British manufacturers have fanned fears that the economy is heading for a slowdown in 2017 after a survey showed a rise in factory bosses putting off plans to increase investment.
Since the EU referendum there has been a sharp rise in the proportion of executives saying political uncertainty is putting them off raising spending, according to a poll by the manufacturers’ organisation the EEF. It found a quarter of manufacturers cited this as a reason when asked in the wake of the vote, up sharply from 6% when the referendum campaign was getting under way in March.
The report comes days after the Bank of England renewed warnings that the British economy would slow next year, although it was forced to admit that its earlier fears of a severe near-term slowdown had proved unfounded. It also warned that slower corporate spending and a squeeze on household incomes would hit growth further out.
The EEF’s report found manufacturers would be likely to pare back their investment in plant and machinery over the next two years in response to growing worries about the prospects for demand as well as the spike in political uncertainty. According to the survey, 60% of manufacturers planned to spend the same or less over the next two years, up from 54% in 2015.
The poll of 306 companies was conducted in August. Since then, the Conservative party signalled at its October conference that the government would go for a hard Brexit deal that leaves the UK shut out of Europe’s single market.
The EEF report, carried out with the bank group Santander, also echoed other surveys that have pointed to an export boost for some firms as the pound’s sharp fall since the referendum has made their goods more competitive in overseas markets.
Manufacturers’ views of export prospects improved between March and August on the back of better demand in Europe and the United States, the EEF said. But that was offset by firms becoming more pessimistic about the prospects for the domestic outlook.
The EEF chief economist Lee Hopley said fears of an immediate collapse in business investment appeared to be unfounded for now and that UK manufacturers had been investing at a “healthy pace” in recent years.
She added: “But the spike in political risk should not go unnoticed. There is caution amongst businesses, which will inevitably make it more difficult to get big decisions across the line.”
The threat to business investment and companies’ hiring intentions increases the onus on the chancellor, Philip Hammond, to use his autumn statement later this month, when he will set out the government’s tax and spending plans, to shore up confidence.
Hopley added: “It’s over to the autumn statement now to press ahead with policies that further enhance the UK business environment for spending on modern machinery and increasingly important intangible investment.”
Economic indicators since the referendum have largely defied early predicions of a post-vote slowdown as consumers have continued to spend, unemployment has remained low and the housing market has held steady, for now. The Bank of England followed City economists last week in revising away its forecasts for the economy to grind to a halt in the run-up to Christmas.
But many experts warn that this is merely the calm before the storm and the real effects of the landmark vote to leave the EU will be felt after Brexit negotiations begin in earnest next year. The Bank is more optimistic on the near-term than it was in August and expects GDP growth of 2.2% this year but still expects a stretch of relatively subdued growth of around 1.5% each year between 2017 and 2019 (pdf).
A separate report on Monday underscores the scale of unease among businesses over the UK’s longer-term prospects. Businesses are preparing for a slowdown in profit growth and domestic sales in the next 12 months, according to a regular check on corporate confidence from the Institute of Chartered Accountants in England and Wales (ICAEW).
Confidence remained fragile in most sectors and business services and financial firms had seen the largest drop in sentiment on the back of growing fears of a hard Brexit, according the report, which used responses from 1,000 chartered accountants given from 26 July to 21 October.
With the weak pound pushing up inflation, thanks to higher import costs in the UK, companies are wary about raising pay and taking on new staff, the poll found. The average total salary growth expected in the next 12 months was just 1.6%. That compares with the Bank’s forecasts for inflation at a much higher 2.7% next year. If both forecasts prove correct, it would mean earnings fall in real terms.
Michael Izza, the ICAEW chief executive, said that a likely squeeze on households put companies in a difficult position.
“The chancellor should be under no illusion at the pressure UK businesses are experiencing. Inflationary burdens are pushing up costs but companies know that customers will not accept higher prices,” he said.
