/Long_Term_Executive_Report

State of the Northwest Economy Long-term Forecasts

Executive Summary May 2008

Produced by

The Regional Economic Forecasting Panel on behalf of the

Regional Intelligence Unit.

www.nwriu.co.uk

Executive Summary • The Panel expects that GVA generated in the Northwest will grow more slowly than in the UK over the next twenty years by an average of some 0.4 percentage points a year. Thus, if growth in the UK turns out to average 2.7 percent a year, that in the Northwest should average 2.3 percent.

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Though this is faster than GVA growth of 1.8 percent a year achieved on average in the Northwest in the 1990s, mainly because the region’s population and working age population are expected to grow rather than fall, as they did then, GVA per resident head is expected to grow on average over the next twenty years by 1.6 percent a year, as compared with 1.9 percent in the UK. As a result, the gap in the level of GVA per head in the region, which may presently be around 13.5 percent lower than in the UK, is likely to widen further.

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Growth in GVA is influenced by growth in the number of jobs, and in productivity when measured in terms of value added per job. Value added in turn reflects wages earned and profits generated and retained in the region. So, our method is to identify recent underlying trends in the growth of jobs and in productivity, to understand why these have arisen, and to ask how various influences may affect them in future.

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The recent history of the regional economy includes a period of very rapid jobs growth, especially between 2001 and 2004. This we think was exceptional and unlikely to be seen again. It followed marked recent increases in public spending such that a third of the region’s jobs are now in the public sector; and it also included the out- sourcing of jobs in financial and business services from higher cost places in the South, following a downturn in international financial markets in 2001.

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Shifts in net immigration, which explain why the region’s population began to grow again from 2001, also appear to have been closely related to this exceptional period of growth in job opportunities. While the participation of men has remained stubbornly low, a significant increase of the participation of women in the region’s labour force appears to have been a further response to this same peak in job opportunities. Yet, the underlying trend in the growth of jobs in the Northwest has, we judge, still been running on average around 0.1 percentage points a year below that in the UK.

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Our conclusions about productivity growth are more disappointing. The recent peak in jobs growth in the Northwest was accompanied by a fall back in the growth of productivity, following which there appears to have been some consolidation. Nevertheless, services now represent the bulk of jobs, and productivity levels in all broad service sectors in the region fell relative to the UK between 1995 and 2005. Also, there is little left of an advantage the region once enjoyed in the productivity stakes because of its once considerable concentration of employment in manufacturing, in which labour productivity, which we are measuring, is generally higher than in services.

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We attribute the relative decline in the region’s productivity in services in part to a gradual fall in its price level relative to the UK, which is bound to have had a general effect on relative wages. There has also bee in disparities in earnings in higher-level jobs between London and other major cities, including Manchester and Liverpool. This effect has been particularly marked in top-end jobs in financial and business services, a sector that now provides almost half of GVA in London as against less than a fifth in the Northwest.

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In short, the main reason why the output gap between the region and the UK has generally grown faster than the Northwest. The main influence has been the performance of London as a global city and as an international provider of high level services, together with consequential growth in an increasingly widespread ‘super city region’ around London. Its direct influence now expands into parts of the East Midlands, the West Midlands, and the South West, as well as into Eastern England and much of the South East.

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Nationally organised service firms operate in Northern regions and in the Territories, and some firms based in these areas also do well in more centrally located markets. But a distinction can be drawn between areas of the UK that are directly influenced by London, and others, such as the Northwest, that are generally further away, and have less well developed links, even if they may host support services for firms based in higher cost places, including the London area.

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Our new forecast says that we expect that these recent trends will continue for reasons we argue based on the best evidence we can assemble. So, the main reason why we expect growth rates in GVA and in GVA per head to continue to diverge with the UK and with England has mainly to do with dynamic effects of economic agglomeration continuing to be stronger in and around London than in and around Manchester and Liverpool. We also expect that the nation’s national and international business is likely to go on becoming still more concentrated in London. Manchester has developed into the equivalent centre for the Northwest, and has some national and international business. But everything is on a smaller scale.

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In addition to spatial factors of this kind, we have looked at the most recent evidence about supply factors that are understood to drive the growth in productivity across the country. We doubt, however, that taken together, these will work to narrow the underlying trends we have identified in productivity or in jobs. On the contrary, there is some risk the reverse could be true. Nor has a review of evidence about the Northwest’s sub-regions led us to amend this view.

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Based on projected trends in total and working age populations, and likely developments in participation, we also expect the effective supply of labour and jobs will go on growing more slowly in the region than in the UK, with a risk that this expected divergence in jobs growth could be wider than we have forecast, depending on where net immigration is concentrated.

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The results of public policy is implicit in these trends but, for reasons argued in the assessment section of our report, we do not expect that it is likely to be able to change them very much. This is because many programmes are similar to those that have been taking effect for some time, while economic performance seems to have been driven mainly by structural change responding to market forces. We might amend our view if we saw firms and other bodies in the region taking increased advantage of strategic opportunities in which the region has strengths (for instance in nuclear, energy, and environment-related industries) and if we saw public policy concentrating an increased proportion of resources on growth, especially on accommodating and underpinning agglomeration through appropriate policies, especially on transport and housing.

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However, we appreciate that policy agendas besides growth are in play, requiring regional institutions to take what amounts to a collective view about how important is faster growth in GVA per head as against other objectives. Our forecast amounts to saying that, even if growth in GVA per head, were given primacy, it would still be a considerable challenge for the region to do better against the target of achieving faster growth in GVA per head that the government has laid down for its policy purposes.

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Supported by SQW Consulting and Cambridge Econometrics, this report completes the fifth year of the work of the Northwest Regional Economic Forecasting Panel.

We were set up in 2003 as a service to business and to others concerned with the development of the Northwest as a thriving regional economy. We prepare and publish long-term forecasts looking forward twenty years, of which this is the latest annual edition. We also publish short-term forecasts for business looking out three years, and do this each Spring and Autumn. We also keep up to date more factual reports about the regional and sub-regional economies.

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While we enjoy the support of NWDA, we are fully independent of the Agency in the views and material we publish.

Our papers may be found at www.nwriu.co.uk, and we would welcome any comments on our work through nicola.christie@nwda.co.uk.

David Coates Panel Chairman