London, Reading and Manchester top economic growth

04 January 2016

The UK’s economic forecast is relatively gloomy as various macro-economic factors see consumer power further eroded over the coming years. It will mainly be business investment that will improve economic output, a recent EY research shows, with particular focus on the Southern and Eastern parts of the UK. The cities of London, Reading and Manchester will see strong economic growth, as well as professional services.

EY recently released its first of what will be a six yearly report into the regional UK economy. The report, titled ‘Rebalancing: UK region and city economic forecast’, takes a macroeconomic snapshot, and then explores how the various factors play out in the UK’s regions, as well as various key cities.

Macro economics
The macroeconomic environment in the UK has seen considerable growth as low inflation and increased wages have allowed consumers to spend more. Consumer-based growth is projected to be the largest growth driver in 2015. The forecast for 2016 is not as rosy however, as higher inflation, public expenditure reform and rises in interest rates outweigh the introduction of the national living wage. Austerity coupled with inflation and interest rate rises will see consumers continue to be pressured in the years following.

UK GDP growth

EY predicts the UK GDP growth to rise just 2.4% in 2016 and 2.3% in 2017. This growth is projected to come from increased business investment, as companies invest in ways of improving productivity. In addition, further capital spending by the UK Government on infrastructure and the support for house building, announced in the Autumn Statement, are also expected to stimulate UK fixed investment.

The aim of the report is to explore the way various UK regions are taking part in the UK economy. Considerable changes are taking place as the current UK Government seeks to devolve greater economic decision-making power, which offers opportunity to the UK’s regions and cities. However, other aspects of the reform agenda, especially cuts to public expenditure, will be felt most keenly in regions with higher unemployment and a greater exposure to state spending as a share of local economic activity.

Employment and GVA growth by region

Regional outlook
The region enjoying strongest economic growth is the South. London in particular has seen its GVA (Gross Value Added) grow by 3.6% in 2014 and 3.4% in 2015 – the highest level across all regions. The South West and South East have also seen strong growth, even in the slowdown in 2015, at 2.5% and 2.4% respectively. The countries of Wales, Scotland and Northern Ireland all have seen sluggish growth in 2015, at 1.7%, 1.8% and 1.7% respectively.

Employment gains across England too show regional variation. It is again the South that is enjoying relatively healthy employment increases, although the East is also doing well. London saw employment up 4.8% in 2014 and 2.1% in 2015. The South West and East were up 4.6% and 2.5% respectively in 2014, and 1.5% and 0.9% respectively in 2015.

Annual average GVA growth

GVA projection
The consulting firm also makes a projection about the coming years for the various regions. For the most part, following the macroeconomic trends, regional GVA will decrease. It is again the regions around the capital that are expected to enjoy above average growth. London will remain at 3% annual growth over the coming three years, followed by the South East at around 2.5%, the East at around 2.4% and the South West at around 2.3%. The areas that will see the least benefit from business investment and consumer growth are the North East, Wales, Northern Ireland and Scotland, all at around 1.7%.

The report further highlights that the Government’s ‘Northern Powerhouse’ ambitions are unlikely to have a radical economic impact during the forecast period through to 2018. At best the economic boost will be felt more in the next decade than this one, EY states, given that major infrastructure schemes such as HS2 will not come into operation for another ten years. The North East’s low growth can be attributed to the region’s relative reliance on public expenditure within the UK, and partly its heavy reliance on manufacturing — a sector that faces particular problems given the current strength of the pound against the euro. 

Employment and GVA outlook 2015-2018

City outlook
In terms of cities, the strongest performer is London; the city has more economic clout than all the other major centres combined. It is expected to add a further 276,500 employees over the coming three years. The top performing cities outside London are Leeds at 3.1% GVA growth, followed by Luton at 2.8%. The cities with the poorest growth are Inverness at 1.5% and Hull at 1.6%.

Certain sectors have particularly high GVA and are helping cities push up their growth performance, these in particular are Financial Services and Insurance, Professional Services, and Information and Communications. In London for instance, these are projected to grow by 16%, 13% and 11% respectively, while for the UK as a whole, their respective shares are 7%, 8% and 6%.

Although many cities are in part enjoying growth from their geographic location near the capital, EY highlights that, with the right policies, many of the UK’s major cities can flourish. “Manchester also gains from being particularly strong in Professional Services and Financial Services but the real story is how targeted initiatives can drive superior growth. Manchester’s projected growth of 2.5% in GVA puts it in the group of top performing cities and shows that geography is no barrier to progress if the right initiatives are put in place,” the firm states. “The challenge is to develop and implement the right mix of policies.”


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