The economic growth of England’s cities and the South is on track to outpace towns, the North and the Midlands as the country recovers from the COVID-19 pandemic, according to EY’s latest Regional Economic Forecast. Although the report says that the ‘levelling up’ agenda can accelerate with targeted government and local action.
When measured by Gross Value Added (GVA), the West Midlands economy is one of four regions – alongside Yorkshire & Humber, the North East, and South West – not expected to regain its 2019 size by 2023. The region’s GVA is forecast to decline by the equivalent of -0.26% per year between 2019 and 2023. Regional employment is also expected to decline by the equivalent of 0.36% per year over the same period.
The economies of just five out of nine English regions are forecast to be larger in 2023 than they were in 2019. Three of these regions are in the South: London (0.51% annual growth forecast); the South East (0.39%); and East (0.08%). Annual growth is also expected in the North West (0.11%), while marginal growth (0.01%) is forecast in the East Midlands.
The West Midlands’ GVA is expected to decline -13.58% in 2020, the largest regional decrease ahead of Yorkshire and Humber (-12.77%), and the East Midlands (-12.45%). Birmingham (-13.47%) is also among the cities expected to see a significant decline in GVA across 2020. As a whole, the region’s cities are forecast to see the equivalent of an average annual decline in GVA of -0.16% between 2019 and 2023, while its towns will see the equivalent of an annual average decrease of -0.29%.
The region’s performance has been significantly affected by the impact of the pandemic on the manufacturing sector. The sector, which accounts for approximately 15% of the region’s economy saw its GVA decline by -12.14% in 2020 and is expected to be slower than other sectors to recover. Regional economic growth between 2019 and 2023 will be led by human health and social work and the public sector.
Simon O’Neill, Office Managing Partner at EY in the Midlands, said: “Manufacturing is a vital part of the West Midlands economy, and this sector has been one of the most exposed to the economic impact of the pandemic. Notably, there has been a significant impact on supply chain operations. Alongside adapting to a post-Brexit future, the sector will have plenty of challenges to navigate in the near future.
“However, there are opportunities and manufacturing is one of the sectors which will be most important to supporting the UK’s ‘levelling up’ ambitions. This isn’t just a North-South issue but a Cities-Towns issue, too.
“An estimated 86% of manufacturing activity is in towns or smaller cities outside the South East, and our recent UK Attractiveness Survey found significant investor interest in reshaping manufacturing supply chains and reshoring activity to the UK. Although a difficult near-term is forecast for the sector, opportunities are there longer-term. Across the country and here in the West Midlands, towns are on track to fall further behind our cities unless we take action.
“Technology will play a major role in the sector’s future, so the UK can compete in a way that was not possible when labour costs drove location decisions. A relaunched Industrial Strategy should target emerging opportunities here.”
Mixed nationwide picture
Nationwide, only the South East and London are forecast to employ more people in 2023 compared to 2019. At the same time, cities are expected to outperform their regions in economic and employment growth by 2023, while no region’s towns are forecast to outpace their region overall.
Rohan Malik, EY’s UK&I Managing Partner Government and Infrastructure, comments: “The economy faces a lopsided recovery which risks setting back the UK’s levelling up agenda unless concerted action is taken. Although images of empty city streets have attracted attention over the past nine months, the numbers show that the pandemic’s impact has been most keenly felt elsewhere.
“The high value-added services that are the lifeblood of city and South Eastern economies have continued throughout the year – albeit often from home. Manufacturing, arts and leisure, and hospitality – vital parts of the economies in towns, the Midlands and the North – have been most affected during the pandemic or are likely to take longer to recover.
Rohan Malik adds: “Despite a challenging backdrop, there are opportunities to reshape the country’s economic geography. The Government’s recent initiatives, including the Levelling-up Fund and National Infrastructure Strategy, are welcome, but new approaches are required to avoid a growing gap between towns and cities, and North and South.
“Some of the recent shifts in how we organise work and home life have been positive for economic rebalancing and mean there could be opportunities to create ‘virtual’ jobs in places that have found it difficult to attract higher value-added sectors. A policy focus on supporting sectors, like manufacturing, which matter to both investors and towns would help.
“The shift to a ‘net zero’ economy also presents a significant green opportunity for the UK. The Government’s target of a 68% cut in annual carbon emissions and the new 10-point plan should provide impetus to green investment in projects – including offshore wind and carbon capture – which will typically be located outside major cities.
“Crucially, the Government must avoid a top-down approach: boosting local capabilities and understanding local characteristics should be the starting point for working up to national policy frameworks.”
Pandemic’s impact uneven across economic sectors, towns and cities
The report shows that the uneven distribution of economic sectors across the country has had a striking impact on the economic performance of England’s regions, towns and cities in 2020.
Regionally, London (-10.4%), the South East (-11.37%) and the North West (-11.75%) have seen the smallest declines in GVA over 2020. This is partly because these regions have the highest share of sectors likely to have been least affected by lockdown restrictions on activity, including financial and professional services and IT. Among other factors, these sectors were able to move a significant share of activity online during the pandemic.
GVA has fallen furthest in 2020 in the West Midlands (-13.58%), Yorkshire and Humber (-12.77%), and East Midlands (-12.45%). Manufacturing is the dominant sector in each of these region’s economies, accounting for approximately 15% of total GVA in each region – nationwide, manufacturing GVA fell by -12.14% over the course of the year.
English cities have all seen a decline in GVA across 2020, with an average -12.02% fall in cities across all regions. The cities most reliant on lockdown-affected activity have seen more significant falls: the economies of Leicester (-13.77%), Birmingham (-13.47%), and Hull (-13.19%) shrank the most, while Exeter’s economy (-10.35%) contracted the least. Manufacturing makes up around 13% of the Leicester, Birmingham and Hull economies – rising to 27% in Hull. Exeter’s economy, by contrast, is dominated by the public sector; manufacturing represents just 2% of GVA.
The difference between towns and cities is starkest in the employment numbers: cities have seen employment fall by -0.47% in 2020, while towns have seen employment fall by -1.23%.
Simon says: “To accelerate the levelling up agenda, the Government’s aim should be to tailor sector opportunities to local conditions. These should dictate what is needed for investment in skills, transport, digital and social infrastructure. Once plans are agreed, resources should be released to local control for delivery wherever practical.”
Growing regional divide forecast if urgent action not taken
According to the report, just over half of the UK’s major economic sectors will have grown in GVA terms by 2023 compared to 2019.
The biggest growth by 2023 is expected in health (0.92% annual increase in GVA), professional services (0.78%), and IT (0.76%). The greatest shortfalls relative to 2019 are expected in manufacturing (-1.83%), hospitality (-1.36%), and arts and leisure (-1.29%).
While only four non-London regions are expected to grow by 2023 overall, the city economies in six non-London regions are expected to grow over the same period (South East, North West, East, East Midlands, South West, North East). In contrast, the town economies in just three regions (the North West, East and South East) are expected to grow by 2023.
And, while the South East is the only non-London region expected to see an overall increase in employment by 2023, the city economies of six regions are forecast to add jobs (South East, North West, East, East Midlands, South West, North East). Only the South East’s towns are expected to increase employment by 2023, however.
Simon says: “Growth is forecast to be driven by high-end services which dominate city economies so, while the outlook for levelling up is disappointing, it is perhaps not surprising. By weakening the sectors that towns are most dependent on, COVID-19 has made levelling up harder.”