State of the Northwest Economy Long-term Forecasts May 2006
Produced by
The Regional Economic Forecasting Panel on behalf of the
Regional Intelligence Unit.
www.nwriu.co.uk
This report is published by the Northwest Development Agency as part of its continuing commitment to inform the economic development of England’s Northwest. It has been produced by SQW Ltd and Cambridge Econometrics Ltd, economic development and forecasting consultancies, on behalf of the Northwest Regional Economic Forecasting Panel. Whilst every effort has been made to ensure the accuracy of the material in this report neither the Panel, SQW Ltd, Cambridge Econometrics Ltd nor the NWDA Research Team can accept any responsibility for decisions based on the material that follows.
Further Information If you require further information on the work of the Panel, please contact Emma Charnock. Press enquiries should be addressed to Rachel Ormandy. Emma Charnock Economic Information Analyst Research Team, NWDA Emma.Charnock@nwda.co.uk 01925 400290 Rachel Ormandy Senior Press Officer NWDA Rachel.Ormandy@nwda.co.uk 01925 400237
Foreword and Executive Summary The Northwest Economic Forecasting Panel was set up three years ago as a service to business and to others concerned with the development of the Northwest as a thriving regional economy. In addition to forecasts looking out over the next three years, which we see mainly as a service to business, we publish regular assessments of the state of the regional economy, and this is the third of our forecasts looking forward over a period of twenty years that builds on these assessments. Our new long term forecast is based on an analysis of developments in the regional economy over the past fifteen years set out on pages 1 to 19. These show that the Northwest has tended to grow more slowly than the UK, save in periods influenced by cyclical events, and that it is has shared in the growth of employment enjoyed by the UK, even though until recently its population has been falling. This is mainly because the proportion of those of working age who have become active participants in the labour market has been faster than in the UK, with a noticeable increase in activity among women in the Northwest, a development we nevertheless think is now at or near its end. The region has also seen considerable changes in structure in its output away from manufacturing and towards services that have tended to bear down on overall levels of productivity. We have also noted that the growth in output has tended to become increasingly centred in the cities and their surrounding areas. In our forecast, which looks forward over the period to 2025, we build on this evidence to ask how is the region likely to grow relative to the UK as a
whole over the next 20 years? We focus on this comparative approach because it abstracts from developments that affect all regions. It also allows us to look at whether or not there appear likely to be differences in degree in a range of factors that can influence the growth in employment, and in productivity, which together will determine the likely growth in output in the region and in the UK. In our view, employment in the region is likely to grow on average 0.2 percentage points a year more slowly than in the UK. This is because of expected differences in the growth of population in the region relative to the UK as a whole, arising mainly because of differences in expected international immigration. We expect that changes in the growth of the working age population will largely follow those in population in the region and the UK, and that future growth in the active participation of the workforce in the region will follow that in the UK. The treatment of productivity growth is more complex, because more factors are involved. We have found it helpful to look at evidence about the present position and likely developments in several productivity drivers, especially skills, enterprise, innovation, and investment. This is summarised on pages 28 to 39. We have also paid more attention this year to the potential effects of the City Regions here and elsewhere on future patterns in the growth in productivity. And we have also borne in mind their possible effects on the growth in employment. This is because of their influence on patterns of migration within the UK, especially of skilled and enterprising people, too many
of whom, among the region’s young have chosen to look for opportunities in the South in recent years. Our paper presents maps and data on pages 41 and 42 that show that it is not just in the Northwest that City Regions have tended to grow more rapidly than elsewhere in recent years. In particular, there is clear evidence of the emergence of a ‘super city region’ centred on London. This has performed more strongly than City Regions elsewhere in England, among which Manchester stands out because of its weight and performance relative to the rest. Looking forward, we began our discussion of City Regions by identifying four economic factors set out on page 43 that summarise those the academic community has identified as necessary, if not always sufficient, requirements for City Regions to prosper. Evidence assembled to illustrate these factors is presented on pages 44 to 51, and we have paid particular attention to their influence in addressing the potential role of the City Regions in our assessment of the evidence that underpins our forecast on pages 60 to 64. In particular we note evidence on page 57 of the emergence of a Northwest corridor stretching from Merseyside through Manchester to Tameside and Stockport that may increasingly come to behave as a single City Region from an economic point of view, and work to attract the skills both Liverpool and Manchester will need to succeed. In the light of all the evidence we expect that productivity growth in the region will lag behind that in the UK on average by 0.1 of a percentage point a year. So taking our views on likely employment and productivity growth together
gives us a central forecast that the growth in GVA in the region is likely to be slower than that in the UK by an average of 0.3 percentage points a year. We identify risks to this central forecast in both directions. For instance, Manchester City Region may be more successful in realising its quite considerable potential than we have judged in this forecast, and do even better than we anticipate relative to other English City Regions away from the influence of London. On the other hand, the London ‘super city region’ may be even more successful, with the effect of the Olympics and of possible patterns of house building in the region and in areas around London playing a part. All in all, while we suspect that the balance of risks to our forecast is on the downside, implying an even greater degree of caution than is usual in taking it as the most likely outcome, we believe that our forecast of an average gap in economic growth of 0.3 percentage points a year between the Northwest and the UK should still be seen as central for the next twenty years. While we remain independent of the Northwest Development Agency, we are grateful to the Research Team based in the Agency for support and for publishing our papers. We have made a number of judgements in developing these forecasts which some may regard as controversial, and we may have omitted issues that others feel are too important to have been left out. Any comments on substance and method would be welcome care of emma.charnock@nwda.co.uk David Coates Panel Chairman
Contents Setting the Scene: Developments since 1990
1
Developing the Panel Forecast for 2005-2025
21
Demographics & Employment
24
Productivity
28
Productivity Drivers
29
City Regions
41
Panel Assessment
53
The Panel’s Central Forecast:
61
How do our Long Term and Short Term Forecasts Relate?
67
Risks to the Forecast
68
Setting the Scene: Developments since 1990
Page 1
Recent growth performance in the Northwest Figure 1: Annual growth in GVA in the Northwest & UK, 2001 prices
•
In the Northwest economy Gross Value Added (GVA), the accepted measure of total output, grew by 32% in constant prices between 1990 and 2004. This is equivalent to an average annual growth rate of 2.0%, 0.4 percentage points (pp) per annum below the UK average of 2.4% for the same period
•
The gap in growth rates narrowed to an average of 0.2pp per annum between 1998 and 2004, with growth in the region in 2003 and 2004 slightly higher than that in the UK
•
Northwest growth exceeded that in the UK only in periods influenced by cyclical slowdown – between 1991 and 1993, and between 2001 and 2004 - which tended to affect Southern more than Northern regions
•
In terms of GVA per resident head, relatively slow growth in GVA was mitigated by the decline in the Northwest population. The gap in GVA per head narrowed to 10.3% in 1992, but widened to a peak of 13.0% in 2000. By 2004, the gap between Northwest GVA per head and the UK had narrowed to 11.6%
5.0% 4.0% 3.0% 2.0% 1.0% 0% -1.0%
UK
2003
2001
1999
1997
1995
1993
1991
-2.0%
Northwest
Figure 2: GVA per resident head - % difference between Northwest & UK
2004
2002
2000
1998
1996
1994
1992
1990
13.5% 13.0% 12.5% 12.0% 11.5% 11.0% 10.5% 10.0% 9.5% 9.0%
Source: Regional Accounts & Cambridge Econometrics
Page 2
The drivers of GVA growth •
•
GVA growth depends on changes in Employment and in Productivity. We begin by exploring the components of these drivers as follows: n
Population – trends in resident and working age populations, including international immigration and net migration within the UK
n
Employment – trends in employment and in the proportion of the working population which is economically active
n
Productivity – trends in productivity, and the part played in influencing productivity growth by the region’s changing structure and by its City Regions.
