Risk to investment and growth as manufacturers remain 'reluctant' to borrow from banks

The concern today is that manufacturers are shunning the banks in favour of self-financing investment projects, potentially leading to lower levels of manufacturing investment overall. The report warns that this presents a risk to growth that will likely be sharpened as the UK heads towards Brexit and says that the Competition and Markets Authority’s final recommendations on the competition failures affecting retail banking services for SMEs must ‘pack enough punch to stop the rot’. 

According to the report, over eight in ten (85%) manufacturers are confident of securing finance for a new business opportunity. But, while just over a third (35%) say they are more likely to use external finance than they were two years ago, 65% disagree. At the same time, there has been a spike in cash holding, with 55% saying they are now holding more cash on their balance sheets compared to pre-recession levels.

The data shows that prior to the Brexit vote, manufacturers’ investment intentions were solid, but still over half of firms (53%) would postpone or cancel investment if they couldn’t fund it themselves. This suggests that attitudes towards bank lending have remained largely unchanged even though economic conditions had improved considerably and interest rates have been stuck at historic lows.

Manufacturers’ unwillingness to leverage their business with bank debt or rely on products such as overdrafts for working capital is likely to deepen post-referendum. Uncertainty over economic conditions will only add to the caution.

At the same time, concerns about the banking sector’s liquidity and the decline in bank stock prices could bring competition shortfalls back to the fore. Supply-side issues, such as the absence of product diversity, minimal differences in price, little transparency and poor banking relationships have been deterring factors even for those manufacturers with an appetite for bank finance. This lack of a diversified base for finance could lead to tighter credit conditions which will be detrimental for the real economy.

Another major concern, however, 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.

Ms Lee Hopley, chief economist at EEF, the manufacturers’ organisation, says: “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.

“This makes the CMA’s package of reforms even more important. 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.”