We need faster rebalancing to boost UK growth

All change at the national level…

We are told that a week is a long time in politics, but it is certainly true that a year can be a long time in economics. The recent EY ITEM Club UK Autumn forecast  shows just how much the outlook for the UK has changed since this time last year.

The vote by the UK electorate to leave the EU is often cited as the reason for the forecast slowdown in economic activity but the reality is that a number of factors are at play. Whatever the causes, it is clear that the combination of low inflation and rising employment and average earnings and higher investment that supported UK growth in 2015 is fading fast. 2017 is set to be much tougher and EY ITEM Club forecast that UK GDP will expand by just 0.8% in 2017 and 1.4% in 2018.

 …means slower rebalancing.

The economic changes at the national level will have clear regional impacts. No region or city will be immune from the consequences and economic growth will be lower across the country. There will however be significant variations in the impact of the projected lower overall growth across the UK’s regions and cities.

Our latest UK region and city economic forecast clearly shows London and the South East have been the fastest-growing regions of the UK economy since 2013. This will continue in 2016 with London’s GVA forecast to grow by 3.2% for 2016 as a whole and the South East’s by 2.9%, compared with the UK’s projected outturn GVA* growth of 2%.

But it is not just London that is growing faster than the UK average. The East and East Midlands have also grown in excess of the national average rate since 2013 and we forecast that Yorkshire and Humber, Wales and the West Midlands are all also likely to outperform the UK as a whole on GVA in 2016 with growth rates above 2%. However, we expect a significant slowdown in the North East, North West, East Midlands, East, South West and Scotland.

 …and we expect more challenges ahead……even for the “Southern Powerhouse”…

Looking forward, our forecasts largely point to several challenging years. We expect that London and the South East will continue to outperform all other UK regions through to 2019 but with growth averaging 1.9% compared to UK average annual GVA growth of 1.5%, significantly below their average annual growth of 3.4% and 2.7% respectively between 2013 and 2015.

The East of England, South West and Yorkshire and Humber will be the other fastest growing regions, but all three will grow at just below the UK average rate.

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 and Humber will occupy an intermediate position between the two extremes, both economically as well as geographically – perhaps underlining the fact that geographical position and accessibility within the UK do seem to affect the level of economic activity on a consistent basis.

…but there will be no acceleration in rebalancing……hence the need for more action.

Slower growth in London and the South East does not have a silver lining for the rest of the country. Forecast growth will be lower across the country as a whole and there will be no closing of the gap with London and the South East, just a slowing of the rate of increasing disparity.

The need is more urgent, the UK must look to drive economic growth and boost productivity. This means we cannot afford to waste our talent. We need every part of the country to provide the maximum possible contribution, and policy should be designed to make this possible. Even more resources and effort have to be devoted to driving geographic rebalancing and hence boosting overall growth.

…and rebalancing has potential…

 Leeds and Manchester do not conform to the general pattern. Manchester will experience the second fastest employment growth of all the cities that our forecast covers – 0.7% a year over the 2017-2019 period – and will achieve GVA growth of 2.0% over the same period. Leeds is also expected to outpace the performance of Yorkshire and Humber and the wider UK with GVA of 1.7% annually and achieving jobs growth of 0.3% a year.

 Manchester and Leeds show how targeted initiatives can drive superior growth and clearly illustrate the opportunity geographic rebalancing presents. However, success requires a strategy that is based around priority sectors and integrated with region and city growth plans – we’re already seeing tangible benefits from cities in the Northern Powerhouse and Midlands Engine who are working together to maximise their potential.

 … so it’s time for a new push……with sectors and city/regions to the fore…

The Government has made clear that is believes the UK needs an industrial strategy. We see this as an extremely positive development. It is also opportune, the world economy is changing and the UK has a once in a generation opportunity to reposition itself in a world of changing trade dynamics and technology led disruption. At its core, the industrial strategy must articulate a vision for the linkages between priority sectors and the UK’s regions and cities. This will provide the basis for prioritising the policy initiatives required to create faster economic growth. The industrial strategy must be developed across cities regions and articulate how skills, infrastructure and trade can be aligned to ensure the best possible outcomes.

*Gross Value Added (GVA). GVA data is presented in 2013 prices and excludes output from the ‘extra region’ i.e. the contribution from North Sea oil and gas extraction, UK embassies abroad and UK forces stationed overseas. The latter are included in the GDP definition used in the EY macroeconomic forecasts

EY UK region and city economic forecast is part of our Economics for Business programme which provides knowledge, analysis and insight to help businesses understand the economic environments in which they operate.