•
Although we present our view of the most likely rate of GVA growth in the region over the next 20 years or so at the end of our report, throughout we are more interested in how the region is likely to grow in comparison with the UK, and how the various influences on employment and on productivity growth in the region compare with the likely effect of the same influences on the UK. This has the advantage of abstracting from changes that affect all regions, and therefore the UK economy as a whole
Together, these help to explain what has influenced the region’s economic performance since 1990
Page 3
Population trends 1990-2004
2004
2002
2000
1998
1996
1994
1992
60,500 60,000 59,500 59,000 58,500 58,000 57,500 57,000 56,500 56,000 55,500 1990
Population ('000s)
Figure 3: Population in the UK 1990 – 2004
Figure 4: Population in the Northwest 1990 – 2004
Population ('000s)
6,860
•
UK population grew by 4.5% between 1990 and 2004, equivalent to an average of 0.32% each year, with some acceleration since 2000 due mainly to increased immigration
•
In contrast, Northwest population fell by just 0.03% over the same period, equating to an average gap in the growth of population of 0.32pp per annum with the UK. The minimal change in the region’s population hides a significant decline between 1993 and 1999 when it fell by 1.1%, equivalent to an average fall of 0.2% each year, extending an earlier falling trend
•
Since 1999, this decline appears to have been halted. Instead of falling, Northwest population grew between 1999 and 2004 by 0.8%, an average of 0.2% each year, narrowing the population growth gap with the UK to 0.2pp a year
•
During the 1990s, the population of Manchester and Liverpool fell markedly, by 4% and 6% respectively. Since a low point in 1999, Manchester’s population has risen nearly 5%. There also are signs of a halt in Liverpool’s population decline. In 2004, the population of Liverpool grew after a long decline by 0.6%
6,840 6,820 6,800 6,780 6,760 6,740 2004
2002
2000
1998
1996
1994
1992
1990
6,720
Source: ONS
Page 4
The role of migration Figure 5: Net migration (total of internal and international) to the Northwest 1991 1993
•
The fall in the Northwest’s population throughout the 1990s was mainly due to net out-migration, especially of younger UK nationals
•
However, between 2000 and 2003, the region experienced strong growth in immigration. Figure 6 shows the impact of increasing international immigration into the Northwest. The out-migration of UK nationals also seems to have been stemmed
•
2003 was the first year in which the region experienced net immigration of UK nationals in all age cohorts up to 54 years old. The potentially crucial 25 to 34 age group, for example, saw a net inflow of almost 2,000 people
•
Although these recent changes in population, and in underlying migration, occurred in a period in which the economy of the Northwest was relatively buoyant, they are also as yet short lived. The potential importance of population changes for the future growth of GVA makes them particularly important issues for this long term forecast
1995 1997 1999 2001 2003 -20 -15 -10
-5
0
5
10
15
20
25
30
People (000s)
Figure 6: Internal and international net migration to the Northwest 1991 1993 1995
Internal
1997
International
1999 2001 2003 -15 Source: ONS
-10
-5
0
5
10
15
20
25
30
People (000s)
Page 5
Migration of younger people Figure 7: Percentage change in population aged 20-34 years (1994-2004)
•
Young people bring zest and creativity. They are often mobile, not just as students. Where the skilled and enterprising among them settle can bear importantly on future patterns of economic growth
•
Mapping results show that patterns of the net migration of younger people from the Northwest, especially from its more peripheral regions, have been significant enough to have potentially serious effects on future growth
•
Between 1994 and 2004, the number of young adults in the region fell by over 15%, accelerating earlier trends. However, the decline in this population has apparently been stemmed from a loss of 2.7% in 1999 to only 0.1% in 2004. The numbers of young adults, not all students, living in central Manchester increased by 11.3% between 1994 and 2004. Liverpool has also seen an increase, if mainly of students
•
London has experienced the greatest increase in total population between 1994 and 2004, 8.1%, followed by the Eastern region and the South West with increases of 6.1% and 5.9% respectively. However, it is only London where the number of younger people aged 20-34 has grown over the last ten years, by some 4.3%. This is not just the result of migration within the UK. It is also influenced by international immigration. But the capital appears to remain a magnet for many UK young who want to reap the fruits of its success
Page 6
Working age population Figure 8: Working age population in the UK 1990 – 2005
•
UK working age population grew 5.5% between 1990 and 2004, faster than the growth of 4.5% in total population. The average rate of growth in the UK’s working age population has been 0.4% each year, with underlying growth accelerating significantly since 1999
•
The Northwest’s working age population grew by 0.3% between 1990 and 2004, when its total population was almost unchanged. Underlying changes in the region’s working age population have been more marked than those in its total population. Between 1990 and 1999, Northwest working age population fell in total by 1.2%. More recently, the increase in Northwest population between 1999 and 2004 of 0.8% has been accompanied by a 2.2% increase in its working age population
•
International immigration is likely to explain much of these changes in the region, as in the UK, where its effect has been even more marked. Helped by more modest shifts in migration within the UK, these movements are likely to have been influenced by increases in the number of job opportunities in the region, especially in its urban centres
37,500 Population ('000s)
37,000 36,500 36,000 35,500 35,000 34,500 34,000 2004
2002
2000
1998
1996
1994
1992
1990
33,500
2004
2002
2000
1998
1996
1994
1992
4,200 4,180 4,160 4,140 4.120 4,100 4,080 4,060 4,040 4,020 4,000 1990
Population ('000s)
Figure 9: Working age population in the Northwest 1990 – 2005
Source: ONS
Page 7
Trends in Jobs 1990-2004
2001
2002
2003
2004
2001
2002
2003
2004
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
31,000 30,500 30,000 29,500 29,000 28,500 28,000 27,500 27,000 26,500 26,000 25,500 25,000
1990
Employment (000s)
Figure 10: Number of jobs in the UK 1990-2004
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
3,400 3,350 3,300 3,250 3,200 3,150 3,100 3,050 3,000 2,950 2,900 2,850 2,800 1990
Employment (000s)
Figure 11: Number of jobs in the Northwest 1990-2004
•
Between 1990 and 2004, the number of jobs recorded in the UK grew by 5.1%. This masks a 6.9% fall between 1990 and 1993 and an average increase of 1.11% a year since this turning point
•
Job growth has been slower in the Northwest, at 3.9% between 1990 and 2004. The low point for employment in the region was in 1994. Between then and 2004, employment grew 12.1%, an average of 1.15% a year
•
Job growth in the Northwest has been especially fast since 1998, at 1.5% pa on average, while job growth for the UK has remained steady at 1.0% pa
•
Despite clear differences in the growth of working age populations, the average annual growth in jobs has been remarkably similar in the Northwest and the UK since recovery from the 1991 recession began about twelve years ago. Differences in GVA growth in the period can therefore be largely attributed to differences in the growth of productivity, measured in terms of differing wages and profit per job. Productivity differences flow from a number of factors discussed later in this report
Source: LFS
Page 8
Employment rates Figure 12: Jobs as a % of total population for the Northwest and UK
•
In the first half of the 1990s, jobs in the Northwest fell more sharply than population. The gross employment rate in the region, defined as jobs as a proportion of total population, fell from 47.4% in 1990 to a low of 43.9% in 1994. The recovery in the employment rate in the middle of the period reflected a pick up in employment at the same time as the population continued to fall. Since 2000, the population has risen and the gross employment rate has also continued to rise, reaching 49.4% in 2004
•
The gross employment rate in the Northwest remains lower than for the UK, where the rate grew from 46.7% in 1994 to 50.7% in 2004. Since 1998, however, job growth in the Northwest has been relatively strong as UK job growth has slowed. This has led the gap in gross employment between the region and the UK to narrow from 2.8pp in 1994 to 1.3pp in 2004
•
The lower gross employment rate in the Northwest is due to two factors. First, a smaller proportion of the population is of working age. Second, fewer people of working age are in employment
52% 50% 48% 46% 44% 42%
UK
2004
2002
2000
1998
1996
1994
1992
1990
40%
Northwest
Source: Cambridge Econometrics
Page 9
Labour Market Developments Figure 13: Part time jobs as a % of total jobs for the Northwest, England and Wales, and Great Britain
•
Just over a third (4.4pp) of Northwest job growth totalling 12.1% between 1994 and 2004 can be accounted for by an increase in the number of those in employment. The remainder is due to an increase in the number of jobs some of these workers undertake
•
In 2004, there were 13.0% more jobs in the Northwest than people in employment, compared to 5.2% in 1994. This trend is linked to the increasing prevalence both of people with more than one job, and of part-time working as industrial restructuring has forced greater labour market flexibility
•
The increase in part-time working has not just been experienced in the Northwest. Between 1993 and 2003, a very similar trend has been seen in Great Britain as a whole. The split between full and part-time jobs in the region is also very close to that in the national economy even if average hours worked tend to be lower in the Northwest, helping to explain differences in measured productivity. We return to this point on page 26
35% 30% 25% 20%
Northwest
15%
England & Wales
Great Britain 10% 5% 0% 1991
1993
1995
1997
1999
2001
2003
Figure 14: Employment as a % of working age population for the Northwest and Great Britain 75% 74% 73% 72% 71% 70% 69% 68% 67%
GB
Apr 04Mar 05
Mar 02Feb 03
Mar 00Feb 01
Mar 98Feb 99
Mar 96Feb 97
Northwest
Sources: LFS
Page 10
Employment and Unemployment Figure 15: Male and female employment (% of working age) in the Northwest and England and Wales 85% 80%
•
The rate of employment expressed as a proportion of the working age population grew in the Northwest by 3.1pp between 1996 and 2004, from 69.6% to 72.7%. This compares with growth in England and Wales of 2.4pp over the same period from 72.1% to 74.5%
•
The female employment rate rose by a marked 4.1pp, again between 1996 and 2004, compared with 2.7pp in England and Wales. By 2004, the female employment rate in the region had narrowed to only 0.8pp below that in England and Wales. As a result, lower male employment now accounts for more than half the remaining employment rate gap with England and Wales of 1.8pp. The proportion of working age men in employment in the region was 76.4% in 2004 compared with 79.2% nationally, indicating a gap of 2.8pp, down from 3.2pp in 1996
•
Rates of unemployment have fallen sharply in the Northwest for both men and women so that in the 12 months to March 2005 its total unemployment rate became the same as in Great Britain at 4.8%. What is still a lower employment rate in the Northwest is explained by its relatively large proportion of inactive people
