Growth and investment in the UK’s manufacturing industry are at risk because of companies’ reluctance to seek external finance, according to a new report from EEF.
The manufacturers’ organisation has expressed concern that businesses are shunning the banks in favour of self-financing investment projects, with little more than one-third of manufacturers saying they are more likely to use finance today than they were two years ago.
This is in spite of 85% of manufacturers saying they are confident of securing finance for a new business opportunity; 55% of firms are holding more cash on their balance sheets when compared to pre-recession levels, as the fallout from the economic downturn leaves manufacturers “disengaged” with the banking sector.
Manufacturers’ unwillingness to leverage their business with bank debt is likely to deepen following the UK’s decision to leave the European Union, EEF added.
Lee Hopley, chief economist for EEF, said: “Manufacturers’ reluctance to rely on external finance is a persistent hangover from the credit crunch, where trust and confidence in the banks stalled and never quite recovered. But with the Brexit vote dampening investment intentions and adding to uncertainty, this pre-existing condition could now become further aggravated, posing a risk for growth.”
EEF has called on the Competition and Markets Authority (CMA) to provide “swift and firm remedies that pack enough punch to stop the rot” when it delivers its finals recommendations on the competition failures affecting retail banking services for small-to-medium-sized companies. The CMA is due to publish those recommendations tomorrow.
The risk of falling investment post-Brexit “makes the CMA’s package of reforms even more important”, Hopley continued.
She said: “The CMA cannot prevent a fall in investment intentions, but it can help to strengthen supply dynamics in the market and resolve some of these long-term issues by providing swift and firm remedies that pack enough punch to stop the rot. Whether the next recession is in one year or 20 years’ time, the problems in this vital market must be fixed. Manufacturers must have access to finance – progress needs to be seen.”
The report shows that, prior to the referendum in June, manufacturers’ intentions to invest in their businesses were “solid”, but more than half of firms still said that they would postpone or cancel investment if they couldn’t fund it themselves. The data “suggests that attitudes towards bank lending have remained largely unchanged, even though economic conditions have improved considerably and interest rates have been stuck at historic lows”, EEF said.
The worry is that manufacturers’ increased propensity to hold cash on their balance sheet leaves them particularly vulnerable in the event of negative interest rates, as some banks have already flagged the prospect of charging customers for having credit balances.
Last week, the Bank of England reduced interest rates to 0.25% – a record low, and the first downward revision since 2009 – while warning that the rate could decrease further if the economy worsens.
Manufacturers are still more likely to use “traditional” finance options, EEF’s report has said, with medium-term debt, asset finance and overdrafts the most common types of finance that they would consider.
Lower costs and the ability to demonstrate manufacturing-specific expertise would encourage them to consider increasing their use of external finance, while at the same time, six in ten manufacturers would consider switching banks if the process was easier, EEF said.
It reiterated its calls for “additional measures to boost competition in the banking market”.
© FoodBev Media Ltd 2021
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