British manufacturing is battling against the impact of higher interest rates. The new higher rates are making waves in the industry, impacting manufacturers in ways that demand a closer look. As the Bank of England takes measures to manage inflation and stabilize the economy, it is important to understand how these interest rate hikes affect British manufacturing and consider what can be done to support this vital sector in the British economy.
Interest rates play a critical role in shaping the financial environment for businesses, including manufacturers. When interest rates rise, the cost of borrowing increases, which has far-reaching consequences for the manufacturing sector. Manufacturers often rely on loans and credit to fund their operations, purchase new equipment, and invest in research and development. Higher interest rates translate into increased financing costs, which can erode profit margins and impact capital expenditure decisions. Companies may delay or reconsider their investments, particularly in long-term projects, due to concerns about financing expenses. This has a direct negative consequence for employment and growth.
Higher interest rates can lead to an appreciation of the British pound. A stronger currency can make British exports more expensive for foreign buyers, reducing demand for British-manufactured goods in international markets. This can put pressure on manufacturers, especially those that rely heavily on exports. The Institute for Prosperity has long argued that a more competitive exchange rate is vital if we are to make British manufacturing competitive with the rest of the world and increase our share of world trade. The pound is trading at its highest rate against the dollar since April 2022 as it is the strongest currency in the G10. This, however, is not good for manufacturing.
Rising interest rates can affect consumers' disposable income, leading to reduced purchasing power. A decrease in consumer spending can directly impact industries that produce consumer goods. British manufacturers involved in the production of products like automobiles, appliances, and electronics have experienced lower and/or fluctuating demand, affecting their production and employment levels. This has been exacerbated by higher import costs. Manufacturers often import raw materials and components from overseas. Higher interest rates can contribute to an increase in the cost of these imports due to exchange rate fluctuations. This puts additional pressure on manufacturers, who may either absorb these costs or pass them on to consumers.
Higher interest rates are making it more expensive for manufacturers to expand their operations, build new facilities, or invest in technological advancements. This can hinder innovation and limit the capacity for growth in the manufacturing sector. The government also abandoned the manufacturers’ super deduction in the spring, a scheme which permitted manufacturers to deduct 130% of the costs of investment in new plant and machinery. This is terrible for British manufacturing when facing competition from countries like China where subsidies to manufacturing are huge. With interest rates rising in the UK higher than key rival manufacturing hubs, British manufacturers are at a disadvantage.
Combined with higher interest rates the UK has no comprehensive industrial strategy to provide the framework for investment in manufacturing and delivering growth. There has been no real movement on essential planning reform which is essential to drive manufacturing. We have highlighted in the past the real skills and training issues that are lacking in the UK, and how we could look to the German training model to fix this. The UK’s infrastructure also requires tremendous upgrades to support a manufacturing revival. As British manufacturing navigates the challenges posed by higher interest rates, adaptability and strategic decision-making will be crucial. The industry has weathered economic storms in the past, and it will be a challenge to continue to do so. As the manufacturing sector continues to adjust to these changes, it is essential for policymakers, businesses, and stakeholders to remain vigilant and proactive in addressing the evolving economic dynamics that higher interest rates bring.