To say that the EU referendum has divided opinion about the UK economic outlook would be an understatement. And while the divergence of views on overall growth in the next few years is large, the forecasting spectrum on the path of investment is enormous, with some predicting that private investment will be the first, immediate casualty of uncertainty, while others see recent investment commitments as a sign that UK businesses will push through Brexit.
EEF’s latest research, in partnership with Santander, provides a manufacturing perspective on the likely trajectory of investment in the next two years. The research is based on surveys of nearly 300 companies conducted before the referendum (in March) and after (in August).
Inevitably, the most likely outcome for firms’ capital expenditure plans is somewhere in the middle of the forecasting spectrum – but not for all the reasons you might expect.
Up, down, sideways – investment in the next two years?
The results of our survey show that after healthy capital spending for the past few years, manufacturing investment in capital equipment is set for a slowdown over the next two years. Before the alarm bells go off, this does not mean that manufacturers are canning their capital expenditure plans, but rather, that they’re investing at a slower pace compared to previous years.
Critically, this was the trend that we were seeing before the referendum and therefore not necessarily a Brexit-related phenomenon.
If not Brexit, then what?
Brexit isn’t irrelevant – but I’ll come back to that in a sec.
The results are largely underpinned by two key drivers weighing on overall investment levels; demand uncertainty in the short-term and a changing investment mix over the longer-term:
On the first of these dampening factors – if there’s one word to characterise the current macroeconomic landscape that’s uncertainty. Order book uncertainty is the top reason weighing on manufacturers confidence to invest over the next two years and this mainly reflects dwindling sentiment about the UK economic outlook. This has increased between our February and August surveys, while there has been some offsetting improvement in the export outlook – partly demand-driven, partly exchange rate-driven.
Looking at the investment mix – strong investment in plant and machinery over the past few years is prompting manufacturers to shift their focus towards investments capable of giving them a competitive edge in tough markets conditions. A good way of doing that is through investment in innovation; this can help manufacturers increase their share in product markets and secure future demand, as well as improve overall productivity. The proportion of manufacturers agreeing that investment in intangibles is becoming more important than spending in plant and machinery has grown exponentially in our survey, from 31% in 2014 to 60% in March 2016.
Political uncertainty more prominent
And back to Brexit. While our relationship with the European Union hasn’t changed and is unlikely to over the time horizon of our survey, the proportion of manufacturers citing political uncertainty as a factor holding back investment has more than quadrupled to 21% from just 5% in August. This is inevitably adding another layer of complexity to manufacturers’ investment plans.
So what does this all mean?
- Investment growth in plant and machinery is undoubtedly heading south over the next few years, but manufacturers’ aren’t taking their eye off investments in areas that will sustain their competitive advantage over the longer term.
- The referendum outcome hasn’t led to a widespread pause of investment plans, but nor is it driving lots of investment to take advantage of new found opportunities.
- The risks to me still look skewed to the downside, with the politics of Brexit dominating the media agenda, there are still lots of potential triggers points that could turn investment plans from cautious to cancelled.
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