Investment: the certainty deficit

Posted on 19 Dec 2016 by The Manufacturer

Question marks around demand, the post-Brexit political landscape and the economy in general have made manufacturers increasingly cautious, particularly regarding investment. Terry Scuoler discusses.

Last month, we published, with Santander, our annual investment survey, producing it just as economists struggle to pinpoint the impact of the Brexit vote on the real economy. The picture showed that after healthy capital spending in recent years, manufacturing capital spend is set for a slowdown.

Terry Scuoler, CEO, EEF
Terry Scuoler, CEO, EEF.

Before the alarm bells go off, this does not mean that manufacturers are abandoning their capital expenditure plans completely – but, they are investing at a slower pace.

The results are underpinned by three key drivers – weakening demand, a spike in short-term political unpredictability and a changing investment mix over the longer-term. If there’s one word to characterise the current macroeconomic landscape, it is ‘uncertainty’. This is the chief worry weighing down manufacturers’ confidence to invest over the next two years.

A persistently soft demand environment is not helping either, with about a third of manufacturers experiencing spare capacity, reducing incentives to invest. (In the survey, around 43% of manufacturers cited order book uncertainty as a reason for not increasing investment, compared to 21% in 2015.)

The investment mix is also changing, with strong investment in plant and machinery over the past few years prompting manufacturers to shift their focus towards investment in intangibles, which can provide a competitive edge in tough market conditions. For example, investing in innovation can help increase market share, secure future demand and improve overall productivity.

The survey also showed that the Brexit result has not yet changed underlying trends, with manufacturers’ investment intentions remaining broadly in line with where they were pre-referendum. Manufacturers still need to invest to have the capacity to fulfil existing customer requirements and satisfy current demand.

However, while the referendum did not trigger a change in manufacturers’ short-term investment behaviour, we’re not out of the woods just yet. The survey showed a sharp jump in manufacturers’ uncertainty about the political outlook – one in four companies saying this was the main reason for holding back investment, the biggest spike in the survey’s history.

Looking forward, given the range of potential trigger points likely over the next two years, including the activation of Article 50, as well as potential major investment decisions along the lines of that taken by Nissan, this uncertainty is unlikely to ease.

The fog around these trigger points means manufacturers are likely to pause investments that fall outside fulfilling current customer needs over the next two years. And, while our survey points to hesitation among manufacturers to invest heavily even before the referendum, the big fear for the Chancellor must be that marginal investment decisions are less likely to happen post-Brexit.

The past year has shown we are in uncharted political and economic territory. Let’s hope the New Year brings better news, greater reassurance and an easing of uncertainty.