Rebalancing, what rebalancing?
Given the projection in EY UK region and city economic forecast that the regions closest to London will tend to grow faster than the rest of the UK through to 2018, it’s hardly surprising that we expect that Luton and especially Reading will all do well in terms of GVA growth, with Bristol, Exeter and Cambridge close behind. Indeed our forecast indicates that Reading will marginally outperform London to record the highest GVA growth of any UK city through to 2018, at 3.1%.
At first sight, this projection might appear to confirm that the UK’s cities are set to fit in with a general widening of the ‘North-South divide’. Newcastle, Hull and Liverpool all face a challenging outlook, Belfast is set to grow relatively slowly and even Leeds, generally seen as a city on the up, will only grow at the national average rate according to our forecasts. Birmingham is also expected to lag the country as a whole as Manufacturing slows.
However, the reality is more complex. For example, we expect that Southampton will slightly underperform the UK average in terms of GVA growth – and will lag even further behind the performance of Manchester and Leeds for example.
It is not a simple story…
These findings clearly highlight that the deeper the geographic level we analyse economic performance at, the more insight we develop into how policy and different industrial structures influence economic performance. A comparison of some of the fastest growing cities in the South East and East regions really brings this point home.
There are specific reasons for the relatively poor outlook for Southampton. The city and its hinterland have suffered not only from the loss of manufacturing capacity generally, but also from pressure on defence spending – which has had a dramatic impact on the Portsmouth Dockyards, and in turn on many contractors in the supply chain within the conurbation. Public Administration and Health account for 14% of GVA in the area compared to 10% for the South East as a whole in 2015, so as public expenditure is squeezed the impact will fall disproportionately on Southampton and the South Coast.
…and sectors are at the core of it…
The performance of Reading, Cambridge and Luton illustrates the importance of sectors in determining performance. We forecast that the UK GVA of Information & Communications and Professional Services will grow by 13% over the next three years. By contrast, Manufacturing will grow by 3% and Public Administration will shrink by 1% over the period. This translates into strong performance for Reading where the Information & Communications sector accounts for more than twice as large a share of GVA as the national average. Professional Services account for twice as much of Cambridge’s GVA as the national average underpinning the city’s strong performance.
…pointing towards the opportunity…
But it is Luton which offers the most interesting perspective. Luton’s GVA is forecast to grow at 2.8% over the next three years significantly above the national average of 2.3%. While it has a reasonably strong Professional Services sector, it is also the case that Manufacturing accounts for 16% of GVA and Administrative Services of 10%. These sectors are not amongst the fastest growing but contribute to a diversified local economy which also includes a strong contribution relative to the national average from Transport and Logistics.
In similar vein, the strong GVA performance both historic and projected for Manchester reflects a number of factors including the substantial investments made over more than a decade in revitalising the city centre – Real Estate accounts for 18% of the city’s GVA, the highest shares in the UK; the commercial opportunities offered by Manchester Airport and its surrounding business infrastructure; the city’s strong surface transport links; and a clear positive reputational effect. Manchester also gains from being particular strong in Professional Services and Financial Services but the real story is how targeted initiatives can drive superior growth. Manchester’s projected growth of 2.5% in GVA puts it in the group of top performing cities and shows geography is no barrier to progress if the right initiatives are put in place. The challenge is to develop and implement the right mix of policies.
Rebalancing will be good for all…
As EY ITEM’s most recent UK forecast makes clear, the UK economy is recovering but moving to a faster level of growth is challenging. The aim of rebalancing growth to maximise the potential of all the UK’s regions and cities is therefore essential if the UK is to move to a higher sustainable rate of economic growth. In this context, we believe our economic forecasts for the UK’s regions and cities provide a lot of food for thought – not least for government policymakers seeking to stimulate a faster and more balanced pattern of growth across the UK, and for local, regional and city authorities seeking to claim their fair share of that growth.
…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 ongoing austerity and welfare cuts will drive the economy in the other way direction.
…and more national support is required…especially for sectors
The three clear messages to emerge from our analysis are:
- Firstly, national and regional policies have to be co-ordinated. Top down policies such as welfare reform can cut across efforts to boost local growth.
- Secondly, relative sector performance is a critical driver of relative geographic performance. Rebalancing the economy is not just about adjusting for geographic differences, the interaction with sector must also be considered.
- Finally, the city and region landscape is becoming more competitive. Successful local development strategies around the world tend to be based upon specialisation in a small number of sectors with policy integrated to support this focus.
This leads us to three areas for national and region/city level policy-makers to work together on.
- Manufacturing remains important to many regions and cities of the UK, especially outside of the South and East. The resurgence in the Midlands shows what is possible and as our recent report Reshoring manufacturing — time to seize the opportunity demonstrated, the UK has a once in a generation to capture share in selected industries as the world economy changes. Co-ordination will be key in identifying appropriate sector opportunities by region/city and funding over and above that generated regionally will be required to support the transformation of UK capability to a competitive global level.
- Trade generally will be another important component of region and city growth strategies. UK Trade & Investment in particular has a key role to play once again ensuring the appropriate levels of support and co-ordination across the UK, such as helping individual areas develop realistic plans for sectors which offer the opportunity to build a local base for successful trade.
- It is clear that technology will be a key component of UK growth both within the Information & Communication sectors but also more broadly across other sectors of the economy. London, the South and East are clearly winning the battle for skilled resources in these areas and benefitting from superior growth as a result. Policies must be designed to facilitate both the development of greater number of skilled STEM resources outside of the current hot markets and the retention of those skills once training is complete.
In an unpredictable and increasingly competitive global economy, guiding the UK towards more balanced growth will not be easy. Devolution is a clear step in the right direction but enabling the regions alone will not be sufficient. National policy must be designed to complement regional policy.