Do we need a digital revolution outside of London to rebalance the UK economy?

Digital is driving economic growth…

We have to close the digital skills divide – we need a digital revolution outside of London if we want to rebalance the UK economy. 

EY’s UK region and cities forecast clearly shows the importance of the digital economy in driving economic performance. We expect the ‘information & communication’ sector to grow at an average rate of 4.8% a year to 2018, way in excess of the average growth rate of 2.3% for the economy as a whole according to the EY ITEM Club UK Spring forecast.

It is not just the core ICT sectors that are being impacted by digital’s surge. ‘Professional, scientific and technical activities’ is expected to be the second fastest growing sector at an average of 3.9% a year over the next three years, closely followed by ‘administrative and support services’ at 3.8%. The adoption of digital increases the demand for the skills in these two sectors as they are needed to implement the changes to operations and technology that will make digital a reality.

Chart 1

Source: EY ITEM Club, EY analysis

By contrast, manufacturing is expected to grow more slowly than the economy overall. I have previously discussed the importance of manufacturing to the UK and especially its role in helping rebalance the economy geographically, but there is also a close link between digital and manufacturing. Modern manufacturing is a technology based sector in which digital skills are as important as they are for the ‘information & communication’ sector.

…albeit the impact varies across the country.

The expected growth rates of regions and cities in the UK vary significantly and existing economic structure is the key driver of the differences in the short to medium outlook for individual geographies across the UK. Reading is expected to be the fastest growing city and this is as a result of its strength in the ‘information and communication’ sector which accounts for 25% of their GVA in 2015.

Chart 2

Source: EY ITEM Club, EY analysis

By contrast, Hull is expected to grow at below the national average rate and the structure of its local economy is also a major explanatory factor for this forecast: 25% of Hull’s GVA is made up of manufacturing and information & communication accounts for only 2%. Having limited exposure to the fastest growing sectors will limit Hull’s potential growth in the next few years.

Birmingham, Leeds, Manchester, Glasgow and Edinburgh all have digital sectors that are currently smaller than we might expect for the dynamism and scale of their local economies. For example, Leeds has just over 19,000 people working in the information & communication sector out of a city workforce of 372,000. This compares to Reading with 14,300 people in the sector out of a total workforce of only 84,000. There appears to be a significant potential to boost the digital sector in the North and Midlands which will act both as a source of growth in its own right but even more so as an enabler of wider economic growth in all sectors.

 Information & communication sector % of GVA % of Employment
London 11 8
Cambridge 14 9
Reading 25 13
Leeds 7 4
Manchester 6 4
Birmingham 4 3
Bristol 6 5
Hull 2 2
Edinburgh 5 4
Glasgow 5 4
Newcastle 6 4
Northern Ireland 3 2

Source: EY ITEM Club, EY analysis

The potential is clear…

EY’s UK Attractiveness survey 2016 provides further insight on the situation with respect to digital and also scientific research, another vital sector for future growth. London’s overwhelming dominance is clear, attracting as it does the majority of software FDI projects into the UK. Beyond London, the data clearly illustrates the UK’s digital divide with the majority of projects concentrated in a few regions.

2015 FDI projects

Digital Research
London 132 11
Scotland 24 23
South East 22 15
North West 18 5
Wales 6 10
W. Midlands 6 10
South West 8 6
Yorkshire and Humberside 7 5
North East 8 4
East Midlands 4 7
East of England 2 7
N. Ireland 4 2

Source: EY’s Global Investment Monitor 2016

Although the South East appears to do well, the 2015 performance lags some of the region’s better years and there are signs in the performance of Scotland and the North West that there is more to play for in the digital world.

There does appear to be a shift in the digital FDI projects towards city based establishments. The South East has been the go to destination for the technology sector in the UK for several decades but the modern software based sector may be drawn to city centre locations by the need to offer the work and life experience its potential workforce requires. A business park on the M4 corridor may struggle to compete with the appeal of city centre living in Edinburgh or Manchester, the cities driving the strong digital figures for Scotland and the North West respectively.

..with Scotland leading the way.

Outside of London, Scotland’s strength provides an interesting insight on what is needed to succeed in the rapidly changing knowledge based economy. Scotland appears to be leading the way in leveraging the power of its universities and bringing this together with business to create interesting propositions for foreign investors.

It is all about the skills.

Skills are crucial to success in the digital and knowledge economies. How good the UK and its cities/regions are in attracting, developing and retaining talent will determine overall economic growth not just the development of the digital industries. Universities are very important in this process but success requires a tripartite approach between educators, business and the public sector. This should not start at university education but needs to begin in schools, making children aware of the opportunities presented and the skills required to succeed.

We rightly celebrate London’s success in developing Tech City but we also need to ensure the North and Midlands are not merely providers of resources for the capital’s businesses. Applying the skills of our best and brightest to problems in manufacturing and research is likely to generate significant economic benefits given the potential of these sectors to stimulate wider economic activity. It is important the UK uses its scarce resources for maximum benefit.

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