What's happening with manufacturing investment?

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Last week’s national accounts release from ONS confirmed the reasonably solid GDP growth for the UK in 2018q2, but the breakdown of recent trends in investment made for pretty bleak reading. Manufacturing investment contracted quite sharply in the first half of the year. EEF's fifth annual Investment Monitor, in partnership with Santander, takes a look at whether this is a sign of things to come.


Manufacturers have been investing

In line with official statistics pointing to growth in manufacturing business investment in 2017, our latest survey shows a pick-up in the % of turnover invested specifically in plant and machinery in the past two years.

And some have plans to do more

For around a third of companies, there are further increases in machinery spend in the pipeline. The requirement to replace and upgrade equipment is, as always, the main reason for companies upping their capital expenditure plans.

Also on the rise as a driver for more investment is the need to reduce the labour content of production – the proportion of manufacturer’s citing this as a major factor in their decision-making has been steadily increasing over the past three years. No doubt the continuing pressure from skills shortages and the advances in available technology in support of greater automation are behind this. Additionally, the loss of (or potential loss) of EU nationals in the workforce could also be playing into choices on investment.

Most will do the same or less in the next two years

This isn’t the only appearance Brexit makes in our survey … but more of that in a sec.

2018-sameorless

The majority of companies are looking at investment plans that are at the same or lower levels in the next two years. And with two thirds of companies indicating these intentions, that’s the weakest outlook in the five year history of our survey. The picture is gloomier still if you consider only SMEs – three-quarters of that group are planning to hold or cut investment levels.

Critically, this is not a factor of business need. Following previous periods of robust growth, well invested manufacturers have less need for big increases, but this is clearly not a factor facing companies in the next two years, with a quarter citing this as a reason not to increase investment plans, down from 40% a year ago.

Instead, it’s about uncertainty – when the order outlook is difficult to gauge and the political situation could have any number of outcomes for UK companies, why invest now? These are the stand out drags on likely investment in the coming years. 

2018-uncertainty

..but there is still a need to up spend on a range of business priorities

This worries economists and manufacturers’ recognise that past investment hasn’t been optimal for all their business objectives. The extent to which investment has been sufficient to avoid additional recruitment to meet demand is finely balanced. Indeed a net balance of SMEs agree that it hasn’t. A further evidence point that there is an investment link to the UK’s recent poor productivity performance.

Smaller companies also don’t feel as though their investment history has allowed them to keep pace with technological change.

Brexit is a mountain sized hurdle

…and specifically to Brexit. We know political uncertainty is a providing a hurdle to investment. The UK’s exit from the EU isn’t the only source of it but it is a big one, and one that seems to be getting bigger. There has been a shift in the proportion of companies saying the Brexit process is having a negative effect on investment plans, with a not inconsequential rise in the share of companies saying that it is leading them to hold off completely.

2018-brexit

And the main area of investment to suffer is plant and machinery, followed by new and improved buildings. Though R&D programmes aren’t immune either, with 30% of companies who say Brexit is holding back investment identifying innovation as an area affected.

Remember that small productivity issue we were talking about…..?

So, the conclusion isn’t great. The best of the UK’s investment performance is definitely behind us, but that hasn’t been sufficient to meet demand or to make the kind of progress on technology adoption that companies think is necessary. Until the clouds of uncertainty lift, the outlook is pretty weak and definitely more so than competitors. This is not how we will get manufacturing productivity growth back on track.

Watch our two minute video on what's happening with manufacturing investment below.

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Chief Economist

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