The issue of regional economic disparity has taken a backseat recently. This raises the question of whether this was truly a policy priority for the Government or an attempt at consolidating support amongst new-found Conservative voters in traditionally industrial areas. At the last General Election, the gap between the richest and poorest regions, London and the North East, stood at £30,000 in per capita terms. Cebr’s analysis suggests this will widen in the coming years, reaching £34,000 by 2028.
The economy as a whole is currently on a weak footing, facing a variety of headwinds from both the demand and supply side. Indeed, our latest forecasts show the UK contracting by 1.2% in 2023, which would mark the second annual fall in GDP in just four years. Nevertheless, this headline growth forecast disguises significant regional variation. Despite recent government schemes purporting to provide targeted support towards previously underperforming areas, many of these regions are expected to fare the worst in 2023.
The North East, home to the Government’s new Treasury Campus, is expected to be amongst the worst performing regions in 2023, with a contraction of 2.0% forecasted. Meanwhile, the West Midlands, part of the Midlands Engine and making up a significant chunk of the HS2 route, is also set to experience a 2.0% slump. The anticipated poor performance of these regions can be partially explained by their sectoral composition. Both are home to a large cluster of businesses in manufacturing. Recent PMI data have shown that significant negative sentiment amongst businesses in this sector is not just contained to the UK. The US and the Eurozone measures fell to their lowest level since Q2 2020 last month, indicating a global manufacturing downswing. This is expected to continue into 2023 as a result of lingering input price inflation and global supply shortages. These factors will make manufacturing one of the worst performing sectors in 2023 and act as a drag on the Midlands and North East regional economies.
The East Midlands and Yorkshire and the Humber are set to be the next worst performers in 2023, with contractions of 1.7% and 1.6%, respectively. These regions also have larger than average manufacturing sectors, while also possessing disproportionately large retail sectors. This is another industry expected to contract in 2023, owing to the impacts of the cost-of-living crisis and anticipated withdrawal of consumer activity amid worsening living standards. Amongst both Midlands regions, the North East, and Yorkshire and the Humber, output is set to fall below pre-pandemic levels in 2023.
Northern Ireland is another area expected to show below average performance in 2023, in large part due to the cost-of-living crisis. Data from Cebr’s Income Tracker, produced with Asda, have shown record falls in Northern Irish spending power in recent quarters, contributing to a consumer-led slowdown in activity in the country. This trend is projected to continue into 2023, when inflation is set to still outweigh wage growth. 2023’s contraction will also take output in the country back toward, but not quite beneath, pre-pandemic levels.
Not only are these regions expected to see the weakest economic performance in 2023, but their position relative to London is also set to worsen. The message of the Levelling Up Agenda has been one of spreading activity across the country, so that regions are able to stand on a stronger footing compared to the capital. There is only mild evidence of this so far, however. Northern Ireland’s economy did increase in size relative to London’s in 2020, but this is expected to be a short-lived phenomenon, driven mostly by varying outcomes from the pandemic. Meanwhile, the economy of the West Midlands was equivalent to 30.2% of London’s in 2019. This share has fallen since the pandemic, and we expect it to drop further in the years ahead, reaching just 28.7% by 2024. By 2028, we expect the economies of the West Midlands, Yorkshire and the Humber, and the North East to all lose at least 4% of their size relative to London, compared to 2019 levels. Smaller relative falls are forecasted for Northern Ireland and the East Midlands, as shown by the chart below. Scotland and Wales, where power is devolved, are also set to worsen relative to the capital by 2028.
Indeed, the only region expected to make gains in comparison to London is the South East, another of the country’s most prosperous areas. These dynamics will widen the gap between regions, with London set to outperform the North East, the poorest region, by £34,000 per head by 2028.
Away from projections for the years ahead, many of the problems facing these regions have been well documented. Cebr has performed extensive analyses on the topic, including the regular Power House reports for Irwin Mitchell and a study on how the new Green Book can help to deliver growth in regions outside the South East. Ultimately, the regions suffer from productivity shortfalls, poorer infrastructure, and a weaker skills base. They also possess lower rates of entrepreneurship, as evidenced by fewer business start-ups. With the general economic shift away from industry towards services, particularly in the technology space, any Government would need to address these more structural disparities in order to avoid some regions falling further behind.
For more information please contact:
Sam Miley, Senior Economist Email firstname.lastname@example.org Phone 020 7324 2874
Cebr is an independent London-based economic consultancy specialising in economic impact assessment, macroeconomic forecasting and thought leadership. For more information on this report, or if you are interested in commissioning research with Cebr, please contact us using our enquiries page.