On Monday we published Investment Monitor 2017/18 in partnership with Santander. Lee blogged on the day about the key highlights of the report, and today we are going to dig a little deeper into the report’s findings, as well as take a look at the sectoral picture.
The 50/50 split
Perhaps the most interesting aspect of this year’s Monitor is how evenly manufacturers are split when considering their future investment plans. 51.1% intend to spend more on plant and machinery, while 48.8% intend to spend the same/less. So what’s behind manufacturers’ investment intentions being so finely poised?
Improved outlook supporting first half…
On the one hand, the improved global outlook, illustrated through healthy growth and PMI statistics across the Eurozone, US and China appear to be encouraging manufacturers to look past their brexit related uncertainties to a certain extent, and increase investment. This is perhaps most evident when looking at the number of manufacturers citing order book uncertainty as a reason for not investing. Last year a hefty 42.8% and 38.4% were being deterred in our two surveys due to order book uncertainty, not all that surprising given the EU Referendum Result and its fallout.
Since then however, the admiral performance of the UK economy and the manufacturing sector in particular (illustrated in yesterday’s GDP data) has seen this figure drop to 23%. This is encouraging half of our manufacturers to up their capital expenditure spending, to replace outdated or obsolete equipment, as well as take advantage of the healthy climate and expand into new areas.
The Sector Picture
Encouragingly this is also the case across all manufacturing sub sectors, where order book uncertainty as a reason for not investing has fallen since 2016. Special mention must go to the capital goods and much maligned metal sectors however, which are benefiting in particular from the improved demand environment after a number of years of subdued growth. The pick-up in these sectors are encouraging manufacturers to invest, with half of all manufacturers in both of these sectors planning on spending more on plant and machinery over the next 2 years, compared to 23% and 38% in Investment Monitor 2016.
Conversely sectors which are less export intensive, for instance those in the construction supply chain such as rubber and plastics, while they have seen order book uncertainty fall, they are not benefiting to the same extent, given their reliance on the domestic market. Indeed 32% of manufacturers in the rubber, plastics and chemicals sectors cited worsening confidence in the domestic demand environment as a reason not to invest. The weaker domestic environment is therefore likely to be behind order book uncertainty remaining relatively stable in these sectors. Still…not bad all things considered.
For the other half Brexit uncertainty…but other underlying factors too
For the other half of manufacturers in our survey, as Lee blogged, Brexit appears to be holding back investment plans. However this is not the only overriding factor. Our survey suggests that there is a concerning underlying issue that is hindering investment plans.
It appears manufactures do not feel they need to invest. The top reasons cited for not investing were “we have no need for more investment” and “we have spare capacity”.
The reasons for not investing are therefore conscious decisions, rather than those dictated by the macroeconomic environment, and these manufacturers are instead choosing to rely on their past capital expenditure, given that they have no need for more capacity to expand output.
However, investment is not just a tool to expand capacity, it is also a vehicle to improve the production process, to improve efficiency and ultimately productivity i.e. to produce stuff “better”. Our survey results suggest that many manufacturers are overlooking technology, and in particular automation technologies, when it comes to their investment decisions, and are consequentially missing out on the benefits they offer. This is backed up by international data, which shows the UK invests significantly less in machinery and robots compared to our international counterparts.
This is a real concern, and while government cant solve all of the problems, next month's Budget, as well as the final draft of Industrial Strategy can go some in way in helping to bridge this gap.
Stay tuned for the last of our three blogs on this years Monitor, when we will be delving into this issue in more detail - which manufacturers are investing in automation? What are the barriers stopping other manufacturers from following suit? And what can be done to overcome these barriers?