East Midlands’ economy forecast to weaken as economic report predicts slow growth across the UK

Simon O'Neill

The East Midlands is expected to be among the UK’s weaker regions for Gross Value Added (GVA) growth over the next three years, at 1.4% per year – lower than the forecast UK average GVA growth of 1.7%, according to EY’s Regional Economic Forecast.

However, according to the report, average employment growth of 0.5% in the East Midlands is forecast to match the UK as a whole, with the region’s growth concentrated in business services, partially offset by job losses from its manufacturing sector.

The East Midlands saw a significant slowdown in its economic growth activity in 2018, with 0.8% GVA growth compared with 2.2% in 2017. Manufacturing grew strongly but other sectors such as services and real estate increased at below the national average rate.

Employment growth saw a decline of -1.2% compared to 1.4% in 2017 and has contributed to the East Midlands being one of only two regions where unemployment has risen in the year to August 2018, with the rate increasing to 4.3%.

Simon O’Neill, Managing Partner at EY in the Midlands, said: “The East Midlands is losing out to regions that have secured devolved powers from central government. Regions such as the West Midlands are showcasing how to make a success of devolution with GVA and employment performance above the UK average.

“In the case of the East Midlands, the region’s weaker GVA performance just strengthens the case for driving deeper geographic rebalancing to maximise the potential of all the UK’s regions. Brexit makes this even more important, both to maximise growth but also to support the UK’s transformation to be in a position to prosper after the UK leaves the EU.”

Rebalancing – the gap gets smaller in the UK economy

According to the report, UK growth is set to be more geographically balanced over the next three years. However, this rebalancing will principally be the result of slower growth in the services sector, which will have a detrimental impact on the south of the UK, rather than the regions ‘catching up’ through an improved performance.

The UK economy is growing slower than its historic trend – with annual growth of 1.7% a year to 2021, more than half a point lower than the trend. London will continue to outperform all other UK regions through to 2021, but in the three years since our first regional forecast, there has been no reduction of the imbalances between the South of England and the rest of the country.

The fastest growing regions of the UK with the highest GVA growth forecast per year up to 2021 are: London (2.1%), the West Midlands (1.7%) and the South East (1.7%). The slowest growing regions are forecast to be the North East (1.1%), the East Midlands and Wales (both 1.4%).

Core cities outperforming the rest

EY’s analysis of eight core cities in the UK (Birmingham, Bristol, Cardiff, Leeds, Liverpool, London, Manchester and Newcastle upon Tyne) saw growth of 2.2% annually on average between 2015 and 2018, whereas large towns grew at 1.8%. EY’s forecast expects this distinction to continue with growth rates of 1.8% for core cities and 1.6% for large towns over the next three years.

The strongest performing cities will continue to grow faster than average. However the gap to the slower growing areas of the UK will be less than in the recent past with little more than a 1% difference in average annual growth rates between the fastest and slowest growing locations.

Employment growth expected to slow over the next three years

EY expects the rate of employment growth to be around 0.5% per annum on average over the next five years, compared to over 1.4% in the five years to 2018 – a major change in pace. A slowing economy, expected reduction in immigration and technological change are all contributing to this significant shift in the labour market over the coming years.  The South East is the only region expected to see employment growth accelerate in the next three years compared to the previous three years.

The report says a slowdown in the retail sector, especially on the high street, also poses significant challenges for smaller towns and communities as retail tends to be a major employer in these locations. There are also similar challenges facing the manufacturing sector. The sector has grown over the last three years and employment has increased as a result. However, it is expected to grow more slowly over the next three years as technology is used to drive productivity in a more challenging labour market.

Simon O’Neill continues: “This report demonstrates how geographical imbalances not only remain within the UK economy, but are actually widening at a local level within regions. With smaller places more vulnerable to economic downturns it is critical that we start to develop policy now to help drive greater balance and security in economic activity across the whole of the UK.

“This is an opportunity for geographic rebalancing to an extent, but the national approach to geographical rebalancing must identify how to ensure that smaller cities and towns, and the more remote parts of regions, can benefit from the success of the faster-growing cities. Improving connectivity, both physical and digital, will be critical in ensuring the economy is one in which everyone has a chance to participate fully, regardless of location.”