UK manufacturers invest at slowest pace since 2017, report says

British manufacturers are investing the least in new equipment relative to sales since 2017, with current investment at 6.8% of annual turnover, a decrease from 8.1% previously, according to Make UK. This decline, which also includes a drop in R&D spending, contributes to the UK's weak productivity growth compared to other advanced economies. Trade body Make UK is urging the government to streamline and maintain tax incentives in the upcoming budget, as nearly 40% of businesses surveyed indicate these incentives heavily influence their investment decisions.

Analysis

British manufacturers' investment in new equipment relative to sales has fallen to its lowest level since 2017, reaching 6.8% of annual turnover this year, a significant decline from 8.1% in 2024. This trend is further exacerbated by a decrease in research and development spending, which dropped from 6.5% to 6.2% of turnover, indicating a broad underinvestment across the sector. This sustained reduction in capital expenditure is a key factor contributing to the UK's weak productivity growth and lower output per hour when compared to other advanced economies like the United States and Northern Europe.

The trade body Make UK highlights that nearly 40% of surveyed businesses consider tax incentives a major influence on their investment decisions, underscoring the critical role of fiscal policy in driving corporate spending. This dependency suggests that current incentive structures may be insufficient or overly complex, deterring necessary capital allocation.

Make UK is urging the government to streamline and maintain existing tax incentives in the upcoming budget, specifically advocating for easier access for smaller firms to claim various tax breaks. With Finance Minister Rachel Reeves expected to announce further tax rises and savings on November 26, the industry faces a critical juncture where policy support is deemed essential to reverse the current underinvestment trend and bolster long-term competitiveness.

Key Decisions for Investors

• Investors should closely monitor the UK's upcoming budget on November 26 for specific policy changes related to manufacturing tax incentives, as these are crucial for capital expenditure and productivity.
• Given the strongly negative sentiment and declining investment trends, consider potential underperformance in UK manufacturing-heavy sectors or companies with significant domestic capital expenditure exposure.
• Evaluate individual companies' balance sheets for their capacity to self-fund investment amidst a challenging fiscal environment and assess their vulnerability to the UK's comparatively weak productivity growth.