Males (England and Wales)
75%
Females (England and Wales)
70% 65%
Males (Northwest)
60%
Females (Northwest) 2004
2003
2002
2001
2000
1999
1998
1997
1996
55%
Figure 16: Unemployment (% of working age) in the Northwest and Great Britain 7.0% 6.5% Great Britain 6.0%
Northwest
5.5% 5.0%
Apr 04Mar 05
Mar 03Feb 04
Mar 02Feb 03
Mar 01Feb 02
Mar 00Feb 01
Mar 99Feb 00
4.5%
Source: LFS
Page 11
Inactivity Rates Figure 17: Male and female inactivity rates (% of working age) in the Northwest and Great Britain 35%
•
The proportion of those of working age that are inactive, those who do not participate in the labour market for whatever reason, has recently declined by 0.5pp in the Northwest from 24.2% to 23.7% between the 12 month periods ending in February 2000 and in March 2005. This compares with a slight rise for Great Britain from 21.5% to 21.7% over the same periods
•
Added to the fall in unemployment, the relative reduction in inactivity accounts for the relative recent improvement in employment in the Northwest compared with Great Britain
•
Reflecting trends in job growth, female inactivity has fallen relatively quickly in the region, so lower male activity now primarily explains why the Northwest differs from Great Britain. In the year to March 2005, 19.5% of working age males in the region were registered as inactive, compared with 16.7% in Great Britain
•
Against a backdrop of generally rising employment, Figure 18 shows a slight fall in lone parents claiming benefits in the Northwest and in UK, but a more marked increase in the region in those registered as sick
30% Males (GB) 25%
Males (NW)
20%
Females (GB) Females (NW)
15%
Apr 04Mar 05
Mar 03Feb 04
Mar 02Feb 03
Mar 01Feb 02
Mar 00Feb 01
Mar 99Feb 00
10%
Figure 18: Benefit claimants as % of working age population for the Northwest and UK 7% 6%
Any other form of Income Support
5% 4% 3%
Lone parent
2%
Sick person
1% 0% UK
Northwest 1998
UK
Northwest 2005
Source: LFS
Page 12
Productivity Figure 19: GVA per job in the Northwest & the UK
•
Overall productivity in Northwest industry, as measured by GVA (profits plus wages) per job, rose by 27% from £22,013 in 1990 to £27,993 in 2004 in constant 2001 prices. This is equivalent to a real terms increase of 1.73% a year on average, 0.33pp below the UK average of 2.06% a year
•
Productivity levels in the Northwest have been lower than the UK for the whole period 1990-2004, reflecting differences in performance between broad sectors. While productivity in manufacturing in the region is close to that in the UK, in other significant sectors, notably private sector services, there is a substantial gap
•
The marked slowing in productivity in the Northwest has been accompanied by the significant increase in participation, especially among women, as noted earlier
31 £000s (2001 prices)
30 29 28 27 26 25 24 23
UK
2004
2002
2000
1998
1996
1994
1992
21
1990
22
Northwest
Source: Cambridge Econometrics
Page 13
Productivity by Industry Figure 20: Labour productivity in Manufacturing, 2003
Figure 21: Labour productivity in Services, 2003
(£000s per person employed)
(£000s per person employed)
120
50 Manufactured Fuels
Banking & Insurance finance
45
100
Distribution
40
Other services
Chemicals & Man-Made Fibres Motor vehicles Northwest
Northwest
80
35
Paper, printing & publishing 60 Non-metallic min. products Rubber & plastic
40
Food drink & tobacco
20
Other manufacturing
Electronics, electrical & instrument Mechanical engineering Wood & wood products
Transport & communication Public administration & defence Education and Health Hotels & catering
15 10 5
Basic metals & metal products
0
Other business service
0 0
20
40
60 UK
•
Retailing
25 20
Other transport
Textiles & clothing
30
80
100
120
0
10
20
30
40
50
UK
Northwest productivity in 2003 was close to the UK average for most manufacturing sectors. Some key ones - Chemicals, Motor Vehicles & Manufactured Fuels - performed better in productivity terms. However, productivity was significantly lower in services, and especially so in what can be higher valueadded services, such as Banking & Finance, Transport & Communications, Insurance, and Other Business Services
Source Cambridge Econometrics
Page 14
Employment & Productivity – trends by broad sector
2004
2003
2002
2001
0 2000
2004
2002
2000
1998
1996
1994
1992
1990
•
5 1999
10%
Services – NW
10
1998
Services – UK
15
1997
15%
25%
20
1996
20%
Distribution, hotels & catering – NW
25
1995
30%
30
1994
Distribution, hotels & catering – UK
35%
35
1993
Manufacturing – NW
40%
40
1992
45%
45
1991
Manufacturing – UK
50%
Figure 23: Productivity (GVA per employee £000s) by main industry grouping for the Northwest and UK
1990
Figure 22: Employment as a % of total by main industry grouping for the Northwest and UK
These charts show employment increasing in services, which generally have lower productivity on average than manufacturing sectors, and falling in manufacturing. This has been part of a structural shift in which the composition of output in the region has gradually become more like that of the UK as a whole. It has had adverse effects on average productivity levels, and on rates of productivity growth in the region relative to the UK, effects which can be expected to continue if the structural shift in the region towards services continues to be more marked than in the UK, and if significant differences in productivity levels persist
Source: Cambridge Econometrics
Page 15
Productivity – the picture within the Region Figure 24: Productivity in the Northwest in 2002 by Broad Industry Group 70 60 Financial Services
50
£000
40 30 20
Wholesale/ Retail
Manufacturing
Transport & comms
Construction
Other business services
Education
Other services Total
Public admin.
Health/social services
Hotels/ catering
10 0 Cumbria
•
Cheshire
Greater Manchester
Lancashire
Merseyside
Northwest
Sectoral productivity varies significantly by sub-region. Overall productivity is highest in Cheshire and lowest in Cumbria. This is not just an outcome of the relative mix of industry in each of these local economies, as this relative ranking is also present within many of the broad industry groupings. Indeed, the widest variations in levels of productivity within the region occur within sectors. In manufacturing, productivity varies from £32,300 in Merseyside to over £60,000 in Cheshire. Though it is less marked, there is also variation within service sectors. Nevertheless, and with the exception of Cheshire, service sector productivity in Greater Manchester is slightly ahead of most sub-regions. This could have a positive bearing on the future potential for productivity growth in this important City Region
Source: ONS Regional Accounts & Cambridge Econometrics
Page 16
Productivity and Changes in Industrial Structure Figure 25: Output per head advantage given by Northwest industrial structure vis-à-vis the UK, 2001 prices (difference between GVA per head for the Northwest, & the regions with the UK industrial structure for 9 broad groupings 1.5%
•
Looking in more detail at the effects of recent changes, we have seen how the region’s industrial structure has tended to increase average productivity vis-à-vis the UK, since the manufacturing sector’s share of jobs in the Northwest has been relatively high, and the service sector’s relatively low. But, the charts show clearly that this structural advantage has been sharply eroded since 1990 as total employment has risen, disproportionately so in services. As the Northwest’s industrial structure has become increasingly like the UK’s, the region’s relatively low productivity in expanding service sectors has had a telling effect (£22,800 per employee on average in services in 2004 compared with £27,900 in the UK)
•
Overall the Northwest’s productivity gap with the UK increased from 4.4% in 1998 to 8.1% in 2004. There has been a strong correlation between increased employment and lower productivity growth in the region. With a step-up in job numbers in the region since 1998, productivity growth has slowed to an average of only 0.9% a year. This is consistent with many of those newly in employment having gone into relatively poorly paid jobs, and perhaps having taken some time to become effective; and with the bigger increase in the proportion of women in employment in the Northwest, because they tend to be paid less than men, which affects their productivity measured in terms of value added per employee
1.0% 0.5% 0.0% -0.5% -1.0% 1990 1992 1994 1996 1998 2000 2002 2004
Figure 26 Productivity gap between the UK & Northwest, & for Northwest with same broad industrial structure as the UK (measured by GVA/job) 10% 8% 6% 4% 2%
Northwest
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
-2%
1990
0%
Northwest controlling for differential industrial structure
Source: Cambridge Econometrics
Page 17
City Dynamics Figure 27: Percentage change in Regional GVA share 1995-2001
•
Liverpool and Greater Manchester South have been key drivers of regional growth, accounting for 32.5% of regional GVA in 2003, compared to 29.3% in 1995
•
The regional share of output from Halton & Warrington and East Merseyside also grew disproportionately fast between 1995 and 2003, accounting for a further 9.7% of GVA in 2003. Well over 40% of regional output is now generated in the dark red corridor shown on the map
Table 1: Recent GVA performance (1995-2003) – Greater Manchester South & Liverpool (Source: ONS, GVA figures have been adjusted for inflation)
Average pa GVA growth
Greater Manchester South
Liverpool
Northwest
4.0%
3.0%
2.4%
Average pa employee job growth 1.8% Average pa productivity growth 2.1% (GVA per employee job) Share of Northwest GVA
1.8%
1.6%
1.1%
0.7%
1995
23.0%
6.4%
2003
25.9%
6.7%
Share of Northwest jobs 1995
24.4%
7.2%
2003
24.7%
7.3%
Page 18
Summary Table 2: Average per annum growth in GVA, Productivity, Employment and Population for Northwest and UK Northwest (%) UK (%) Population growth pa 1990-2004 -0.002 0.3 1998-2004 0.1 0.4 Employment growth pa 1990-2004 0.3 0.4 1998-2004 1.5 1.0 Productivity growth pa (GVA per job) 1990-2004 1.7 2.1 1998-2004 0.9 1.6 Average GVA growth pa (at constant prices) 1990-2004 2.0 2.4 1998-2004 2.5 2.7
•
The table opposite summarises key growth rates for the UK and the Northwest over the period 1990-2004, the longest period for which we have consistent data, and for the more recent period 1998-2004 in which there has been relatively rapid job growth, but much poorer productivity growth in the Northwest
•
While productivity growth in the region as a whole has slowed, that in Greater Manchester South and in Liverpool has held up. Since they have shared in job growth, the implication is that these cities have also seen a significant expansion in higher productivity growth activities that more than offsets the general impact of job growth on productivity growth seen at regional level, because the same effects must also have been present in the cities. This is a development to which we attach considerable importance in understanding what has been happening recently to growth in the Northwest
NW differential (pp) -0.3 -0.3 -0.1 0.5 -0.3 -0.7 -0.4 -0.2
Source (s): ONS, Regional Accounts and Cambridge Econometrics
Page 19
Page 20
Developing the Panel Forecast for 2005-2025
Page 21
Summary of the Panel’s Long-Term Forecast in January 2005 Table 3: Future Economic Growth, 2005-22
Northwest
UK
NW Differential with UK
Population
0.2
0.4
-0.2
Working Age Population
0.2
0.4
-0.2
Employment
0.3
0.5
-0.2
Productivity
1.9
2.0
-0.1
GVA
2.2
2.5
-0.3
Growth p.a.
