A more unbalanced economy?
The UK economy is becoming more geographically unbalanced according to EY’s first UK region and city economic forecast. This shows that London has been the fastest-growing component of the UK economy since 2012 and that the East and South West have both grown in excess of the average rate since 2012.
Clear evidence of the potential for change elsewhere…
Historic analysis does however also serve to illustrate the potential benefits that devolution can bring. Both the North West and West Midlands have posted growth in excess of the national average since 2012. In the former, this growth in part reflects the successful initiatives undertaken in Manchester that are now being used to create the foundations of the Northern Powerhouse. In the latter, the resurgence in manufacturing, especially automotive has contributed to strong relative performance.
…but a lot to do…
It is good news that targeted strategies by geography and sector can generate improved economic performance. The challenge is to sustain and build on these examples because there is much to do. Consider for example, the North East which will record GVA growth of only 0.9% in 2015. This performance partly reflects the region’s relative reliance on public expenditure within the UK, and partly its heavy reliance on manufacturing – a sector that faces particular problems given the current strength of the pound against the euro. Boosting this and other challenged regions will require strong, concerted and co-ordinated policy, supported by significant resources.
…and this is a long game…
Looking forward, our forecasts largely point to more of the same. We project that London will continue to outperform all other UK regions through to 2018 with average annual GVA growth of 3.0%. Its neighbouring regions, the East of England and South East, will also out-perform the UK average, with the South West just below the UK average.
We expect that the weakest parts of the UK in terms of GVA growth will be the economies on the country’s geographical periphery: the three devolved nations of Scotland, Wales and Northern Ireland and the North East. The traditional English industrial heartlands such as the North West, West Midlands and Yorkshire & Humber will occupy an intermediate position between the two extremes.
…even for the ‘Northern Powerhouse’…
From our projections, it’s clear that we don’t expect the Government’s ‘Northern Powerhouse’ ambitions to have a radical economic impact during our forecast period through to 2018. Manchester will outperform other northern cities growing at rates more akin to cities in the south, but the spill-over will take longer to come through.
At best the economic boost will be felt more in the next decade than this one, given that major infrastructure schemes such as HS2 will not come into operation for another ten years. As work starts so the benefits will start to flow but these will be concentrated initially in the areas where work is taking place. Similarly, the impact of the devolution of powers to cities such as Birmingham and Liverpool will become effective only when budgets can be aligned and funds used more efficiently.
…because the present influences the future.
London’s growth is the result of a number of factors but its existing economic structure is clearly a very important influence on performance. London’s economy looks very different to the rest of the UK. In 2015, we expect that 16% of London’s GVA will be accounted for by Financial Services & Insurance, 13% by Professional Services and Information & Communications will contribute 11%. For the UK as a whole, the respective shares are 7%, 8% and 6%. As these are expected to be three of the fastest growing sectors over the next three years, London’s existing strength provides the basis for stronger future performance.
The rest of the South also tends to have more exposure to the fastest growing sectors and this will drive faster growth relative to the North as a whole. There are variations between the southern regions in terms of sector mix but the overall impact is still positive.
London and the South are much less exposed to the plan to reduce the national debt, and turn deficit into surplus than other regions. Public spending and health account for 9% of London’s GVA compared to 12% nationally. Plans to reduce public expenditure will affect regions with lower wages and higher unemployment harder, resulting in the North-South divide tending to widen rather than narrow.
…but it will take time
Our projection is that with some notable exceptions, primarily among the major northern cities, the North-South divide is set to widen still further over the next three years. The potential of targeted initiatives such as the Northern Powerhouse is clear but these efforts will take years to have a noticeable impact. And in the meantime, other policy initiatives such as on-going austerity and welfare cuts will drive the economy in the other way direction.
In my next blog I will analyse the forecasts for UK city performance and identify what this tells us about the policy mix required to drive successful rebalancing.