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, 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.
The East Midlands’ growth to 2023 will see the region bounce back from being the English region with the third largest decline in GVA in 2020 (-12.45%). Only Yorkshire & Humber (-12.77%) and the West Midlands (-13.58%) are expected to see a larger contraction in 2020.
The region’s growth to 2023 is expected to be led by its cities, which are forecast to see average annual GVA growth of 0.59% compared to 2019. This is the fastest city growth of any region. Nottingham is set to see the fastest growth of all cities in the region, with annual GVA growth forecast to be 0.59% between 2019 and 2023; the city’s employment level is expected to increase 0.4% per year over the same period.
Derby follows with annual average forecast GVA growth of 0.09% between 2019-23. Leicester, however, is expected to see its GVA decline by 2023 compared to 2019 at an average annual rate of -0.14%. Employment in both Derby and Leicester is expected to contract – by -0.16% and -0.13% per year, respectively – by 2023 compared to 2019.
In contrast to the strong forecast for the region’s cities, the East Midlands’ towns are expected to see an annual average decline in GVA of -0.05% per year between 2019 and 2023.
The region’s economic performance in 2020 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 is expected to be led by the real estate sector.
Simon O’Neill, Office Managing Partner at EY in the Midlands, said: Manufacturing is a vital part of the East 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, 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. Across the country and here in the East 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 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.
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%).
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.”