The economic growth of England’s cities and the South is on track to outpace towns and the North and the Midlands, according to EY’s latest Regional Economic Forecast – although the economy in the South West is unlikely to return to its pre-pandemic levels until 2024, later than most other regions of the UK.
The report says that the ‘levelling up’ agenda can accelerate with targeted government and local action, and if lessons are learned from the pandemic’s impact on work-life balances.
When measured by Gross Value Added (GVA), 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.
Of the four regional economies expected to be below their 2019 sizes by 2023, three are outside the South: Yorkshire and Humber (equivalent to a -0.31% annual decline in GVA forecast); the North East (-0.29%); and West Midlands (-0.26%). The South West’s 2023 GVA is expected to be lower than 2019’s level by the equivalent of a -0.17% annual decline.
With the region expected to see a 12.2% decline in GVA in 2020, the South West’s relatively slow rate of growth between now and 2023 means the region’s economy is unlikely to return to pre-pandemic levels until 2024, later than most other regions of the UK.
Contractions or only marginal gains in GVA across several sectors, including those most affected by COVID-19 such as manufacturing and retail, are to be expected by 2023. The region’s significant hospitality sector will hold back overall growth, particularly in the near term, although the national roll-out of the COVID-19 vaccine may open-up opportunities in this sector as 2021 progresses and in the longer term.
The South West’s towns are set to be slower to recover economically, with an annual average forecast GVA change of -0.26% between 2019 and 2023. At the same time, the GVA of the region’s cities is expected to grow 0.54% per year between 2019 and 2023. The region’s employment is forecast to fall by 0.38% per year over the same period.
There are pockets of positivity across the region, including in Bristol, which is set to perform better than the region with GVA growth forecast to average 0.54% per year between 2019 and 2023. This will be underpinned by growth in two main sectors: real estate (annual average GVA growth of 1.31%) and professional services (1.30%). Employment in Bristol contracted by 0.52% in 2020, but is forecasted to grow 0.16% between 2019 and 2023, helped by gains in real estate and the public sector.
The picture for the other major towns and cities across the South West’s remains challenging, although some areas will perform better than average. Exeter, for example, is also forecast to see an increase in GVA of 0.54% per year up to 2023 from 2019.
Andrew Perkins, Office Managing Partner at EY in the South West said: “Some of the South West’s most important economic sectors – such as hospitality, leisure and tourism, and manufacturing – are among those which have been most affected by the COVID-19 pandemic. It’s positive that our region’s cities are expected to fare reasonably well over the next few years, but ‘levelling up’ isn’t just about a North-South divide – the South West’s towns need attention, too.”
Regional divide in post-pandemic recovery expected
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 town 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.”
Sector impact of COVID-19 pandemic matters
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.
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%.
Andrew 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%).
Andrew 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.
“Looking ahead, manufacturing will be key to the levelling up agenda. An estimated 86% of manufacturing activity is in towns or smaller cities outside the South East, while 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.
“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.
“As advisers to businesses across the region, we must remain agile and flexible to meet the needs of those working in the Private sector, whether they are looking to undergo further cost efficiency processes, or for those that have been less impacted by the pandemic, make the most of opportunities to grow their business portfolio. We must also remain focused on supporting the region’s larger, listed businesses with their growth ambitions, notwithstanding the next couple of years and the challenges they will face.”