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UK manufacturing investment set to fall as recession looms

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Investment in British manufacturing is set to fall for the first time in nearly two years as companies start to cut spending as a recession looms next year.

Make UK, the trade body, said the balance of its members reporting an increase in investment intentions during the past three months of the year dropped to minus 5 per cent from plus 7 per cent. This was the first time in seven quarters, since the height of the coronavirus pandemic, the measure had turned negative.

The quarterly Make UK/BDO Manufacturing Outlook survey published on Monday also forecast output would fall 4.4 per cent this year, compared with a “very strong” 2021, and warned further declines would follow.

In its September forecast, Make UK had still anticipated growth of 0.6 per cent for the year and said the change in outlook highlighted “the extent to which conditions for the sector have weakened significantly, especially in the final quarter of the year”. It added that it expected a contraction of 3.2 per cent in 2023 as the UK entered recession.

The balance of manufacturers reporting an increase in orders also fell sharply in the final quarter, from 15 per cent to 6 per cent, with the measure dropping to minus 2 per cent for the first three months of 2023.

The data will add further pressure on to the government to find ways to stimulate business investment, with companies across the country warning they will rein in spending as economic conditions worsen.

The decline also comes ahead of the end of the government’s tax incentives designed to boost business investment — the so-called super deduction tax break — next spring.

Manufacturers have been hit by higher costs, especially in the more energy-intensive industries, while many are still struggling with the costs and extra paperwork caused by Brexit.

The government has helped businesses with energy costs for six months, but business leaders warned that the cliff edge when this support ended in March could lead to widespread business failures if prices remained high. Meanwhile, with the UK and other parts of the world facing recession next year, companies are worried that demand for their products is also falling.

Make UK said that deteriorating economic conditions were exerting a “vice-like grip on the sector”, with increasing costs, tighter fiscal and monetary policy and weakening consumer demand “forming a perfect storm”.

The industry has grown frustrated with the lack of government efforts to help a crucial sector of the British economy, with no sign yet of a rumoured new industrial strategy or pro-growth measures to boost investment, such as new tax incentives.

Stephen Phipson, chief executive of Make UK, said that there was “simply no sugar-coating the outlook for next year and possibly beyond”. 

He added: “The UK risks sleepwalking into an acceptance that little or no growth is the norm. Government needs to work with industry as a matter of urgency to deliver a long-term industrial strategy that has growth at national and regional levels at its heart.”

The government said it continued to work to strengthen the UK’s manufacturing industry”, pointing to tax incentives including the annual investment allowance and the super-deductor, adding: “Our Autumn Statement set out further measures to boost growth and productivity by investing in people, infrastructure and innovation.”

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