Brexit fears are holding back manufacturing investment, study finds

Britain’s manufacturers are putting the brakes on investment plans as uncertainty over Brexit makes them more reluctant to spend money on new factories and machinery, a report reveals.

The amount invested by UK manufacturers in new plant and machinery has slowed to 6.5% of turnover, from 7.5% last year, according to a survey by EEF, the industry trade body, as companies press the pause button until there is further clarity on a Brexit deal.

Britain’s business community has warned the government that it must urgently agree a Brexit transition deal with the EU or risk losing UK jobs and investment.

“With global demand on the up, conditions should be ripe for industry to make new investments in capacity and productivity-enhancing technology, but Brexit means the future outlook for investment is not clearcut,” said Lee Hopley, EEF’s chief economist.

The 328 companies taking part in the annual EEF/Santander investment monitor were almost evenly split over whether they intend to increase spending in the next two years.

A small majority, 51.1% of manufacturers, intended to spend more on plant and machinery, either to replace obsolete equipment or to take advantage of new opportunities on the back of an improved global outlook.

For the other half, uncertainty over the UK’s exit from the EU was holding back planned investment, while there was also little focus on investing to improve process efficiency.

Hopley said the chancellor, Philip Hammond, should use his forthcoming budget on 22 November to introduce measures that would encourage business investment.

“Political uncertainty is adding to the hurdles of cost and lack of skills in holding back spending on automation technology,” she said. “The forthcoming budget can at least start to address the latter of these challenges, starting with an ambitious industrial strategy that tackles barriers to investment head on and ensures UK manufacturers are equipped to compete for the future.”

Official figures to be published on Wednesday are expected to show UK growth stalled at 0.3% in the third quarter, having grown at the same rate in both the first and second quarters of 2017.

Economists said a sharper-than expected fall in retail sales in September was likely to weigh on the third-quarter growth figure, which is also expected to reflect a sharp drop in construction output over the period.

However, George Brown, an economist at Investec, said a weak growth rate of 0.3% in the third quarter was unlikely to scupper the Bank of England’s plans for an interest rate rise at its November meeting. If the Bank’s monetary policy committee does raise rates from an all-time low of 0.25% next month, it would be the first increase in more than a decade.

Another leading UK business trade body, the British Chambers of Commerce (BCC), also urged the government to use next month’s budget to help companies prepare for Brexit rather than prioritise “goodies and giveaways”.

“The best possible Brexit deal won’t be worth the paper it’s written on if conditions for growth aren’t right here at home,” said Adam Marshall, director general of the BCC. “The chancellor has a unique chance to move the dial on growth and productivity now, leaving the UK in a position to succeed over the long term. Action to slash the up-front costs faced by business, to incentivise investment, and to improve mobile coverage and infrastructure would lead to a real boost to productivity, wages and trade.”

The lobby group’s proposals included a special Brexit investment allowance, to incentivise business investment during the process of leaving the EU.

“At a critical moment for the UK economy, the chancellor must be bold and deliver a big budget that prioritises economic confidence and investment,” Marshall said. “A budget that prioritises goodies and giveaways rather than future-proofing the economy would be a dereliction of duty by the government as a whole.”

The Federation of Small Businesses called on Hammond to use his budget to provide investment to deliver on promised improvements in the UK’s broadband and road networks.

The body urged the chancellor to make good on its 2015 commitment to a universal service obligation, providing UK-wide access to broadband by 2020. It also called on the government to provide support for the major road network initiative, which aims to increase investment in routes under local authority control in England.

“The UK has slower download speeds than Romania, Bulgaria and Thailand,” said Mike Cherry, the FSB national chairman. “We welcome the government’s commitment to an ambitious industrial strategy. But clearly we’re not going to have an economy of highly paid, highly productive workers when a significant proportion of businesses can’t even access the internet.”