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Supply chain disruptions prompt fall in investment

Companies that used up cash reserves stockpiling materials when supply disruptions were at their worst are scaling back plans to invest as a result, a Bank of England survey has found.

The rising cost of loans is also driving firms to focus on reducing existing debt rather than borrowing more, according to the Bank’s regional agents.

“Companies paused or reduced investment plans due to weak demand, tighter financial conditions and uncertainty about the outlook,” their report reads.

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Consumer services firms were affected most seriously after demand dried up amid the squeeze on household incomes from the high cost of living.

“A number of contacts said that they had less cash available for investment because they had been obliged to build up stocks in order to manage supply chain disruption,” the Bank said.

Shortages of components, such as the semiconductors used to make cars and smartphones, caused disruptions that increased the costs of producing goods and services last year. These were made worse by coronavirus restrictions in China during March and April, which stopped supplies leaving the world’s biggest port in Shanghai. The Russian invasion of Ukraine exacerbated the problem.

However, the disruptions have settled in recent months, according to the latest purchasing managers’ surveys.

The Bank has a network of about a dozen regional representatives, known as agents, in Glasgow, Manchester and other areas. Their report is based on interviews conducted with about 700 businesses between mid-October and late November.

The Bank said that for companies that borrowed to invest, higher costs of funding such borrowing had increased uncertainty around their investment plans by extending the payback period on projects.

However, rising energy costs have given companies an incentive to invest in improving the efficiency of their power supplies. Costs for firms remained high despite the fall in gas prices over the survey period because of the fall in the value of the pound.

“Input cost inflation remained elevated, as falls in some commodity prices and freight costs were offset by higher energy costs and the weak pound. Profit margins remained squeezed as firms’ price increases have not kept pace with rising costs,” the Bank said.

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