Manufacturing set for investment lift off

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Britain’s manufacturers are set to ramp up their investment with a focus on boosting skills, net zero and R&D, according to a major survey published by Make UK and RSM UK.

According to research carried out by Make UK and audit, research and consulting specialist RSM UK, six in ten companies plan to increase investment in the next two years, with investments in skills, capital and R&D the top priorities. The survey also shows that while manufacturers support the decision to make the Annual Investment Allowance permanent, the measure overwhelmingly backed to boost investment, the majority of manufacturers believe that an increase in Corporation Tax will make the UK less attractive as a destination for foreign investment.

According to Make UK analysis of official data, manufacturing investment still remains 3% below the last pre-pandemic year in 2019. While there are now clearly greater downside risks in the light of current market and business sentiment, the survey shows manufacturers see increasing investment as mission-critical to tackling supply chain disruption, labour shortages and increased energy costs, as well as improving productivity.

Increased manufacturing investment will also help drive overall total business investment, which is key to the Government’s aim of improving the trend rate of economic growth.

Encouragingly the survey also revealed that overall, the average investment in plant and machinery as a share of turnover has increased over the last five years. However, the survey shows that there is a clear difference between the average share of turnover invested by UK firms compared to foreign-owned firms with UK subsidiaries. According to Make UK, this could suggest that the UK plants have become a less favourable location for foreign companies with other locations.

Furthermore, the survey also showed that the cost of inflation is likely to act as a drag on investment by reducing the rates of return, while the prospect of significantly higher base rates will deter companies that may have built up substantial amounts of debt during the pandemic.

Commenting on the research, Fhaheen Khan, Senior Economist at Make UK, said: “Despite becoming increasingly digitalised, manufacturing remains a capital-intensive sector that must invest continuously to grow, innovate and remain internationally competitive. However, it’s clear that investment has not accelerated at the pace it needs to for some time.

“While the pandemic has clearly stopped some investment in its tracks and, despite current uncertainty, manufacturers recognise that upping their investment is fundamental to securing their future. If we are serious about boosting growth and improving productivity, then a step change in the UK’s business investment must be at the heart of Government policy. This must start with providing economic and political stability, as well as carefully designed and targeted incentives which properly reflect the life cycle of manufacturing investment.”

The factors likely to prove a barrier to increased investment by companies are a rise in inflation (37%) and increased interest rates (22%). Given the likelihood of both these increasing, the survey makes clear that companies will face significant hurdles to realising their investment ambitions.

To counter these potential barriers, Make UK believes it will be essential that Government taxation policy supports investment with incentives which are properly designed to fit with the life cycle of manufacturers’ investments and aligned with measures to ensure the UK is seen as an attractive overall destination for investment.

Two-thirds of companies believe increasing the rate of Corporation Tax to 25% will make the UK less attractive for foreign investment, over half (57%) said it would result in manufacturers investing less in capital, while a third said it would wipe out the benefits from capital allowances.

The survey of 196 companies, which is available at bit.ly/MakeInvestment, was carried out between July 4 and August 1, 2022.

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