August 8, 2016
The relationship between manufacturers and the banking sector is yet to recover since the credit crunch in 2007/8, new figures have revealed.
Manufacturers’ organisation the EEF said it hoped that the Competition and Markets Authority’s (CMA) final recommendations on the competition failures affecting retail banking, due out tomorrow (August 9), would provide “swift and firm remedies” and must “pack enough punch to stop the rot”.
The new report from the EEF found that manufacturers are ‘shunning’ the banks in favour of self-financing investment projects.
This is leading to potentially lower levels of investment overall and could present a risk to growth that will likely be sharpened by Brexit, according to the EEF.
Eight-in-10 manufacturers (85%) said that they were confident about securing finance for a new business opportunity. However, just over a third (35%) said they were likely to use external finance compared with two years ago, whereas 65% disagree.
The report also showed a spike in cash holding, with more than half (55%) saying they are holding more cash on their balance sheets compared with pre-recession levels.
Prior to the Brexit vote, 53% of firms said they would postpone or cancel investment if they couldn’t fund it themselves, which suggests attitudes towards bank lending have remained largely unchanged.
The EEF predicted that manufacturers’ willingness to leverage their businesses with bank debt, or rely on overdrafts for working capital, would likely deepen post-referendum, as uncertainty over economic conditions will add to caution.
However, the EEF forecast that this lack of a diversified base for finance could lead to tighter credit conditions, which would be detrimental for the economy.
Another concern flagged in the report was that manufacturers’ increased tendency to hold cash on their balance sheets could leave them vulnerable in the event of negative interest rates.
Manufacturers, said the EEF, are more likely to use traditional products, with medium-term debt (64%), asset finance (56%) and overdrafts (50%), being the most common types of finance they would consider.
Lower costs (59%) and the ability to demonstrate manufacturing-specific expertise (53%) would encourage them to consider increasing their use of external finance. Six-in-10 would also consider switching banks, if the process were easier.
Lee Hopley, chief economist at the 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.
“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.”
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