In the coming month but the OBR and the Bank of England will be updating their outlook for the economy. While the GDP growth expectations of economists have converged for this year and next, there is still some variance around predictions on the composition of growth. This is evident in the spectrum of forecasts for business investment.
EEF’s annual Investment Monitor, now in its fourth year, tries to shed some light on this question from a manufacturing perspective. Today we have launched our 2017/18 Monitor, in partnership with Santander.
The survey confirms the slowdown in investment spending signalled in last year’s report and the recent official data.
The report suggests that the future path of investment in finely balanced.
Spurring on new spending is the improved external demand environment and the need to replace machinery with new technology.
But Brexit related uncertainty is putting the brakes on more investment for around half of our respondents.
This is further hampering the pace of investment in automation, where manufacturers are already dealing with cash, certainty and capability challenges.
What’s happened to investment?
In last year’s Monitor manufacturers told us that after healthy capital spending for the past few years, manufacturing investment in capital equipment was set for a slowdown. At the time we were keen to stress that no collapse in spending plans was expected, but factors such as a change in the mix of assets in which companies invested in and a bit more uncertainty about the outlook at home and abroad were driving expectations of more subdued plans.
Our latest report shows that this has indeed been the trajectory of actual investment in new plant and machinery, with average turnover investment dipping slightly from 7.5% in 2016/17 to 6.5% in the preceding two years.
What does the future hold?
As we also pointed out last year, economists were still grappling with how the EU referendum outcome would play out in companies’ decisions on business investment. And given we are still in the thick of negotiations this situation has not become an awful lot clearer. Previous forecasts from the Bank of England and the Office for Budget Responsibility in August and March this year respectively, assume a gradual pick up in business investment as we get more clarity on Brexit outcomes through 2018.
Our central forecast judges that investment growth will be subdued in 2018 in light of ongoing uncertainty. The survey respondents this year show that the outcome is finely balanced, with our sample more or less split down the middle on their plans for the next two years.
Global growth is driving the need for more capacity
Diving into the reasons behind those planning more investment, the top driver is the need to replace and upgrade existing machinery. The pace of technological change together with recent step back in investment will be pushing ahead the need for catch up.
The demand picture is also improving – particularly in the rest of the world. Fewer manufacturers are citing this as a cause for less investment and more are looking at expanding capacity to take advantage of new opportunities.
The long standing skills challenge for industry is also leading some to drive ahead with investment, in order to reduce labour content in production and consequentially free up key skills for higher value activity, such as innovation. But as it turns out this shift towards greater process automation is not moving ahead at speed and requires numerous hurdles to be overcome along the way.
But Brexit casts a shadow and caution rules for many
Inevitably, one of the main barriers to more investment is the uncertainty that continues to come from the UK’s decision to leave the European Union. Our survey indicates that this uncertainty is not likely to bring investment to a crashing halt, but around half the manufacturers in our sample are investing only what is needed to meet the demands of existing customers or have put all plans on pause. There is remarkably little variation across company size or manufacturing sub-sectors in this split.
This would suggest that the best case investment scenario over the next two years for manufacturing is some early clarity on future relationships with the EU and a continuation of the synchronised upturn in global markets. But we would see risks to both of these variables given potential delays to EU trade talks and well recognised risks to global growth.
A need to push through the politics to support productivity
But we know investment in new machinery isn’t just about making more, it’s also about deploying technology for more productive manufacturing. Automation is one route to securing these gains and our Monitor puts a spotlight on what progress UK industry is making.
The headlines would align with some disappointing international comparisons that the UK is not a global leader in this respect. Some of this is down to strategy, but a big part of the challenge is traversing issues around cost, certainty and capability.
Government policy can’t fix all of these, but the forthcoming Budget and the final draft of the government’s industrial strategy – due soon – can help accelerate investment in new technology.
We’ll be setting out some of our detailed policy thinking in our Autumn Budget submission.