•
The Panel’s central view this time last year was that the Northwest would continue to grow more slowly than the UK economy over the next 20 years or so. GVA growth in the region was expected to average 0.3pp a year below that in the UK. If the UK were to grow on average at its previous trend rate of 2.5% a year, as we thought likely, economic growth in the Northwest would average 2.2% a year
•
On the main drivers, we concluded that labour market participation would follow UK trends from now on with a common average increase of 0.1pp a year. Relative employment growth would therefore reflect expected demographic trends, and we accepted government projections that the working age population in the region would grow at 0.2pp a year less than in the UK
•
Having reviewed the available evidence, we concluded that productivity growth was likely to lag that in the UK on average by 0.1pp a year. This was a more buoyant outcome than had been achieved recently. A key judgement was that the gap in productivity growth would recover to that seen before the relatively marked increase in participation had begun in the Northwest
•
Currently, GVA per head in the region is 89.6% of the UK average. A consequence of our forecast was that the underlying gap in GVA per head could be expected to widen gradually over the forecast period. Narrowing this gap would depend on a sufficient improvement in productivity growth, in which the cities seemed to be the possible key
Source: Panel Forecast 2005
Page 22
Developing our new Long-Term Forecast Having decided to adopt the same basic approach, we tackled this year’s forecast by reviewing the key judgements we had made last year. This was in the light of revised and extended evidence, especially about the performance and potential of the Northwest’s City Regions. Our main departure was to discuss the City Regions in terms of a far more developed analytical frame, and to do so comparatively in the light of evidence about other City Regions in England To help to think about the main influences on our forecast, we needed to form a view on likely differences between the region and the UK in terms of: n
Employment – which depends on Population, Working Age Population and Participation
n
Productivity Drivers – in recent years, the Treasury has defined five drivers which confer productivity advantage, namely Skills, Enterprise, Investment, Innovation and Competition. The first four of these are addressed in detail for the Northwest region in comparison with the
wider economy on pages 28 to 39. The fifth productivity driver, exposure to effective Competition, is unlikely to be much influenced by regional factors in our view, especially in a very open regional economy subject to national and trans-national rules and practices. As such, the role of Competition is not reviewed further in this report n
The performance and potential role of City Regions1 in the Northwest and in the wider economy, with a bearing on differential productivity growth and perhaps on demographics
n
A judgement about our central forecast
n
The risks to which our central view might be subject
1City Regions as defined in the Northern Way Growth Strategy ‘City Regions Economic Analysis’, 2004
Page 23
Employment 1 – Projected population growth Figure 28: Population in the Northwest & UK
population. Numbers of those under 20 were projected to decline by 0.5% a year while those aged 60-64 and 65+ were projected to increase by 1.25–1.5% a year
110
Index, 2004=100
106
•
The projected increase in the growth of the Northwest population resulted mainly from expected changes in migration, especially international immigration, rather than from natural change. However, immigration into the UK was projected to grow even faster than into the Northwest. The Panel has noted that these projections have been borne by recent population estimates for 2004
•
The ONS updated its UK projections in October 2005. These show a slight upward revision in the underlying numbers, again because of expected immigration, but not by a big enough margin to shift their UK long-term average projection of population growth from a rounded figure of 0.4% a year. Sub-national projections consistent with this UK picture have yet to be released. However, in view of their general experience, especially of Eastern European immigrants in local labour markets, the Panel expected the Northwest to fully participate in this underlying revision
•
The Panel therefore agreed that the population of the Northwest is still likely to grow 0.2pp a year below that in the UK, but thought there is a risk that the figure could be slightly stronger as a result of trends in immigration into the region
102 98 94 90 1981
1986
1991
1996 UK
2001
2011 2006 Northwest
2016
2021
Source(s): ONS mid-year population estimates, ONS 2003-based sub-national population projections; 2004-based UK population projections, Government Actuary Department
• •
Knowing that the population in the Northwest began to rise in 2001, last year we accepted the pattern of demographic change provided by the Office of National Statistics in its 2003-based sub-national population projections These projections showed the Northwest population growing by 0.2% a year to 2022, half the rate of 0.4% in similar projections for the UK as a whole. Detail for the Northwest included a trend towards an ageing
Page 24
Employment 2 - Working Age population •
Projected trends for working age populations generally follow those for populations in total, and last year we accepted further government projections for the working age population in the Northwest and the UK that showed this pattern
110
•
Behind this, immigration is again expected to be stronger into the UK than into the Northwest
105
•
After 2010, the projected growth in both working age populations is influenced by the increase in retirement age for females which will be introduced from that date
•
Following our judgement about population growth in the Northwest relative to the UK, the Panel still expects the working age population in the Northwest to rise on average by 0.2% a year to 2025, again 0.2pp a year below the figure for the UK. Such a rate of increase would raise the working age population in the Northwest from 4.2m at present to some 4.4m in 2025
Figure 29: Working age population in the Northwest & UK
Index, 2004=100
115
100 95 90 1981
1986
1991
1996
UK
2001
2006
2011
2016
2021
Northwest
Source(s): ONS mid-year population estimates, ONS 2003-based sub-national population projections; 2004-based UK population projections, Government Actuary Department
Page 25
Employment 3 – Participation Figure 30: Differences in total employment between the Northwest and the UK (broken down into constituents – difference in working age population as % of total and employment as % of working age.)
•
More significant, however, is the increase in the employment rate of the working age population, from 72.8% in 1994 to 80.5% in 2004, narrowing the gap with the UK from 3.9pp to 1.4pp
•
The main reason for this change is the recent marked increase in the proportion of women with jobs to a level now close to that in the UK. Last year, we saw this as a significant structural adjustment that was at, or near, its end. After careful discussion, we think this judgement stands. That is not to say that the proportion of working age women in work will not rise in response to a further shift towards services in total employment, just that the rise is likely to be similar in the Northwest and UK
•
We still doubt the involvement of younger discouraged men can be improved much relative to the UK. But the higher proportion of men on incapacity benefit will gradually fall in the region relative to the UK as those who were once employed in manufacturing reach 65, or are perhaps encouraged back into work. These factors may lead to a slightly higher growth of employment in the Northwest, but we doubt it is likely to be very significant
•
Overall, we believe that participation in the labour market in the region and in the UK will grow by 0.1pp a year. A further shift in this direction would tend to reduce productivity. However, our central forecast assumes that employment growth in the Northwest will be 0.2pp below the UK, essentially because the working age population is expected to grow more slowly
6% 5%
working age population
4% 3%
employment rate (as a percentage of the working age)
2% 1% 2004
2002
2000
1998
1996
1994
1992
1990
0%
Source: Cambridge Econometrics
•
The Panel discussed the future of employment growth in the region relative to the UK. This was in the light of recent developments in activity and job growth, and the working age population projections
•
We noted that the proportion of the Northwest population of working age has risen from 60.8% in 1990 to 61.4% in 2004, narrowing the gap with the UK from 0.7pp to 0.5pp
Page 26
Employment 4: Influences on Productivity
2020
2017
2014
2011
2008
2005
2002
1999
1996
1993
1990
Figure 31: Indexed Employment Growth the UK and the Northwest by sector (Index 100 = 1990) 160 Manufacturing – UK 140 Manufacturing – NW 120 100 Distribution, hotels 80 & catering – UK 60 Distribution, hotels 40 & catering – NW 20 Services – UK 0 Services – NW Source: Cambridge Econometrics
Figure 32: Hours worked as a percentage of all those in employment 60% 50% 40% 30% 20% 10% 0%
work under 10 hours work 10-34 hours
Mar 1999-Feb Mar 2004-Feb Mar 1999-Feb Mar 2004-Feb 2000 2005 2000 2005
England & Wales
Northwest
•
Model based projections show that similar changes in the structure of employment by broad sectors are to be expected in the Northwest and in the UK. This implies that structural change will continue to impact on the relative growth of productivity, tending to widen the gap, especially if levels of productivity in several of the region’s major service sectors do not improve relative to the UK. Without improvement, an increasing proportion of Northwest employment will be in sectors with productivity levels below those in the UK
•
Productivity levels would tend to be lower in the Northwest if the proportion of those who work part-time were generally higher than in the UK. Figure 32 shows that this is not so. However, although there has been a slight increase in the proportion of part-time working in the region and UK in the past five years, the clearest difference between the region and the UK is the lower proportion of those working over 45 hours a week, and the slightly higher proportion of those working between 35 and 44 hours. This implies that average hours worked in the region are slightly below the UK, impacting on comparative levels of productivity because of the effect of this on wages
work 35-44 hours work 45 hours or more
Source: LFS
Page 27
Productivity Figure 33: Growth in productivity (GVA per job) to each year 1991-2004 for the Northwest and UK
•
Before the Panel could discuss how productivity in the region was likely to grow relative to the UK over the next 20 years, we had, as last year, to select a differential growth rate that reflected reasonably well what had been achieved in the past as a basis for developing our forecast
•
There is a problem because of a shift in relative performance during our base period. Between 1990 and 2004, productivity in the Northwest grew 0.3pp a year more slowly on average than in the UK. But this disguises an average of 0.1pp a year between 1990 and 1997, and a much wider gap averaging 0.7pp a year between 1998 and 2004, a period in which employment as a proportion of the working age population grew more rapidly in the region than in the UK
•
We confirmed our choice of a 0.1pp a year gap as the basis for discussion of future prospects, because it reflected performance before the marked employment adjustment in employment began
•
The argument is explained in more detail on page 53 in the assessment section of this report
5% 4% 3% 2% 1% 0%
UK
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
-2%
1991
-1%
Northwest
Source: Cambridge Econometrics
Page 28
Productivity drivers – Skills 1 Figure 34: Highest qualification attained 30% 25%
•
The Northwest has tended to have relatively low recorded skill levels. In 1999/00, 19.1% of the working age population had no qualifications compared to 16.7% for England and Wales, while 19.6% had Level 4 qualifications in the region compared to 22.3% in England and Wales
•
Since 1999/2000, there has been relatively strong regional growth in the proportion of working age population with Level 4 qualifications. This had increased by 5.0pp by 2004/05, compared with 3.4pp in England and Wales. Furthermore, the proportion of individuals with no qualifications had fallen by 3.7pp compared to 2.0pp in England and Wales
•
As employment has increased in the Northwest, so has job-related training. This has risen from involving 9.4% of the workforce in 1999/00 to 11.1% in 2004/05. This improvement has been better than in England and Wales, narrowing the gap in the proportion who have been trained in the preceding four weeks from 1.4 to 0.5pp. This is a positive factor, helping to underpin our view that the productivity of those drawn into the workforce ought to become like that of others in similar jobs
20% 15% 10% 5% 0% Mar 1999-Feb 2000
Mar 2004-Feb 2005
Mar 1999-Feb 2000
England & Wales no qualifications
Mar 2004-Feb 2005
Northwest NVQ1
NVQ2
NVQ3
NVQ4+
Figure 35: Proportion of working age population who have undertaken job related training in the last 4 weeks 14% 12% 10% 8% 6% 4% 2% 0% March 1999-Feb 2000 Source: Labour Force Survey
England & Wales
April 2004-March 2005 Northwest
Page 29
Productivity drivers – Skills 2 Figure 36: Proportion of pupils achieving at least five GCSEs grade A*-C 60% 50% Northwest
40%
•
In 2004/05, 53.4% of pupils in the Northwest left school with five GCSE graded C or above. This is 3.1pp below the 56.5% who achieved this in England as a whole
•
While there has been a significant growth (13.0%) in the proportion of pupils reaching this standard across England, growth has been notably faster in the Northwest (at 15.8%). The gap between the Northwest and England has closed encouragingly from 3.9pp in 2000/01 to 3.1pp for 2004/05
•
Young people Not in Employment, Education or Training (NEET) on completing Year 11 is relatively high in the Northwest at 8.0% in 2004, in comparison to 7.5% in England. However, there has been a narrowing in the gap between the levels of NEET in the Northwest and in England from 1.2pp to 0.5pp between 1999 and 2004.
