A good day for UK economic data. Both GDP and business investment figures for Q2 2016 were revised upwards, from 0.6% to 0.7% for the former and from 0.5% to 1% for the latter. The first post-Referendum data release also showed monthly services output data for July coming in stronger than expected at 0.4% growth month on month. With the services industry accounting for three quarters of UK GDP, this is a good sign that the economy is trotting along despite the Brexit vote.
Manufacturing investment back to growth
The final GDP release for Q2 2016 also came with manufacturing investment figures for the same quarter. These were also positive showing that manufacturing investment grew by 0.8% between Q2 and Q1 2016. This was the second consecutive quarter of growth for manufacturing investment after a poor 2015 which saw four quarters of contraction.
However, the figures also show an underlying slowdown in manufacturing investment between Q2 and Q1 2016. When looking at the year on year figures, this slowdown becomes starker.
In fact, manufacturing levels of investment have yet to recover from their highs at the end of 2014/start of 2015. There are a number of factors weighing on manufacturing investment over the past few quarters:
- Soft demand: Since the end of 2014 the sector has been hit by a range of global headwinds – such as the end of the commodity super-cycle, weakness in key export markets and the downturn in the oil & gas industry – opening up a margin of spare capacity, particularly in the capital and intermediate goods markets.
- Strong past investment: Robust investment over the past few years – manufacturing investment is 27% above its 2008 trough – means that most manufacturers are well-invested in their capital. In combination with a softer demand environment, some of the impetus for large-scale investments is lower than in previous years.
- Referendum uncertainty: The slowdown in investment between Q2 and Q1 2016 could be an indication of manufacturers’ hesitation splash the cash before the result of the referendum was known. However, business intelligence since the Referendum indicates that most manufacturers are pressing on with their existing investment plans.
The sectoral picture
While a soft demand environment has been a consistent theme for the manufacturing sector over the past couple of years, we saw some of the global headwinds responsible for that weakness unwinding at the beginning of this year. This could have prompted manufacturers, even in some of the hardest-hit sectors like metals and mechanical equipment, to step up their capital expenditure. This could either be the result of putting some more capacity in place or efforts to boost productivity.
The sectoral breakdown shows growth in all manufacturing sub-sectors in Q2 2016, with food and drink the only exception. Nevertheless, with some intense price competition and the drive for automation gaining momentum in the sector, we expect investment in the food and drink sector to pick up in the following quarters.
What next for manufacturing investment?
Today’s figures show a pick-up in manufacturing investment in the first half of 2016 but with levels still trending below their highs in the end of 2014 and beginning of 2015. The relative resilience of manufacturing investment in the run up to the Referendum is undoubtedly a good sign.
We expect manufacturing investment to continue to grow modestly in the second half of the year despite the referendum result. We expect it to grow because manufacturers are unlikely to scrap their existing investment plans when no change is expected in the UK’s relationship with the EU for at least the next two years. But we expect it grow modestly because manufacturers are also unlikely to make any large-scale investments in a macroeconomic environment characterised by uncertainty and a high concentration of risk.