FORECASTING EYE SPECIAL

The UK economy is certainly starting to revive from its coronavirus caused crash and will continue to do so as lockdown diminishes.

How far the recovery will go in the short term will depend on a series of factors – whether an effective Covid 19 vaccine will emerge from one of the 119 laboratories working on the task, whether business and consumer confidence will re-emerge and whether economic policy achieves the right mix between helping businesses and employees and restraining the pressure on public finances.

But medium term most expect tech to be a key feature of the recovery. And since much of Cebr’s work focuses on tech, it makes sense to look at how tech can contribute to the revival and what could be done to boost that contribution and ensure it is spread around the country.

After the financial crisis in 2008 it was thought that the London economy was being dealt a mortal blow with the collapse of much of finance and property, London’s two key sectors. But it recovered rapidly, driven by what I called the Flat White Economy in the eponymous book[1]. As early as 2012, London house prices were already 12% higher than their 2007 peak and economic revival was on its way.

Tech is now mainstream and a much larger part of the economy. On my definition (essentially based on the sorts of businesses that operated near Cebr’s office in Shoreditch and including key tech using sectors like digital marketing and advertising as well as tech producing sectors) digital was only 7.6% of GVA in 2012. The number of digitally based sectors has increased and now a realistic estimate for its size in 2019 using ONS statistics (see Table) was 12.2% of GVA making it comfortably Britain’s biggest economic sector, larger than manufacturing (9.6%), Finance (6.6%) Construction (6.2%) and Retail (5.2%).

And it is still growing roughly twice as fast as the economy with its contribution to the UK’s GVA up 37.0% in the 5 years to 2019 compared with 19.5% for the country’s GVA as a whole (although this faster growth will become more difficult as its share gets bigger).

One of Cebr’s recent digital studies has been the report which we produced for Openreach in October 2019 on the implications of full fibre broadband. We estimated that this on its own could boost working from home by just over a million additional people, taking the share working more than 2 days a week from home in England and Wales up from 11.9% to 16.2%[2]. Currently survey data suggests that with the lockdown the share of the labour force working from home is 45-50%[3]. Other survey data suggests that around half of those working from home would prefer to work from an office and intend to do so when possible[4].

We expect that when things return closer to normal, there will be three types of workers, those who mainly work in a workplace, those who mainly work at home and those who do a bit of both. Our current modelling suggests that in 2025 we might have about a quarter of the workforce working from home on any day.

The Openreach report[5] indicated that, using a spatial model which my Cebr colleagues had developed for them, we could see as a result of full fibre broadband (which would reduce the time taken to download a 1 gigabyte file from the current 7 minutes on a superfast network to 43 seconds):

• 1 million additional people in total having the opportunity to work from home;
• Over 270,000 people could potentially move away from London and other major citiesand into suburban and rural areas. Over 93,000 more people could choose to work in rural communities compared to the present day;
• Non-metro areas across the North could see significant boosts in residential levels – with over 43,000 more people choosing to live in these areas.
• Perhaps even more importantly, the study indicated that making it easy for people to work from home would be likely to bring 450,000 people whose primary task is caring, 150,000 people over 65 and 125,000 people with dependent children into the labour force.
• The increase in working from home could save 300 million commuting trips, representing a carbon reduction of 360,000 tonnes per annum.
• At the same time, the time saved commuting would both create more leisure and increase productivity. Potentially annual GVA could be boosted by £59 billion by 2025.

These estimates show the impact of full fibre broadband on its own. The National Infrastructure Commission estimated that the investment cost would be £33.4 billion[6] including the £5 billion earmarked for government subsidy to provide this in ‘hard to reach’ areas. As an investment case it looks a no brainer, particularly as most of the investment will be paid for by the private sector, though I should declare an interest since Cebr has been employed by Openreach to research this.

But if the combination of the changes in working practices from coronavirus and the introduction of full fibre broadband mean that the proportion of people working from home rises to 25% (over 6 million people in England and Wales), some of these changes could be very much greater.

A more online economy would certainly boost the Flat White Economy. We have been looking at the likely impact working on the assumption of 25% of the workforce working from home by 2025.

We estimate that this would cause the Flat White Economy to grow from £240 billion in 2019 to £430 billion in 2025, rising from 12.2% of GVA to 17.8%. Conservatively this could generate 1.2 million new jobs in the sector and around double that number in total once knock on effects are taken into account.

The key policy questions are how best to make sure that this happens and how best to see that the gains are spread around the country.

Obviously the investment in a full fibre broadband network is part of a solution, including the sums already committed to subsidise the extension to hard to reach areas.

Beyond this at a national level, taxes and regulations need to be such that they don’t discourage the UK from continuing to be Europe’s digital centre.

Supplying the flat white economy with skills means a permissive immigration policy post Brexit. In addition, equipping people laid off as a result of the coronavirus economic downturn with digital skills makes huge sense, with economic returns of up to 4 times the cost.

At a local level, though London is a magnet for digital investment because of its mix of finance and digital skills, Cebr’s analysis of the geography of digital in the US has suggested three other factors can help spread digital jobs to areas outside London:

Cheap property is a critical factor, since digital companies tend to want to have more space than just for their immediate needs given the likelihood of explosive growth and indeed this is one of the reasons that London’s digital economy came to the then depressed areas of East London in the first place.

Digital also thrives where there are young skilled people, so universities and colleges are also catalytic.

But a lively cultural and creative sector is another major factor determining the location of digital clusters. It is no surprise that Nashville Tennessee is one of the US’s most important digital hubs based on its music. Another of the factors boosting digital in East London was the buoyant art and film sector that was already there.

Digital jobs around the world are often spinoffs from defence sectors. Israel has the highest share of digital jobs in the world, with a particular expertise in cyber security. Davidovo near Moscow is also booming with defence and other spinoffs.

Tech is notoriously footloose and those communities that can make themselves attractive to investors will reap the rewards. There is no reason why the 1.2 million digital jobs should be all or mainly in London and it is up to us to make sure that they are spread around the country.

[1] Douglas McWilliams, The Flat White Economy, Duckworth Overlook, Paperback edition, London 2016
[2] This is based on Travel to Work Survey data. Other data on working patterns from the ONS’s population survey for the UK shows 5% ‘working mainly from home’ with roughly twice that number having ‘worked at home at some point during the week prior to the interview’.
[3] ONS – Coronavirus and the social impacts on Great Britain, 16 April 2020
[4] People Management – Half working from home during lockdown are unhappy with work-life balance, 7 April 2020
[5] Openreach – Full Fibre Impact
[6] House of Commons Library – Gigabit-broadand in the UK, February 2022

For more information, please contact:

Douglas McWilliams:          dmcwilliams@cebr.com   +44 7710 083 652

The GVA from the Flat White Economy in 2019
(Source ONS)