Roads lead to Britain: UK still a destination for European firms
As French baker fires up a new production line and German giant Müller ploughs £100m into Britain the post-brexit future looks benign,
The scent of freshly baked brioche fills the air. French accents chatter to and fro across the room. But this is not a pretty little Gallic boulangerie. This is an industrial estate in Milton Keynes where a French bakery has just opened a new production line.
Every hour 25,000 brioches pour off the shining new machine, the second installed in this immaculate, gleaming facility.
Brioche Pasquier, still run by the Pasquier family that once ran a typical local bakery, has spent £40m on the site since buying the land in 2014. And in post-brexit Britain, it has plans to spend more.
This bucks expectations in terms of UK investment.
Brexit raised fears that business spending – particularly from firms headquartered in other EU nations – would slow to a trickle as companies turned off the taps and hunkered down for a recession.
Immediately after the referendum the average economist thought fixed investment would dive by 3.5pc in 2017. Clearly the recession has not happened, and now companies are regaining some of their lost confidence.
Business investment is expected to grow a touch this year instead.
This is not a part of the economy that takes kindly to volatility.
Investment projects do not take place overnight.
Major orders for new machinery and buildings take time to arrange, design, and construct, so there is a lag both in any slowdown and in any acceleration. Yet some businesses are continuing to invest. Brioche Pasquier planned this line from the start of the project in 2014. But the changing business outlook has not put bosses off their stride, indicating they are confident in the longer term economic outlook – an important factor, given that they are betting households will be happy to spend more on their premium breads. “We think we will open the third production line in 2019 or 2020,” says Olivier Ripoche, UK managing director, a nephew of the five brothers who expanded their family bakery into an international empire. That will fill up the current building, but he has secured land next door to extend the factory. “We have the land close to the factory, and we can copy and paste what we’ve got here. We can have six production lines in this factory,” he says, speaking in very good English, though he jokes about his accent. “And when those six production lines are full we will build another factory.”
It is not alone. Müller, the German dairy giant, has committed to invest £100m in three sites in Shropshire.
The idea is to develop, make and market a new range of
It already makes goods in the UK but wants to reduce the industry’s reliance on imports, something which an increasing number of companies are considering since the fall in sterling made imported goods more expensive. That is true for Brioche Pasquier, too. It entered the UK market by importing its baked goods from France, but when the financial crisis struck and the pound tumbled, its profits suffered.
By building its factory in the UK and using locally sourced ingredients, it has been more insulated from the latest fall in sterling. Companies from outside Europe are also making new investments. Earlier this month US aircraft manufacturer Boeing started work on a new factory in Sheffield, its first in the UK. It selected the site in February for a £20m plant making complex parts for actuators, which move the flaps on aeroplanes’ wings.
That said, investment is not booming everywhere. Some companies are pulling back instead.
French bank Credit Agricole, for example, is moving trading jobs out of the UK and over to Paris, in a decision not unexpected when France is courting bankers in an effort to move them ahead of Brexit taking place.
Overall investment levels are essentially flat. There has been no collapse, but no surge either.
Manufacturing industry group the EEF surveys its members and has found hints of a recovery in sentiment, but only on a modest scale.
Lee Hopley, the group’s chief economist, says she sees few new factories being built. Instead companies are typically investing on a less glitzy scale. “I don’t get the sense that there are a lot of new factories going up at the moment. Companies are looking at the next 12 to 18 months, at productivity enhancing machinery and equipment,” she says.
Those smaller gains are still important for boosting the economy, but indicate more modest levels of confidence than full-scale new
construction projects. EEF’S members report strong export growth helped by healthy demand overseas combined with the weak pound. But machinery is often imported so the fall in the pound also means any firm building a new factory faces extra costs in setting up. “The proportion that is imported is quite large and that has got more expensive in the past year. The cost of investing has gone up by 15 to 18pc in the last 18 months,” Hopley says.
Other issues include a skills shortage – employment has surged and joblessness crashed, and now firms are worried they cannot find any more of the type of workers they need.
Even that is crucial for investment. It is hard to design a new factory without the right engineers, and difficult to run it without trained staff.
The rate of hiring may also reflect caution in investing, however, with the state of the jobs market both caused by low investment, then acting to make it worse.
“Businesses have a choice between labour and capital if they want to grow – wage growth has been slow so they can hire workers relatively cheaply, then get rid of them easily if they need to,” says Alan Clarke, an economist at Scotiabank.
“Capital is expensive and is there for
the long term, so some have chosen to spend on human capital rather than physical capital.”
At the same time, the financing is at least in place for capital expenditure. In contrast with the financial crisis, funds are available and interest rates low, and global demand creates an incentive to invest, keeping investment from falling off a cliff.
Both economists are clear that manufacturers need longer term certainty over Brexit if they are to make major spending decisions.
“The story isn’t as positive as it might be. Given where some of those activity indicators are, you would expect investment intentions to be stronger,” Hopley says.
“But it is quite difficult for them to make big capacity judgments beyond that given the Brexit uncertainty.”
That reflects a warning in a speech made earlier this year by Ben Broadbent, the deputy governor of the Bank of England. He said exporters are in something of a “sweet spot”, benefiting from the weaker pound while also enjoying no changes to their trading relationship with the EU.
While a surge in sales would usually result in a rise in investment, this sweet spot has a deadline of March 2019 and what follows is unclear.
“While investments with shorterterm payoffs make commercial sense, especially for those already running up against capacity constraints, the uncertainties involved in longer-term decisions could temper the usually positive response of business spending to depreciations in the exchange rate,” he said.
So far the data have borne that out. David Davis and Michel Barnier came out of last week’s negotiations to claim progress is being made, but shed little light on trading arrangements beyond the next 18 months. Certainty is still hard to come by. Back in Milton Keynes, the mayor gives a speech welcoming the new investment and the French ambassador to the UK promises he will help keep relations cordial whatever happens in the Brexit talks.
A staff member sings La
Marseillaise and God Save the Queen.
Wine is poured. A four-foot round brioche cake is cut open, its slices passed around the suppliers, clients and workers who have gathered to celebrate the new production line.
It is a party here, and it is showing no signs of slowing down.
‘After the referendum the average economist thought fixed investment would fall by 3.5pc’
Life after Brexit: Many overseas firms, including baker Brioche Pasquier, dairy giant Müller and US plane maker Boeing have invested in the UK. Below, left, Olivier Ripoche, Brioche Pasquier’s UK boss, has backed Britain