•
It matters greatly that young people who develop useful skills in the region should exploit them here, and that others should be attracted and settle. The maps overleaf present disturbing evidence of marked migration of younger people, especially out of the region’s more peripheral areas. We have also seen that this net migration may be coming to an end overall, because of the draw of the Northwest’s more successful areas. It will, however, continue to be a serious matter for those communities in the region who do not replenish their young
England Average
30% 20% 10% 0% 2000/01
2002/03
2003/04
2004/05
Source: DfES
Figure 37: NEET (those completing Year 11 in 1999/2004 not in employment, education or training) 9% 8% 7% 6% 1999 5% 4% 2004 3% 2% 1% 0% England Northwest West London South East Midlands Source: Connexions
Page 30
Productivity Drivers – Skills 3 Figure 38: Percentage of the population aged 20-34 years (2004)
Figure 39: Percentage change in population aged 20-34 years (1994-2004)
•
The net loss of younger people over the last ten years has been particularly severe in areas such as Barrow-in-Furness, Blackpool and South Lakeland, whereas in Manchester the number of people aged 20-34 has increased by 11%. This is not just because of Higher Education trends. Better local prospects are likely to have had a bearing, bringing city factors into play
Page 31
Productivity Drivers – Skills 4 Figure 40: Change in occupational structure in England and Wales 16% 14% 12% 10% 8% 6% 4% 2% 0%
•
The current occupational structure of the Northwest exhibits lower relative proportions of the highly skilled occupations (managers & professionals, professional and the associate professional & technical occupations) and higher relative proportions of the low skilled occupations (sales & customer services, process plant & machine operatives and elementary occupations) compared to England & Wales (38.5% & 41.7% and 28.7% & 26.7% respectively). This poses a direct challenge to productivity
•
This structural difference is likely to be a reflection of the lower skills base currently observed in the Northwest, as compared to England and Wales
•
The Northwest and England and Wales have exhibited similar patterns of growth and decline in occupational structure. There has been an increase in the proportion of employees in higher skilled occupations, a fall in occupations linked to manufacturing, and a slight fall in the proportion of employees in some lower skilled occupations in a period in which employment as a whole increased quite sharply
Mar 2001Feb 2002
elementary occupations
process plant & machine
sales and customer
personal service
skilled trades occupations
administrative & secretarial
associate professional
professional occupatiions
managers and senior
Apr 2004Mar 2005
Mar 2001Feb 2002 Apr 2004Mar 2005
elementary occupations
process plant & machine
sales and customer
personal service
skilled trades occupations
administrative & secretarial
associate professional
professional occupatiions
managers and senior
Figure 41: Change in Northwest occupational structure, 2001/02 – 2004/05 16% 14% 12% 10% 8% 6% 4% 2% 0%
Source: LFS
Page 32
Productivity Drivers – Skills 5 Figure 42: Projected occupational change in the Northwest and UK, 2002-2012
•
Our forecasters, Cambridge Econometrics, have recently produced regional occupational projections for the Sector Skills Development Agency’s Working Futures Report. Based on forecasts of future structural demand, their report indicates that the largest increase in occupational employment in the Northwest between 2002 and 2012 is likely to be in personal service occupations. This is expected to increase by 33.9%, or 3.0% pa, over the ten year period. Professional occupations and associate professional and technical occupations are also expected to increase across the region, by almost 70,000 and 65,000 additional jobs respectively
•
Given the current shortfall in residents qualified to degree level or above, this poses a question over the region’s capacity to fully secure this activity without a marked shift in patterns of migration, which we think of in terms of the relative attractiveness of our City Regions. Panel members report that there is presently an image problem to overcome in persuading wellqualified candidates to move into the region, even if their families can be persuaded to move at all. There are signs of a distinct downside risk if this difficulty is not overcome
Managers & senior officials Professional occupations Assoc. prof. & tech Admin. Cler. & sec. Skilled trades Personal serv. Occs. Sales & cust. Serv. Machine & trans. Ops Elementary occs. UK Northwest
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
% change p.a. (2002-2012)
Source: Cambridge Econometrics and Institute for Employment Research for Working Futures, SSDA
Page 33
Productivity drivers – Enterprise 1 Figure 43: VAT registrations per 10,000 of working age population
•
Enterprising firms and individuals can help to drive productivity increases by directing resources to their most efficient and profitable uses. Though it has shortcomings, the best measure we have of levels of enterprise is the number of new firms registering for VAT as a ratio of the working age population
•
The most recent data continues to show a clear enterprise deficit in the Northwest vis-à-vis England and Wales. In 2004, there were 39.5 start-ups registered per 10,000 working age population in the Northwest, 16.7% below the national rate of 47.4. The Northwest has reduced its enterprise deficit from 18.6% to 16.7% over the past ten years, but the enterprise gap remains stubbornly pronounced
•
There has, however, been strong growth in the rate of VAT registrations in the Northwest of 5.6% between 1994 and 2004 (equivalent to 0.5% a year), compared to 3.1% for England and Wales (0.3% pa). Growth in the Northwest has also continued on an upwards trend, despite a fall in the VAT registration rate of 1.0% across England and Wales between 1999 and 2004
•
Though these trends may be taken as encouraging, it is possible that these comparisons reflect cyclical influences of the kind reported on page 2. Other evidence presented on the next page is also mixed
60% 50% 40%
1994
30%
1999 2004
20% 10% 0% England and Wales
Northwest
Source: ONS & NOMIS
Page 34
Productivity drivers – Enterprise 2 Figure 44: Business start-ups (2004)
Figure 45: New business start-ups per 10,000 working age population (2004)
•
Business starts are concentrated in the region’s cities and surrounding areas, which is encouraging for the future prospects of the City Regions
•
Greater Manchester, and Macclesfield in particular, perform well in terms of business start up rates (startups as a proportion of working age populations). So do some rural economies such as Eden and Fylde, which are generally less densely populated
Page 35
Productivity drivers – Enterprise 3 Figure 46: Total Entrepreneurial Activity as % of adult population
•
Total Entrepreneurial Activity (TEA) measures the proportion of the adult population made up of individuals who have taken some action towards creating a new business in the past year, or who are the ownermanagers of firms less than 42 months old. TEA therefore captures entrepreneurial activity more broadly than the VAT based measure, not least by including new businesses below the VAT threshold
•
TEA in the Northwest in 2004 was 4.6%, which lagged significantly behind the national average of 6.3%. Furthermore, the gap between the Northwest and UK has widened worryingly from 0.6pp in 2002 to 1.7pp in 2004
•
On the other hand, in 1999 the average survival rate for Northwest business start-ups after three years was 64.9%, still 1.6pp below the UK average, but a narrower gap than in 1994. In terms of one-year survival rates, the Northwest also narrowed the gap with the UK from 1.9pp in 1994 to 0.7pp by 2001
7.0 6.0 5.0
2002
4.0 3.0
2003
2.0
2004
1.0 0 UK
Northwest
Source: Global Entrepreneurship Monitor, DTI
Figure 47: One year and three year business survival rates 95 90 85 80 75 70 65 60 55 50
One year survival rate United Kingdom One year survival rate Northwest Three year survival rate United Kingdom
2001
2000
1999
1998
1997
1996
1995
1994
Three year survival rate Northwest
Source: Small Business Service, DTI
Page 36
Productivity drivers – Investment 1 Figure 48: Gross Fixed Capital Formation (£m) per 10,000 resident population
•
Data on Gross Fixed Capital Formation per 10,000 of population suggests under-investment is a cause of poorer productivity in the Northwest, since recorded investment was 19% lower than the national figure in 2000. This gap increased from 13% in 1998, reflecting a slowdown in recorded investment in the region
•
Northwest (net) manufacturing investment of £4,309 per employee was 16% above the UK average of £3,700 in 2002. This is consistent with a relatively capital intensive manufacturing sector, with concentrations in sectors like chemicals, automotives and aerospace rather than electronics
•
In July 2005, London was selected to host the Olympics in 2012. The decision will lead to considerable investment occurring in the capital and its surrounding areas. While much of this investment was planned to take place anyway, the decision will result in some major new projects, and there is a risk of investment being displaced from other regions, including the Northwest
30 25 20
1998
15
1999
10
2000
5 0
UK
Northwest
Source: ONS
Page 37
Productivity drivers – Investment 2 •
