CFOs (55%) surveyed saying they are extremely confident their company will hit growth targets. Thirty-six percent are moderately confident and only 9% are not confident.
All eyes are on efforts underway in Washington to implement major tax policy changes that would likely significantly lower corporate rates.
“By and large, the CFOs we surveyed are watching the prospects for tax reform closely,” said Steve Woods, head of Corporate Banking for Citizens Commercial Banking in a statement. “However, confidence in the new administration’s ability to enact its pro-business agenda appears to be mixed, and companies are continuing to focus on self-funding of growth initiatives.”
At 60% a solid majority of CFOs believe anticipated changes to federal tax policy will amplify company growth, but expectations for broader policy change as a driver of corporate growth are split.
On trade policy (55%), federal regulatory policy (55%) and monetary policy (55%), a majority of CFOs said the impact on business growth would be moderate. The remaining respondents were otherwise divided on whether the potential impact of the policy changes in the three respective areas would be positive or negative.
“Companies are skeptical regarding trade and regulatory policy in Washington, which is providing a little bit of headwind to broader optimism about the future of the economy,” Woods told Thomson Reuters LPC. “Corporate tax rates will go down and will give middle market companies some resources to reinvest, but CFOs and CEOs are also thinking more strategically - in a highly competitive market - about effective ways to generate earnings.”
Among opportunities for growth, improving operational efficiencies is a key objective for CFOs, with more than 80% citing this as a focus in the next 12 months. Nearly half of those surveyed said they anticipate expanding into new domestic markets as well as developing a pipeline of new products in the next year.
Merger and acquisition activity is also on the minds of CFOs, particularly at upper middle market companies, or those with annual revenue greater than US$500m. Two-thirds of those companies expect to pursue the acquisition of another company over the next three years. By comparison, 23% of lower middle market companies, defined as those with annual revenue between US$25m to less than US$500m, expect to acquire another company over the same period.
“Corporate America, including middle market businesses, has never had more cash. In an issuer friendly debt market with record low rates, companies are very aggressive. We are somewhat bullish on the M&A dynamic heading into 2018,” Woods said.
Reporting by Leela Parker Deo; Editing By Lynn Adler