There’s capital beyond the Capital
Panmure Gordon’s Chief Economist, Simon French, comments on the underreported regional growth story in the UK.
Is the consumer squeeze easing? Is the UK making progress on its twin deficits? What is happening to house prices? Economic commentary that attempts to answer these questions is often like a lightbulb – producing more heat than illumination.
But there are exceptions. This week started with one of the UK’s pre-eminent economic voices, Lord Jim O’Neill, noting that the recent upswing in world economic growth was set to dwarf the near-term impact of Brexit. O’Neill has form in this area. He noted earlier than most the dramatic impact that the BRIC economies (Brazil, Russia, India and China) would have on the world economy. His comments yesterday triggered the usual set of claims and counterclaims. These mainly centred on Brexit. Less widely reported was O’Neill’s observation that UK growth, for the first time in two decades, is being led by non-London regions such as the North West.
We have become accustomed to the idea that London leads the way. Since 1997 the output of the London economy has grown by an average of 4.7% a year, compared to just 3.4% a year across the rest of the UK. A huge influx of native and non-native migrants into London fused with inward investment to help widen the gap between London and the rest of the UK.
The recent rotation of growth into the UK regions therefore remains poorly understood. Economic narratives always take time to adjust. As a rule the media struggle to evaluate the three-quarters of the UK economy that sits outside of the M25. Typical of this gap in understanding is the fact that UK manufacturing remains a larger share of the economy than financial services. That 51% of the latter occurs in the UK’s capital skews its importance for London-based commentators, broadcasters and politicians.
What is behind this recent change in fortunes? Five factors are, in my view, behind the regional revival.
Firstly, changes to property taxation and a tightening in mortgage lending criteria are disproportionately impacting London and its commuter belt. The effect of falling house prices in and around the UK capital is translating into more cautious spending and investment decisions. By contrast, the recent cut to Stamp Duty and extension of the Help-to-Buy scheme has been a shot in the arm for lower value housing transactions that are disproportionately found outside the South East of England.
Secondly, Bank of England researchers have identified that Remain-supporting consumers have been more downbeat than those that voted to leave the EU. “Remainers” are estimated to have grown their consumer spending by 2.9% in 2016/17. “Leavers”, a group disproportionately found outside of London, increased their spending by 3.2% over the same period. Perception around the long-term impact of Brexit appears to matter when it comes to near-term spending decisions.
Thirdly, a weaker Pound since the EU referendum has begun to translate into fuller manufacturing order books. Manufacturing is 12% of economic output in non-London regions, compared to less than 3% in the UK capital. The less-tradeable services sector that dominates the London economy has benefitted less from the weakness in the Pound.
Fourthly, uncertainty over the future rights of EU nationals has disproportionately impacted London – an economy with around four times the percentage of EU migrants in the labour market compared to the national average. The recent slowdown in inward migration has made skill and capacity shortages a more acute problem for London-based firms.
Finally, the much-maligned Conservative government deserves some credit for recent devolution deals granted to regions with directly-elected mayors. This policy has built on the Coalition’s City Deals that has enabled other UK cities to share in the powers that London has long enjoyed.
These five factors – together a combination of luck and design – have started a rebalancing. This is long overdue. Members of my own family voted to leave the EU for no other justification than resentment of the London-centric nature of the UK economy. They were not alone. Rebalancing is therefore vitally important politically and socially, as well as economically. The UK’s recent progress needs to be both celebrated and sustained.
This article was published in the Times Newspaper.