Investment in house building continues to lag behind the national average. In 2004/05, construction commenced on almost 22,000 dwellings across the Northwest, equivalent to 3.22 dwellings per 1,000 in the population (based on 2004 mid-year population estimates). This compares to a construction rate of 3.49 dwellings started per 1,000 population across England during the same time period
•
Whilst growth in the number of housing starts in the Northwest has been slow at 0.2% p.a. on average over the past ten years, compared to 0.5% p.a. nationally, the regional rate of house building has accelerated since 2003/04, in line with that in England
•
This is apart from the potential impact on patterns of migration if major housing schemes in the South are given permission to proceed
3.6 3.4 3.2 3.0 2.8 Northwest
2.6
England
2.4 2.2
2004/05
2003/04
2002/03
2001/02
2000/01
1999/00
1998/99
1997/98
1996/97
1995/96
2.0 1994/95
Dwellings started per 1,000 population
Figure 49: Permanent dwellings started per 1,000 population
Source: ONS
Page 38
Productivity drivers – Innovation 1 R&D expenditure as % of GVA
Figure 50: Total R&D expenditure as proportion of GVA
•
‘High-end’ innovation, measured by total R&D expenditure, has been relatively strong in the Northwest, exceeding the UK rate until 2002, and including 1999, as shown in the chart. However, between 2002 and 2003 R&D spend as a proportion of GVA in the Northwest fell from 2.3% to 2.0% below UK levels
•
R&D expenditure by business in the Northwest is significantly (13.9%) above the UK rate, but has decreased by 0.2pp between 1999 and 2003. The Northwest’s manufacturing sector also has a higher propensity to invest in R&D (8.0%) than the UK average (6.9%). However, this may be linked to the concentration of pharmaceuticals and aerospace; and R&D investment in services across the region (0.2%) lags behind the national average (0.4%)
•
Public sector (0.1% of GVA) and HEI (0.4% of GVA) R&D expenditures, however, are lower than across the UK due to a concentration of this class of research in the South, in particular in and around London
•
The share of research grants and contracts received by HEIs in the Northwest has increased from 7.5% in 1999/00 to 7.8% in 2002/03
2.3% 2.2% 2.2% 1999
2.1% 2.1%
2003
2.0% 2.0% 1.9%
Northwest
UK
R&D expenditure as % of GVA
Figure 51: R&D expenditure by business, as a proportion of GVA 2.0% 1.5% 1999
1.0%
2003 0.5% 0.0%
Northwest
UK
Source: ONS
Page 39
Productivity drivers – Innovation 2 Patents per 10,000 workforce jobs
Figure 52: Patents granted in Northwest and Great Britain per 10,000 workforce jobs 1.4 1.2
An important issue for the Northwest is how far expenditure in R&D is translated into new or improved products
•
Between 2000 and 2004, the number of patents granted to companies and individuals based in the Northwest increased by 17.1%. But in 2004, the number of patents granted per 10,000 workforce jobs was still one third below the national average. Conversely, the rate of trade mark registrations in the region fell by 18% between 2000 and 2003, although the gap has closed with Great Britain
•
In 2002, at a time when business R&D expenditure in the Northwest exceeded the UK average, the percentage of turnover attributable to new or improved products in the region (5.6%) was below the UK level (9.0%). These data provided by DTI suggests that the translation of R&D investment into new products in the Northwest falls short of the national average. This may point to an unusual degree of process R&D linked to manufacturing controlled from outside the region for which new product R&D is done elsewhere
1.0 0.8
Northwest
0.6
GB
0.4 0.2 0.0 2000
2001
2002
2003
2004
Figure 53: Trade Marks registered in Northwest and Great Britain per 10,000 workforce jobs 8.0 Trade Marks per 10,000 workforce jobs
•
7.0 6.0 5.0
Northwest
4.0
GB
3.0 2.0 1.0 0.0 2000
2001
2002
2003
2004
Source: The Patents Office & NOMIS
Page 40
City Regions 1 •
In last year’s long-term forecast, we recognised that a high proportion of economic growth in the region in recent years had been generated in its cities and surrounding areas. GVA data showed that Greater Manchester South and Liverpool had been alone in keeping up productivity growth. We took some comfort from the strength of this performance in making our overall judgement about the future productivity growth gap between the Northwest and UK
•
Though we were aware of the contribution of City Regions elsewhere, especially around London, we didn’t have any systematic evidence to hand about their contribution to growth in their regions, or about their weight relative to one another. Such evidence should help us to make a judgement about the relative scale and potential of our City Regions in comparison with others elsewhere in the UK
•
The maps on the next page and the table that follows show the comparative position of the Northwest’s City Regions with those elsewhere in England. In data terms, defining the City Regions is challenging. In presenting City Region perspectives we have identified those geographies for which data is most readily available and, as far as possible, assembled the City Region geographies using the districts
identified in the Northern Way1. It is not just in the Northwest that City Regions have become key engines of growth. The maps show how growth in GVA, and in GVA per head as a proxy for productivity, have become concentrated in City Regions across England, especially in areas close to London, which is shown to be the hub of a ‘Super City Region’ extending along major transport routes as far as the South Midlands, and towards the West and the South West
•
Though the data in the table are not quite on the same basis, they show the relative importance of Greater Manchester South (GMS) as a proxy for Manchester City Region, and of Lancashire CC and Liverpool as proxies for Central Lancashire and Liverpool City Regions respectively. In 2003, the GVA of Inner London alone was five times greater than that of GMS, but GMS achieved a rate of growth between 1995 and 2003 that was not far short of Inner London, or of its surrounding City Regions, both which tended to grow faster than most of those elsewhere. Outside the London ‘Super City Region’, output of GMS was 50% bigger than Birmingham and double that of Leeds. Liverpool contributed a quarter of the GMS figure. Lancashire’s was bigger than Liverpool, but we only have figures for the county, not for what is defined as the City Region
1‘Northern Way Growth Strategy City Regions Economic Analysis’, 2004
Page 41
City Regions 2 Produced by the University of Salford’s Centre for Sustainable Urban and Regional Future for ‘New Horizons – A report for ODPM’ 2004. They were first published by ODPM and are reproduced by arrangement with Professor
Source: SURF New Horizons – a report for ODPM
Alan Harding of Salford University. In the spectrum of colours, red denotes the fastest rate of growth and deep blue the slowest.
Source: SURF New Horizons – a report for ODPM
Page 42
City Regions 3 Table 4: Performance of City Regions (NUTS 3 areas) across England
Region
Northwest
North East
Yorkshire & Humberside
East Midlands
West Midlands
South West
London South East East
City Region area (NUTS 3) Northwest average Lancashire CC Liverpool Greater Manchester South North East average Tyneside Yorkshire & Humberside average Leeds York East Midlands average Northamptonshire Nottingham Derby West Midlands average Birmingham Coventry Warwickshire South West average Bristol Swindon London average Inner London - West Inner London - East South East average Milton Keynes East average Cambridge CC
Absolute GVA ÂŁm GVA as % of GVA (2003, at current in all City Regions basic prices) 15,722 6,459 25,130
5.8% 2.4% 9.3%
11,996
4.5%
13,870 3,390
5.1% 1.3%
10,819 5,829 4,625
4.0% 2.2% 1.7%
17,065 5,084 8,431
6.3% 1.9% 3.1%
8,984 4,404
3.3% 1.6%
72,664 39,893
27.0% 14.8%
5,107
1.9%
9,946
3.7%
GVA per head (ÂŁ, 2003, at current basic prices) 14,269 13,707 14,619 18,523 12,805 14,993 14,284 19,392 18,512 14,682 16,834 21,285 19,831 14,624 17,201 16,670 16,234 15,019 22,946 24,305 24,320 68,330 21,667 17,631 23,676 15,565 17,419
GVA - % change p.a. (1995-2003) 4.8% 4.5% 5.4% 6.4% 4.3% 5.5% 5.1% 6.0% 6.1% 5.2% 6.9% 4.0% 7.7% 4.9% 5.6% 4.8% 6.1% 5.8% 6.6% 6.0% 6.5% 7.0% 7.6% 6.4% 7.6% 5.7% 6.6%
Working age population- % change p.a. (1995-2003) 0.2% 0.4% 0.0% 0.3% 0.0% -0.2% 0.3% 0.3% 1.1% 0.6% 1.1% 0.7% 0.6% 0.3% 0.3% 0.5% 0.7% 0.7% 0.6% 0.8% 1.3% 2.4% 1.6% 0.6% 1.8% 0.6% 1.2%
Employee jobs % change p.a. (1995-2003) 1.6% 1.5% 1.8% 1.8% 1.3% 1.4% 1.5% 1.5% 2.7% 1.0% 1.8% 0.7% 2.1% 1.1% 0.6% 1.2% 1.6% 1.8% 1.2% 1.0% 1.6% 1.4% 2.3% 2.1% 3.6% 1.7% 1.8%
Page 43
City Regions 4 An initial impression from the table and the maps is that in terms of weight and recent performance, the success of Manchester City Region in particular is crucial for future regional performance
n
Quality of Life – including the housing and schools offer, and the vitality and buzz, and cultural, retail and leisure facilities to attract and retain skilled and enterprising people
To take our analysis further, we discussed the present position and the potential of the Northwest’s City Regions in terms of the following four key factors. Work by academic economists, on which we were briefed at our meeting by Professor Alan Harding of Salford University, had suggested that these might all be of particular importance in contributing to the success of City Regions:
n
Business environment – an environment in which businesses can thrive, which has proved its success in attracting inward investment in high value activities and knowledge intensive sectors, or is likely to do so.
