This morning EEF published its annual Investment Monitor report. The survey tracks manufacturers’ investment plans in plant & machinery over the next two years. This year’s report is also concerned with the role of investment – and manufacturing investment in particular – in the UK’s productivity performance.
The report offers some revealing insights into the UK’s investment and productivity trends as well as investment patterns in the manufacturing sector for the next two years.
The UK’s productivity track-record has been poor
The UK’s productivity shortfall, commonly referenced as the ‘productivity puzzle’, has been widely publicised over the last couple of years. The ‘puzzle’ points to the fact that productivity growth in the UK has flat-lined since the recession and fallen behind that of most of its G7 competitors.
Investment Monitor 15 shows that, in fact, productivity in the UK has been poor for some time now. From 1970 to 2007, productivity in level terms in the UK has trended about 6% below the G7 average.
The UK’s investment performance has not been spectacular either
One of the reasons identified for weak productivity in the UK is under-investment. Taking average figures from 1970 to 2014, the UK has the lowest historic share of investment to GDP in the G7 – 18.2% compared to 21.2%.
Despite a strong post-crisis rebound, total fixed investment was still 0.7% below its pre-crisis peak in 2014 and a whopping 24% below its pre-crisis projected trend.
But manufacturing bucks whole economy trends
The UK’s historic productivity and investment performance has been weak. However, not all sectors are equal.
Productivity growth in manufacturing between 1972 and 2007 has been 3.4% on average per annum compared to 2.3% for the economy as a whole. Post-crisis the gap has widened even further; from 2008 to 2014 productivity in manufacturing has grown by 5.9% whereas whole economy productivity has shrunk by 0.7%.
Manufacturing is also the most investment-intensive sector in the economy; between 1998 and 2014 the sector spent on average 16% of its GVA compared to 9% for services and 11% for the whole economy.
Manufacturers to continue investing in productivity
Investing to improve productivity is fundamental to any manufacturer’s business model. Indeed our survey shows that 95% of manufacturers are planning to invest to improve their productivity over the next two years.
They also identify a number of diverse investment areas to achieve this. About 80% of manufacturers plan to invest in plant & machinery (58% in machinery equipment, 25% in new ICT systems and 21% in automation), 72% plan to invest in skills (58% in workforce skills and 31% in management) and 33% plan to invest in innovation.
Manufacturers set to invest solidly over next two years
Slightly less than half of manufacturers in our survey (46%) plan to increase investment over the next two years. A number of enabling factors are at play.
A key driver is replacement-cycle effects as 60% of manufacturers will increase investment to replace obsolete machinery – up from 46% in Investment Monitor 2014. Improved demand is also significant with 36% increasing investment as a result of improved domestic demand.
Finally, a balance of +33% manufacturers think the UK is a more competitive location for investment than it was two years ago.
….but at a slower pace of growth
While manufacturers are to continue to invest healthily in their business, the pace of growth is set to slow. Slightly more than half of manufacturers (54%) plant to invest the same or less in the next two years compared to the previous two years.
The report identifies a combination of short-term and long-term dampening factors affecting the level of those investments.
In the short-term, oil & gas supply chain effects and weakness in key export markets are affecting the demand outlook. The collapse in North Sea activity has caused a simultaneous collapse in domestic demand and increase in spare capacity in manufacturing sectors in the oil & gas supply chain, while weakness in key export markets has led to a deterioration in confidence in the export demand outlook.
In the long-term, less need for catch-up investment and the increased importance of intangibles are constraining the pace of growth in plant & machinery investment. Robust capital investment since 2010 (manufacturing investment has increased 48% from its trough) has diminished any need for rapid catch-up investment in manufacturing, while the proportion of manufacturers citing the relative importance of investment in intangibles compared to plant & machinery had risen exponentially since Investment Monitor 14.
This slowdown is not a major cause for concern. The short-term factors are highly cyclical and should dissipate by the end of 2015, while the long-term factors indicate shifts in manufacturing investment patterns rather being signs of under-investment in the sector.
Support for productive and investment-intensive sectors
Manufacturing is a highly productive and investment-intensive sector of the UK economy. Investment Monitor 15 confirms that this trend is likely to continue over the next two years.
With productivity likely to form a key part of the new Government’s economic plan, supporting productive and investment-intensive sectors – like manufacturing – looks like a good place to start.