By Jonathan Davies

The UK's manufacturing industry is planning to invest more money over the next two years to boost productivity, according to the manufacturers’ organisation, EEF.

A overwhelming 95% majority of the firms surveyed said they plan to increase investment in productivity.

The survey shows manufacturers’ investment in the latest machinery has grown rapidly in recent years to keep up with rising demand and to make good on past cutbacks. The research shows more growth in investment in machinery and equipment to come, but a slower pace of increase reflects a switch in focus to ‘intangibles’ such as training, recruitment, R&D, software and marketing in order to derive a competitive advantage.

While productivity is a major investment driver, the levels of new spending are being affected by confidence in the demand outlook, emerging capacity constraints and diversification into new business areas. However, growth scenarios in Europe could either boost or bust manufactures’ capital expenditure plans for the coming years with a sustained recovery across the region pushing investment levels higher, while a break up would send growth into reverse for many companies.

The survey also shows that a third of manufacturers believe the UK to be a more competitive place to invest than two years ago. According to EEF, this is due to the supportive industrial policy pursued by the previous coalition which has sent favourable signals for the UK as a place to invest. EEF is urging the new government to maintain these policies, especially the supportive schemes backing skills, science and innovation.

Commenting, Ms Lee Hopley, Chief Economist at EEF, said: “UK manufacturers’ on-going commitments to invest in technology, skills and innovation provide positive signals about the sector’s future growth and productivity prospects. Some of the barriers that companies’ investment strategies came up against following recession have clearly faded, but it is vital that their current plans stays on track.

“Some sectors are facing some headwinds from more uncertain demand, but big questions about the future economic prospects for European partners present one of the biggest external risks to firms ability and confidence to press ahead with vital investment.

“UK efforts to build solid policy foundations are still needed to support the efforts of investment-intensive and highly productive sectors — like manufacturing — if the UK economy is to return to a more sustainable and balanced path of economic growth.”

The report shows that manufacturing investment has recovered strongly since the financial crisis increasing by almost half. It also shows that manufacturers invest a high proportion of their output, almost one fifth of Gross Value Added (GVA) in 2014.

Productivity is the key driver of manufacturing investment with 95% of companies in the survey spending to improve productivity in their business. The results show that manufacturers are broadening the areas of investment with intangibles continuing to gain in importance, with 28% of companies saying this was more important than investing in plant & machinery, up from 4% last year.

In line with this, almost three quarters of companies are planning invest in workforce and management skills and a third investing to boost innovation. Investing in plant & machinery continues to be crucial target for productivity improvements in the manufacturing sector. Around 80% of manufacturers will invest in plant & machinery to improve their productivity.

The survey confirms this trend with 4 in 5 companies planning to spend the same or more on plant & equipment in the next two years. The need to replace obsolete equipment covers the lion’s share of investment plans with 60% of manufacturers increasing investment to improve their productive capacity.

The positive economic outlook accounts for a similar proportion of companies citing increased investment plans, with confidence concentrated in the prospects of the domestic market. Export demand has also been subdued and was cited by around one in five manufacturers as a reason to not increase investment.

According to EEF, this is due to the supportive industrial policy pursued by the previous coalition which has sent favourable signals for the UK as a place to invest. The survey also shows that a positive balance of 32% of manufacturers believe the UK to be a more competitive place to invest than two years ago. EEF is urging the new government to maintain these policies, especially the supportive schemes backing skills, science and innovation.

As part of the survey, EEF also conducted scenario planning for the UK and Eurozone. This showed that 56% of companies would increase investment if the Eurozone recovered strongly. Conversely, 41% of companies would invest less if the Eurozone broke up with only 8% of respondents investing more.

The results clearly highlight the importance of the UK’s relationship with Europe for British manufacturers. The Eurozone remains the biggest market for UK exports with 8 out of the top 10 importers of UK goods being in the Eurozone. Current developments around Europe will therefore have major implications for UK manufacturing.