n
Connectivity – internal and external connectivity, including to London, and globally by air, offset by congestion, delay, and difficulties in getting to work, train stations and airports, and limitations on accessibility by others not presently connected with the City Region in question
n
Critical mass – especially of high value added and innovative businesses competing on the basis of quality, creativity and innovation. It is crucial that these should provide a range of employment opportunities for double income professional households to develop their careers, and a pool of such people to attract new firms and to encourage others to expand and diversify to meet their clients’ needs
Pages 44 to 51 set out evidence relevant to each of these factors that our consultants had assembled before we met
Page 44
City Regions – Connectivity 1
2001
we rth
ys of st Re
G
re
at
er
M
er
No
se
ch an M
st
id e
r es te
st we rth No
Lo
nd on
2004
n
Figure 54 presents data on average daily motor vehicle flows on roads in the Northwest, London and Great Britain to illustrate the extent to which connectivity in our City Regions could be relatively constrained by road congestion
7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0
ai
•
Manchester City Region clearly has the largest labour catchment area, with approximately 23% of all people employed in the City Region residing in districts outside its boundary in 2001. Liverpool and Central Lancashire City Regions, in contrast, attract 12% and 5% of workers from outside their boundaries
rit
•
Figure 54 Average daily motor vehicle flows on all roads
tB
The maps presented on the following page illustrate the extent to which the Northwest’s City Regions are connected to wider labour markets, at least by mapping travel to work catchment areas using 2001 Census data
Levels of traffic in the Northwest are 20% higher than the national average, but 31% below London. Traffic flows are particularly high in Greater Manchester, which are almost twice the national average, indicating that the area suffers from a degree of congestion, which may in turn act as a break on growth
re a
•
•
G
To indicate external connectivity we have collected information on two measures: first, travel to work catchment areas; and second, traffic flows to indicate levels of congestion
Thousand vehicles per day per km
•
Source: Department for Transport at level of Metropolitan County
•
Compounding this evidence, the average speed on roads during the morning rush hour across the region (47.4mph) was notably slower than the national average (50.2mph) in 2003
Page 45
City Regions – Connectivity 2 Travel to work patterns2 Figure 55: Flow of workers (aged 16-74) into the Manchester City Region1
Figure 56: Flow of workers (aged 16-74) into the Liverpool City Region1
Figure 57: Flow of workers (aged 16-74) into the Central Lancashire City Region1
2Assembled from those districts comprising the City Regions as defined in the ‘Northern Way Growth Strategy City Regions Economic Analysis’, 2004
Page 46
City Regions – Connectivity 3 Figure 58: Proportion of businesses surveyed who use computer systems Northwest
•
We have selected two indicators to measure external connectivity; first, ICT use; and second, the number of air passengers to regional airports
•
Research undertaken in 2004 by the North West Regional Intelligence Unit on the use of computers and other ICT by Northwest businesses reveals that ICT connectivity is highest in the Liverpool City Region, where 76.0% of businesses surveyed use ICT, closely followed by the Manchester City Region (75.6%). ICT use was below the Northwest average (73.9%) in the Central Lancashire City Region (67.7%)
•
Data on the number of air passengers indicates that the Manchester City Region is particularly well connected. In 2004, Manchester was the third largest airport in the UK, with almost 21 million passengers using the airport in that year. This was nearly 10% of all air passengers to UK airports, a sixth of the total at London’s airports. Liverpool and Blackpool airports much smaller, but both have grown rapidly of late
•
The Department for Transport White Paper, 'The Future of Air Transport' (2003), forecasts that Manchester Airport will grow to accommodate 50m passengers per annum by 2030, as against 7-10.5m through Liverpool
Central Lancashire City Region Liverpool City Region Manchester City Region 62
64
66
68
70
72
74
76
78
Source: NWRIU ICT Baseline Survey, 20043
Table 5: Total (000s) and percentage change in number of air passengers to Northwest and London serving airports
Manchester Northwest Liverpool Blackpool London City Heathrow London Gatwick Stansted Luton
1999 (000s) 2004 (000s) % change 17,418 20,969 20.4% 1,301 3,352 157.6% 117 266 127.3% 1,384 1,675 21.0% 61,975 67,109 8.3% 30,408 31,391 3.2% 9,409 20,907 122.2% 5,246 7,520 43.3%
Source: Civil Aviation Authority 3
Assembled from those districts comprising the City Regions as defined in the ‘Northern Way Growth Strategy City Regions Economic Analysis’, 2004
Page 47
City Regions – Critical mass 1 •
The concentration of industries within City Regions may be taken as an indicator of possible critical mass in the sense of our definition. The table below lists location quotients for industries with a more concentrated presence in at least one of our City Regions than the average in England and Wales. They score a quotient greater than unity. Those that are highlighted are 25% or more concentrated than on average in England & Wales. Accordingly they have location quotients of 1.25 or more
•
The table shows that there is range of manufacturing sectors that are significantly concentrated in Central Lancashire City Region, possibly with clustering effects round Preston, Lancaster and Blackburn. Manufacturing is generally more concentrated in the Northwest than in Leeds City Region, included as a northern comparator. Greater London hardly figures in manufacturing
Table 6: Concentration of industries in the Northwest – Location Quotients4 * Northwest
Central Lancs City Region
Manchester City Region
Liverpool City Region
Leeds City Region Comparator
Greater London City Region Comparator
Manufacture of textiles
2.39
4.55
2.79
0.65
3.50
0.20
Manufacture of wearing apparel; dressing and dyeing of fur Tanning and dressing of leather; manufacture of luggage, handbags, saddlery, harness and footwear Manufacture of pulp, paper and paper products
1.21
1.83
1.40
0.59
1.44
1.14
1.26
2.05
0.59
1.56
1.18
0.55
1.58
2.26
1.41
1.04
1.27
0.22
Manufacture of coke, refined petroleum products and nuclear fuel
4.86
4.07
0.56
3.32
0.48
0.06
Manufacture of chemicals and chemical products
1.82
1.46
2.10
1.97
1.19
0.34
Manufacture of rubber and plastic products Manufacture of fabricated metal products, except machinery and equipment Manufacture of motor vehicles, trailers and semi-trailers
1.20
1.77
1.28
0.61
0.88
0.24
0.97
1.37
0.95
0.76
1.08
0.22
0.95
1.06
0.41
1.49
0.59
0.21
Manufacture of transport equipment
1.58
5.89
0.54
0.56
0.25
0.15
Manufacture of furniture; manufacturing not elsewhere classified
1.11
2.22
0.95
0.80
1.68
0.39
Construction
1.12
1.34
1.21
0.87
1.08
0.68
Industry MANUFACTURING AND CONSTRUCTION
* Location quotients are calculated using the statistics for England & Wales as the denominator Source: Annual Business Inquiry, 2004 4
Assembled from those districts comprising the City Regions as defined in the ‘Northern Way Growth Strategy City Regions Economic Analysis’, 2004
Page 48
City Regions – Critical mass 2 •
There is relatively little evidence of concentration in service sectors in the City Regions of the Northwest, especially relative to Greater London. Manchester City Region bears the most similarity to Greater London, albeit with significantly less evidence of concentration, including in banking and finance, and in transport and communications, for which figures are shown on page 50. This lack of concentration might cast doubt on its potential to achieve a sufficient critical mass in high value added services activities. The data also give cause for concern since the
Northwest has exhibited strong growth in service sector employment in recent years, but private service sectors still show much lower concentration than in London, which generally dominates the picture in England and Wales
•
The table also shows the relatively high concentration of public sector activities in the Liverpool City Region. Over-dependence on this type of employment could present risks to its future development
Concentration of Service Industry – Location Quotients5 * Industry
Northwest
Central Greater Manchester Liverpool Leeds City Lancs City London City City Region City Region Region Region Region
DISTRIBUTION, HOTELS & RESTAURANTS, BANKING & FINANCE, PUBLIC SERVICES Retail trade, except of motor vehicles etc.
1.02
0.95
0.96
1.13
0.99
0.83
Hotels and restaurants
1.00
1.20
0.86
0.97
0.94
1.08
Air transport
0.60
0.03
1.20
0.07
0.08
3.38
Supporting and auxiliary transport activities; activities of travel agencies
1.01
0.53
1.26
0.92
1.28
1.31
Financial intermediation, except insurance and pension funding
0.85
0.46
0.92
1.17
1.43
1.89
0.95
0.47
1.19
1.15
1.38
1.08
Activities auxiliary to financial intermediation
0.81
0.52
0.95
0.97
0.67
2.55
Real estate activities
0.89
0.69
1.00
0.74
0.85
1.53
Computer and related activites
0.79
0.76
1.00
0.47
0.70
1.28
Other business activities
0.88
0.63
1.09
0.77
0.86
1.56
Public administration and defence; compulsory social security
1.02
1.30
0.86
1.25
0.92
1.07
Health and social work
1.06
1.07
0.94
1.29
1.04
0.81
Insurance and pension funding, except compulsory social security
* Location quotients are calculated using the statistics for England & Wales as the denominator Source: Annual Business Inquiry, 2004 5
Assembled from those districts comprising the City Regions as defined in the ‘Northern Way Growth Strategy City Regions Economic Analysis’, 2004
Page 49
City Regions – Quality of Life Figure 59: Average gross weekly pay by district, £, full time workers, 2005 1,400 1,200 1,000 800 600 400 200 0 Manchester Liverpool Central Leeds City City Lancashire City Region Region City Region Region
Greater London
(Source: Annual Survey of Hours & Earnings)6
Figure 60: Average house prices (£000), July – Sept 2005
•
The attractiveness of City Regions to skilled and enterprising people is hard to capture in statistics, but one can show relative living standards in terms of pay and prices, which bear on the quality of life
•
Average gross weekly pay for full time workers across the Northwest (£484) in 2005 was 6.4% below the national average (£517) and 26.2% below the Greater London average (£655). Within the City Regions, earnings range from £398 in Blackpool (Central Lancashire) to £719 in Macclesfield (Manchester), compared with a range of £469 to £1,309 across Greater London
•
Below-average house prices help to level real living standards. In 2005, average house prices in Central Lancashire, Liverpool and Manchester were 40.3%, 46.4% and 49.6% of the London average
•
The relative level of living standards in Central Lancashire and Liverpool City Regions is particularly apparent when compared to Leeds. Despite similar average gross weekly pay, house prices in Leeds are 24.5% and 8.1% above those in Central Lancashire and Liverpool, respectively
Central Lancashire City Region Manchester City Region Liverpool City Region Leeds City Region Greater London 0
50
100
150
200
250
300
350
Source: The Land Registry6 6
Assembled from those districts comprising the City Regions as defined in the ‘Northern Way Growth Strategy City Regions Economic Analysis’, 2004
Page 50
City Regions – Business environment 1 Table 8: Knowledge intensive and high technology employment * (2004)7 All employment in knowledge sectors
(Excluding public sector)
percent of total employment
1998-2004 change
Location Quotient **
percent of total employment
1998-2004 change
Location Quotient**
England and Wales
51.2%
9.9%
1.00
30.5%
3.1%
1.00
Northwest
49.3%
15.4%
0.97
27.5%
10.6%
0.93
Central Lancashire City Region
45.3%
12.4%
0.95
23.7%
3.2%
0.91
Manchester City Region
50.7%
17.5%
0.97
30.8%
14.7%
0.98
Liverpool City Region
51.7%
11.3%
1.01
26.3%
4.3%
0.91
Leeds City Region
48.9%
13.4%
0.93
27.1%
9.4%
0.86
Greater London
58.6%
4.5%
1.09
41.8%
-4.2%
1.22
* Knowledge intensive & high technology sectors are those defined by the European Commission ** Location quotients are calculated using the statistics for England & Wales as the denominator
•
Here we provide an analysis of the concentration of knowledge intensive sectors within the Northwest City Regions
•
The Northwest as a whole is relatively reliant on the public sector for its employment in knowledge intensive sectors. This is also true of the Liverpool and Lancashire City Regions, as may be seen by comparing location quotients including and excluding public sector employment in the table
•
Manchester City Region differs in that the concentration of private sector knowledge intensive employment is close to that which includes public sector employment, notably in health and education. But the table also shows a far greater concentration of private sector employment in knowledge intensive sectors in London. More detailed data show location quotients of 1.49 and 1.57 in London for employment in finance and business, and in transport and communication, respectively, as against 1.04 in both groups of sectors in the Manchester City Region
