Slower growth predicted across UK’s regions and cities until 2019 – rebalancing still more of a promise than a reality

05 December 2016

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• UK is likely to make little progress on economic rebalancing as slowing growth will reinforce existing strengths across all regions and cities over the next three years
• London and the South East will be the joint fastest growing regions with GVA of 1.9% per year to 2019
• Reading set to be the UK’s fastest growing city (outside of London) over the next three years with GVA of 2.5%, compared with the UK average of 1.5%
• Potential of rebalancing is clear - cities like Manchester and Leeds set to outpace regional performance with employment growth of 0.7% and 0.3% a year until 2019

None of the UK’s region’s or cities will be immune to slower economic growth over the next three years, however there will be significant variations across the country with little progress made on economic rebalancing, according to a new report from EY.

According to EY’s UK region and city economic forecast, London’s economy is expected to see the largest absolute slowdown in GVA growth over the 2017 to 2019 period when compared to the previous three years. However the capital’s strengths means that it is still expected to be the joint fastest growing region of the UK, along with the South East, with each having annual average GVA growth of 1.9% over the next three years. This compares with overall UK GVA of 1.5% during the same period until 2019.

Regional disparities highlight need for economic rebalancing

The forecast says that East of England (1.4%), South West (1.3%) and Yorkshire & Humber (1.3%) are also expected to outperform other UK regions between 2017 and 2019, boosted by their strengths in key sectors such as professional and administrative services, and information & communications.

The slowest regional growth levels are expected in the North East (0.7%), Scotland and Wales at 1.0% GVA respectively over the next three years. The North East has experienced employment losses in the accommodation, food, health and social work sectors, whilst Scotland’s economy continues to be impacted by North Sea activity and the falling oil price. In Wales, the relatively heavy reliance on the public sector is cited as a potential source of vulnerability.

Mark Gregory, EY’s chief economist commented: “This is our first region and city forecast since the EU referendum, but Brexit isn’t the only factor at play in these economic downgrades. The combination of low inflation and rising employment and average earnings that made 2015 a bumper year for UK consumer spending is fading fast and no area of the UK will be immune.

“Although we can see pockets of growth across the UK’s regions and cities, little progress is likely to be made on economic rebalancing over the next three years and, in a slower growing economy, closing the gap will become even harder. Devolution is a clear step in the right direction but enabling the regions alone will not be enough. National policy must be designed to complement regional policy through targeted initiatives to support trade, deliver infrastructure, invest in skills and support growth in key sectors.”

UK cities: More complex than a North – South divide

According to the report, cities in southern England are set to continue outperforming those in the rest of the UK. Reading tops the growth league for both GVA and employment, with average annual rises of 2.5% and 0.9% until 2019. As the UK’s fastest growing sector, digital accounts for 25% of Reading’s GVA, and this together with growth in key sectors such as ‘professional, scientific and technical’ and ‘administration and support services’ contributes to its strong performance.

Northern English cities mostly do less well. Newcastle, Liverpool and Hull all face a challenging outlook, with forecast average annual GVA growth of 0.8%, 1.1% and 1.0% respectively over the next three years until 2019.

Leeds and Manchester demonstrate the potential for rebalancing

At first sight, EY’s forecast might appear to confirm that the UK’s cities and regions are set to fit in with a general widening of the North-South divide. However, EY says the reality is more complex with Leeds and Manchester not conforming to the general pattern. The forecast says that Manchester will experience the second fastest employment growth of all the cities that EY’s forecast covers – 0.7% a year over the 2017-2019 period – and will achieve GVA growth of 2.0% over the same period. Leeds too is also expected to outpace the performance of Yorkshire and the wider UK with GVA of 1.7% annually and achieving jobs growth of 0.3% a year.

Mark explains: “Manchester and Leeds show how targeted initiatives can drive superior growth and clearly illustrates 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. We also see real opportunities for the UK around life sciences and technology in particular. The challenge is to develop and implement the right mix of policies to drive economic growth locally.”

Slower growth means we need to accelerate rebalancing – industrial strategy is key

EY’s analysis says that the expected GVA growth of Reading (2.5%), Cambridge (1.8%) and several other southern cities illustrates the importance of sectors in determining economic performance. EY’s report forecasts that the GVA of information and communications, and professional services will grow by 11% and 10% respectively over the next three years. By contrast, manufacturing will only grow by 2% over the same period.

Concluding Mark added: “The changing UK landscape means that it is even more important to continue to monitor economic developments at the region and city levels and to include the potential implications of emerging economic, industrial and trade policy for all parts of the UK.

“The Autumn Statement confirmed the thrust of policy is to reshape the economy in parallel with ensuring Brexit over the next few years. The design of the industrial strategy, the impact of moves to create fairer economic outcomes, including the approach to public expenditure and taxation, will be the key drivers of future economic performance at the region and city level.”