UK becoming more geographically imbalanced, with North South divide set to increase over the next three years
6 min read
UK ITEM report projects that the North South divide will continue to worsen.
There has been little progress on geographical rebalancing of the UK’s economy in the last three years. Furthermore, the economic divide between the North and South of the UK will continue to expand over the next three years, albeit at a slower rate than previously, reveals EY’s UK Regional Economic Forecast. Of even more concern the weaker parts of the economy, smaller cities and towns, are expected to fall further behind the largest cities.
Economic rebalancing remains illusive
London and the South East will continue to outperform all other UK regions through to 2020 with Gross Value Added (GVA) growth per year averaging 2.2% and 2.0% respectively, compared to 1.8% for the wider UK. London is also expected to enjoy the fastest increase in regional employment up to 2020, growing at an average of 0.8% per year, with a strong performing business services sector underpinning growth.
Elsewhere, GVA growth in northern and devolved regions is expected to be relatively slower. The North East is forecast to experience the slowest rate of GVA growth between 2017 and 2020, growing at 1.2% per year. It is also the only region where employment is expected to decline, falling by 0.1% per year between 2017 and 2020, with the largest declines projected in the manufacturing and public administration sectors. Yorkshire and Humber and the North West are expected to experience GVA growth of 1.4% and 1.5% respectively per year.
Mark Gregory, EY’s Chief Economist, UK & Ireland, says: “The UK has made little progress on regional rebalancing over the past three years, and we expect more of the same over the next three years. In fact, we expect that the fastest growing regions over the next three years will be the four most southerly ones, London, the South East, the South West and the East. This means that the economic gap between North and South could be larger in 2020 than it was in 2010.”
Manchester forecast to be UK’s strongest performing city, alongside Reading
Manchester is forecast to be the strongest performing city in terms of both GVA (alongside Reading) and employment growth. These measures will see annual increases of 2.4% and 1.2% per year respectively between 2017 and 2020. Strong performances in the professional, scientific and technical, administrative and support services and construction sectors will be key to driving Manchester’s economy.
Cities in Southern England (outside of London) are forecast to out-perform those located across the rest of the country in the period 2017-2020. Luton, Thames Valley, Bristol and Exeter are all forecast to experience GVA growth of 2.3% per year on average and 1.0%, 0.7%, 1.0%, 0.9% in employment growth respectively. In contrast, Stoke-on-Trent, Hull, Liverpool and Leeds are forecast to experience GVA growth of 1.2%, 1.4%, 1.5% and 1.7% and employment growth of -0.1%, 0.1%, 0.3% and 0.9% per year on average respectively. Stoke-on-Trent is the only city in England which is expected to experience a contraction in employment, as a result of falling employment in the manufacturing sector.
The report predicts a generally weaker pace of growth for cities outside of England with the majority growing slower than the overall rate of UK GVA growth between 2017 and 2020. Edinburgh is an exception to this trend, with GVA forecast to rise by 2.1% per year on average and total employment forecast to rise by 0.9%. This growth will be driven by its growing tourism industry alongside continuing strong performances in the city’s business services sectors.
The strong are getting stronger
Debbie O'Hanlon, national markets leader at EY in the UK comments: “The strong GVA performance both historic and projected for Manchester demonstrates that location is not a binding constraint on growth. It is a reflection of the substantial investments that have been made in the city over the last decade.
“However, the success of Manchester and the strong southern cities highlights the fact that city growth typically outpaces regional growth. In every region, the fastest growing cities outpace average regional growth and the smaller towns and cities are growing more slowly. The rebalancing problem is more acute within local economies than between them but policy is focussed on larger cities and groupings. A national approach to economic rebalancing is needed to ensure that smaller cities and towns and the more remote parts of regions can grow faster. A strategic approach to place and investment in improved connectivity, both physical and digital, and local investment in skills and infrastructure will be critical in ensuring the economy is one in which everyone has a chance to fully participate, regardless of location.”
Key sectors are crucial to performance of UK cities
The performance of Reading, Cambridge and several other southern cities illustrates the importance of sectors in determining growth prospects in the short to medium-term. The report forecasts that the GVA of the information and communications sector and professional services sector will grow by 3.5% and 3.4% per year, respectively, over the next three years.
In contrast, manufacturing is only expected to grow by 1% over the same period. This translates into a strong performance for Reading, where the information & communications sector accounts for more than twice as large a share of GVA as the national average. Over 50% of Cambridge’s growth in the next 3 years is also forecast to come from Information and Communications Technology (ICT) and professional services.
Mark Gregory comments: “The Government’s recently published proposals for the UK’s industrial strategy are a welcome development and demonstrate how sectors will be key drivers of both productivity and the economy as a whole. The focus on manufacturing will help support many regions and cities that are located outside of the South East. Other capital intensive industries such as machinery, electronics, food and drink, and chemicals all offer opportunities to boost exports and to substitute imports - something that is more urgent following the fall in the value of sterling.
“It is also clear that technology will be a key component of UK growth, both within the information & communication sectors and across other sectors of the economy such as advanced manufacturing. Support for Artificial Intelligence is a good first step but a broader approach to digital technology to include, amongst others, virtual reality, Fintech, analytics and 3D printing is essential.”
Public and private investment required to boost manufacturing
The technological revolution in manufacturing will create new opportunities for growth especially in the North and Midlands but exploiting this opportunity will require significant investment.
Mark Gregory concludes: “The UK has to view geographic rebalancing as a key component to the process of transforming the economy. However the scale of the challenge should not be underestimated. With the requirements to prepare for Brexit, position for technological change and maintain its competitiveness, the UK needs to invest more than it has done for some time – robots will not buy themselves.
“To achieve a level of business investment that would put the UK on an equal footing with the G7 average would require an increase of around £50b a year. The Industrial Strategy is a good first step but more public resources will be required to create the economic platform needed to stimulate a significant boost to capital spending by business capital.”
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