Upgrading Britain?

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Upgrading Britain?

November 10, 2011

Europe

Monica Woodley

November 10, 2011

Europe

Monica Woodley
Monica Woodley

Editorial director, EMEA

Monica is editorial director for The Economist Intelligence Unit's thought leadership division in EMEA. As such, she manages a team of editors across the region who produce bespoke research programmes for a range of clients. In her five years with the Economist Group, she personally has managed research programmes for companies such as Barclays, BlackRock, State Street, BNY Mellon, Goldman Sachs, Mastercard, EY, Deloitte and PwC, on topics ranging from the impact of financial regulation, to the development of innovation ecosystems, to how consumer demand is driving retail innovation.

Monica regularly chairs and presents at Economist conferences, such as Bellwether Europe, the Insurance Summit and the Future of Banking, as well as third-party events such as the Globes Israel Business Conference, the UN Annual Forum on Business and Human Rights and the Geneva Association General Assembly. Prior to joining The Economist Group, Monica was a financial journalist specialising in wealth and asset management at the Financial Times, Euromoney and Incisive Media. She has a master’s degree in politics from Georgetown University and holds the Certificate of Financial Planning.

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Upgrading Britain? is an Economist Intelligence Unit report, sponsored by Lombard

Upgrading Britain? The effect of capital expenditure trends on productivity, profitability and competitiveness is an Economist Intelligence Unit report, sponsored by Lombard, part of the Royal Bank of Scotland Group. The report reviews the capital expenditure plans of British businesses to gauge spending trends, as well as related challenges and opportunities.

One of the indicators of a healthy economy is a sufficient level of capital investment, both from government and the private sector. Such investment is crucial to maintaining the long-term competitiveness of both the country and individual businesses.

This Economist Intelligence Unit report, sponsored by Lombard (part of The Royal Bank of Scotland Group), reviews capital expenditure (CapEx) patterns within corporate Britain as the economy moves slowly out of recession while still facing daunting headwinds. This report considers whether firms are planning to increase CapEx and in which areas, and how the decision-making process has changed since the financial crisis.

The key findings from the research include:

  • Capital expenditure is lagging confidence and capital levels. Planned increases in CapEx do not reflect the degree of confidence that management hold in the economy, or the cash held on many balance sheets. While more than two-thirds (67%) of respondents express confidence about the future economic climate for their business and a similar number (70%) are holding cash, just 36% plan to increase capital expenditure. For a similar number (37%), CapEx will remain flat. In part, this is because many firms still have spare capacity, as demand remains below 2007/08 levels. Just 23% plan to cut back or eliminate it entirely (4%).
  • Most, but not all, UK firms cut capital expenditure during the recession. Nearly two-thirds (63%) of firms cut back investment during the financial crisis and subsequent recession. One-quarter of survey respondents cut back all but the most essential of spending, while 38% simply pressed pause on all new investments. Overall UK investment fell by 29% from a quarterly peak of nearly £38bn in late 2007 to just under £27bn in late 2009. However, not everyone was so cautious: some (14%) firms took advantage of the climate to invest for a competitive advantage, while nearly one-quarter of firms maintained all planned investments.
  • Businesses are slowly, but surely, modernising their physical assets. There is a small, but clear shift in CapEx allocation plans, with a trend towards acquiring new assets, whether IT systems, equipment and machinery, or telecommunications infrastructure, rather than simply spending on maintenance.
  • Meeting the demands of existing customers is the main driver for investment. Two-thirds of respondents agree that this has been the key motivation for capital spending. However, keeping pace with technology or delivering more innovative products may be the real motivation, rather than increased capacity. Improved efficiency and expanding the business are also cited as reasons for CapEx by 61% and 53%, respectively.
  • A significant minority of companies are concerned that their lower level of CapEx is negatively affecting their businesses. About four in ten (39%) believe they are falling behind their competitors because of reduced investment levels, while about one-third (34%) say they have been unable to expand into new markets (34%) or to expand their range of products and/or services (31%).
  • Reducing capital expenditure has bolstered profits, with many corporate balance sheets showing strong cash positions. About four in ten (38%) firms say that spending cuts have boosted their profitability, with a further 30% saying this has at least helped to maintain consistent profits. Reduced CapEx has contributed to rising levels of cash on many balance sheets. In an analysis of 251 listed companies carried out for this report, cash levels rose by an average of 7% in 2010 compared with 2009 levels.
  • Most firms believe belt-tightening has boosted productivity. Over one-third (34%) of respondents have seen productivity improve where they have focused on innovation or efficiency improvement during the downturn. A further 28% say productivity has stayed the same. The key question is how long this cycle can be stretched out, as this is not a sustainable strategy for the long term.

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