Rebalancing – more of a priority than ever

Still work to do on geographic imbalances …

While I am pleased to see that EY’s latest UK Regional Economic Forecast shows that the increase in geographic imbalances between the South and the rest of the country has stopped over the last 3 years, the fact this is due in part to the slowing of growth in the services sectors means it is not time to celebrate. However, manufacturing has been performing better than in the recent past and is a more positive driver of reduced imbalances.

Nevertheless, it is concerning that the imbalances in growth between different places within regions continues to increase, with cities and larger towns pulling away from their neighbours. Against this backdrop, the uncertain economic outlook creates challenges, especially for the smaller, more economically exposed places in the UK.

I expect little change in the next three years between North and South, but do expect the imbalance within regions to increase unless action is taken to address this. The significant degree of uncertainty in the UK and the associated risks of shocks and higher volatility are causes for concern and should focus minds on developing appropriate policy responses in the coming months.

… and some new challenges..

What is striking in our analysis is the change in the outlook compared to recent trends. Some of the stronger-growing places in the last few years, such as the South East region and its cities and towns, have seen activity slow. Even more marked are the changes in the labour market, with employment falling in the South East over the last three years and the UK as a whole expected to see total employment growth at only 40% of the rate achieved between 2015 and 2018.

Part of the reason for the changes in the labour market is employers responding to expected lower EU immigration and other demographic changes. The services sectors are forecast to improve their labour productivity as a result. However, we are also seeing the impact of the slowdown in the retail sector, especially on the high street, that has captured many headlines this year. This poses significant challenges for smaller towns and communities in particular as retail tends to be a major employer in these places.

We can see the same challenges when we consider manufacturing. The sector has grown over the last three years and employment has increased as a result. We expect the sector to grow, albeit more slowly, over the next three years but the numbers employed will fall as technology is used to drive higher productivity in a more challenging labour market.

Stepping back it is clear to me that the priority area for policy-makers should be investment in skills to enable people to respond to a more challenging and changing labour market. We need to work out how we can equip people for the new roles that are emerging, giving them the tools to move between sectors and roles as appropriate. When we view skills development in the context of the geographic imbalances mentioned earlier, the clear implication is that more of the activity on skills and education has to be shaped at the local level and not from the top down.

Our analysis of relative city performance provides an insight into how differences in industrial structures influence economic performance. This means that policy must ensure it addresses issues across sector and geography to be impactful.

An agenda for change

With economic growth slowing and the outlook becoming more uncertain, maximising the potential of all the UK’s places is essential to allow us to generate solid economic growth. Most importantly, we must acknowledge that rebalancing is a more significant challenge than considered to date. We need to devolve power much more widely than has been done so far. This means consulting more extensively in towns and smaller places and using this insight to develop ’bottom–up’ plans that reflect local knowledge and strengths. These plans can then be aggregated up through sector strategies to regional and national levels as necessary. This will inevitably require that more control and resource for skills and education, housing, infrastructure, transport and health care will have to be devolved to the local level.

The three key policy initiatives to support the shift to more balanced growth are:

1.     A commitment to deliver infrastructure that addresses needs at the local and regional level. A cross-country rail and road network fit for purpose in the north and midlands are essential requirements. Broadband and mobile access also need to be upgraded to ensure all parts of the country are connected so that people can participate fully in the economy.

2.     Investment in the skills required to build a successful modern economy that is competing on the world stage. This should be based around the needs of all the workforce with more focus on retraining and reskilling than is currently the case. Digital skills will be a key part of this but so will the communications and interpersonal skills that employers value so highly.

3.     A comprehensive assessment of the future of the retail sector and the policy necessary to shape and support the transformation of the high street. This should go beyond business rates and consider planning approaches, environmental issues, the costs of the online supply chain and alternative models for high streets.

This will require radical thinking but this is the time to increase our ambition and we need to do more to position our economy for a different future. We need to ask ourselves, how can we stimulate activity in disconnected parts of the economy?

You can read our latest regional economic forecast here: follow the link.

@MarkGregoryEY