Brexit anxiety is forcing the manufacturing sector to stockpile cash allowances to record levels, while industry investment plummets to a four-year low under similar strains – according to a leading accountancy firm.
Political uncertainty and limited government support are among a multitude of fronts on which UK manufacturers are currently fighting and at what the business advisory firm BDO described as a “critical juncture” for the industry.
Capital allowances claimed by manufacturing reached a six-year high of £12.7bn in March up from £11.8bn the previous year; yet businesses are choosing to postpone capital expenditure in favour of building up their cash reserves as trade arrangements relating to Brexit become more complicated.
While the increase in capital allowances claims is largely positive, a sustained decline in investment could leave the UK at the mercy of its international rivals and increasing the Annual Investment Allowance (AIA) from its current rate of £1m to £5m for the next five years could boost industry confidence, said BDO.
Manufacturing capital investment fell by 16% to £6.9bn in Q2 2019, down from £8.2bn in Q1 – the lowest level since Q1 2015.
But the negative economic impact of companies delaying investment is also being felt in other ways, BDO added.
Investment by manufacturing businesses at the lowest level since the first quarter of 2015 (£bn), courtesy of BDO
In Q2 2019, UK productivity fell by 0.5% – its fastest rate in five years, according to ONS (Office for National Statistics) data. The Bank of England estimates that the UK economy has taken a 3% hit in growth over the past three years as a result of the vote to leave the European Union.
In the face of the “most significant digital revolution” in history, increasing the AIA from its current rate would more than double projected business investment growth and increase labour productivity almost five-fold by the end of 2023, according to BDO’s Productive Nation report.
Incentivising manufacturers to invest capital during a Budget announcement this month is a missed opportunity as political parties instead squabble over Brexit, the report notes.
“UK manufacturing is at a critical juncture. It is facing the most significant digital revolution in its history while dealing with softening export markets, stiff global competition and domestic conditions asphyxiated by political uncertainty,” said Tom Lawton, head of manufacturing at BDO.
“The risk is that manufacturers will continue to postpone their capital investments until they have a clearer view of the future. A mix of more generous government support and clarity about trade post-Brexit is needed urgently to stimulate investment.
“While the increase in capital allowances claims is positive, it doesn’t take us anywhere near where we need to be.
“This month’s Budget would have provided the government with the prime opportunity to incentivise greater capital investment, but now even that’s been caught up in the Brexit crossfire. We’ll be well into 2020 before another Budget will see the light of day,” he added.
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By Rory Butler, Staff Journalist