7
Assembled from those districts comprising the City Regions as defined in the ‘Northern Way Growth Strategy City Regions Economic Analysis’, 2004
Page 51
City Regions – Business environment 2 •
The European Cities Monitor ranks the attractiveness of Europe’s major business cities to investors. In the UK, only London and Manchester qualified within the leading 30 European cities in 2005
•
There are two areas in which Manchester performs well: first, in terms of office space, where Manchester is perceived to offer better value for money than London; and second, in terms of external transport and access to markets, which is identified in the study as the single most important factor for businesses when deciding where to locate their business
Table 9: Ranking of London and Manchester in the European Cities Monitor, 2005 London
•
Each year, Experian produce Retail Centre Rankings that rank British cities according to the ‘vitality’ of their retail centres. Within the Northwest, Manchester has performed consistently well, out-ranking all city centres in Greater London except the West End. Liverpool is also gradually moving up the rankings to 13th place in 2004. Central Lancashire on the other hand, does not perform so well – none of the retail centres in this City Region reached the top 50 retail centres in 2000 or 2004. In 2002, Preston ranked 67th, up five places since 2000
Table 10: Retail Centre Rankings for Greater London and the Northwest
Manchester
Best city to locate a business in today
1
15
Best cities in terms of access to markets
1
10
… qualified staff
1
13
… external transport
1
8
… value for money of office space
24
7
… availability of office space
3
4
… internal transport
2
14
… quality of life for employees
13
22
West End Bromley Greater London Kingston-upon-Thames Croydon Liverpool Manchester Trafford Centre Northwest Chester Stockport Bolton
Notes: 1 is ranked highest, 30 is lowest
Notes: ‘x’ denotes that the city was not in the top 50; 1 is ranked highest
Source: Cushman & Wakefield Healey & Baker
Source: Experian
2000 1 10 11 34 14 6 35 7 31 47
2004 1 22 17 27 13 6 31 11 47 x
Page 52
Panel Assessment - Employment The Panel accepted recent projections from the Office of National Statistics and the Government Actuary that show UK population growing on average at 0.4 percentage points a year as opposed to 0.2 percentage points a year in the Northwest over our 20 year forecast period. We also accepted similar projections for the growth of working age populations, which again show an average growth gap of 0.2pp a year. These projections are particularly sensitive to assumptions about future patterns of immigration. A further shift in net migration within the UK in favour of the region, that is assumed in the figures seems, reasonable on our view of future prospects. On international immigration, Panel members have been struck by the influx of skilled workers from Eastern Europe, especially from Poland, on which we comment in the section on risks to our central forecast.
In contrast with the rapid increase in employment as a proportion of the population of working age that has been seen in recent years in the Northwest, especially among women, our forecasts assume only a relatively modest average increase of 0.1 percentage point a year in overall levels of ‘activity’ or ‘participation’ in the workforce over the forecast period in the UK as well as in the region. This is in keeping with our view that the much increased employment of women in the region has been a structural adjustment that is now at, or near, its end. Since the projected increase in activity rates in the region is expected to be the same as in the UK, this factor shouldn’t affect the likely difference in GVA growth rates we are seeking to forecast. The GVA growth gap between the Northwest and the UK will therefore depend on differences in the growth of working age populations, affected mainly by immigration, and in the growth of productivity, to which we turn next.
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Panel Assessment - Productivity We have again taken a differential rate of productivity growth of 0.1 percentage point a year on average in favour of the UK as the basis for discussing possible future influences on this key variable. This is what was achieved in the period 1990-97 before the marked structural adjustment in employment began. Last year we spent a lot of time on this judgement. Naturally we looked at it carefully again. An important issue has to do with the productivity of those who are drawn into the workforce, and the average time it is likely to take for those who have never worked, or are out of the habit, to achieve the same levels of productivity of those with whom they are working. Setting aside young professionals, who may take several years to contribute to their full potential, the Panel’s experience is that the assimilation period for most of those who have been inactive is usually relatively short, a matter of months rather than years. Some who may resent having been obliged to work by government programmes, or continue to have heavy care responsibilities, may not become particularly productive. Others, especially
those who have brought up families, may bring common sense and an experience of dealing with people into the workplace that employers say is lacking in all too many young graduates. But effects such as these are more likely to bear on levels rather than rates of change in productivity, and should apply equally across the country. The view we therefore took is that the earlier differential growth rate of productivity of 0.1pp a year will be recovered, though we have downside worries about the effect on future productivity growth in the region because of changes in the structure of its output. We also remain concerned about earlier trends in the migration of younger people out of the region. On the other hand, and broadly offsetting these two effects, we are still encouraged by the fairly rapid growth of productivity that page 18 shows has been achieved in Greater Manchester South and in Liverpool in recent years. This dichotomy carries over into the forecast period, which we also discussed in terms of the five productivity drivers on the basis of evidence presented in our report.
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Panel Assessment - The productivity drivers 1 On skills the adverse effect of a workforce with relatively low qualifications continues to worry us, so evidence of better standards and of more training is welcome. Net out migration of the young in recent years still weighs heavily. How far it has really been stemmed could be the most important aspect of the influence of skills on future growth. So the role of the City Regions could be crucial in strengthening what we now see as a mildly positive factor, with a failure to make a permanent shift in trends in the migration of the young a serious downside risk. The Panel pointed out that it is not just skill levels that bear on productivity. The hours people are prepared to work also has a bearing. This reflects individual choices about ‘work-life balance’, and several of our members have been struck by the relative youth of employees who now raise this issue with them. Analytically, it plays into average hours worked, where we present evidence on page 26 of lower average rates regionally than in the UK.
This factor affects productivity levels rather than rates of change, but if such attitudes were to strengthen gradually in the region in comparison with the UK, it would also contribute to a further widening in the productivity gap. Some members said that, while not as many young professionals are now leaving for London, the really high achievers still tend to leave, and those that stay are often more interested in work life balance than pay. Nor is the picture on enterprise all that promising. Comparisons at regional level put a generally unhelpful slant on future prospects, especially new evidence on page 35 about those whose activities are not captured by VAT registration data, on which we have depended thus far. Against this, mapping evidence about a concentration of start-ups mainly in the cities, and the implications of the recent productivity growth figures shown on page 18 both for Liverpool, and especially for Greater Manchester South, are more encouraging. Again, what may matter most is how far enterprise is strengthened by attracting able people into the cities from the rest of the UK, not just from the rest of the region.
Page 55
Panel Assessment - The productivity drivers 2 Data on investment is limited, but what we have is consistent with lower levels of productivity, and with somewhat slower growth in productivity in the Northwest. This is the area in which public policy has the strongest role to play. Better and affordable transport links within urban areas can promote growth, not least by helping the workless into work. Efficient links between centres can encourage ‘double hubbing’ in organisations, for instance between Manchester and London, and now between Liverpool and London as a result of improving train services. They could also assist in the transfer of activities into the region. But a significant new worry on the investment front is the potential impact of the Olympics, where an expected adverse effect on the regional economy might be offset later in the period if there were a new programme of nuclear power station building, if not necessarily through fixed investment. For forecasting purposes we have nevertheless assumed that the impact of investment on differential productivity growth will be broadly neutral. But its influence could be more significant. Spatial policies and public investment in housing in the region and elsewhere can either accommodate or constrain growth. They can also influence future patterns of migration, which we have identified as a key influence on future growth in the region. We have no data on which to judge the comparative effect of competition on the growth of productivity. Nor would we expect its effect to be significantly different from the UK in an open regional economy. So this has
also been taken neutral in its likely effect on future differences in the growth of productivity. On innovation, the Northwest compares favourably with the UK in terms of business funded R&D in relation to output, but this is likely to reflect a significant presence in pharmaceutical and aerospace. Together these two sectors dominate business R&D in the UK, and therefore almost certainly in the region, leaving other sectors relatively under-invested in R&D, especially in international comparison. There is also worrying new evidence on page 39 of a relatively low level of new product innovation in the Northwest in relation to R&D. This may imply a relatively high level of process R&D in connection with new products developed elsewhere. More generally, though the universities offer a potential source of strength, we are still reminded of evidence that only a small proportion of firms have contact, if any, aimed at the transfer knowledge as opposed to recruiting scarce skills, especially in engineering. Bearing on prospects in advanced industries, at least one is already constrained by shortages in advanced skills. We are nevertheless inclined to see innovation as a mildly positive influence on the growth of productivity in the Northwest. But if enterprise can be taken as a wider indicator of the willingness to innovate, the true effect of innovation may also be no better than neutral, again depending on future patterns of migration.
Page 56
Panel Assessment - City Regions 1 Last year we had relatively little evidence to hand about the region’s cities, or about its City Regions. We knew from NUTS3 data that Greater Manchester South was the fastest growing city area outside London and its surrounding areas, and that development in Liverpool had been particularly strong since 2001. There was an issue, however, as to how far this recent productivity performance reflected a degree of catching up, perhaps influenced by well organised functions moving in, and how far, alternatively, it was the result of a continuing shift in underlying confidence and attractiveness, which might be expected to continue. This stands, as does the point that these factors would make the cities better places in which to live as well as to work, and better places in which business activities could feed off one another dynamically having developed an effective critical mass. On this, we were more optimistic about sustainable prospects in Greater Manchester South than in Liverpool, though we thought a good deal could hinge on Liverpool’s effectiveness in realising the potential of its year as Capital of Culture. We also recognised that almost all the larger players in the region in financial and business services, sectors that have been growing significantly in the Northwest in terms of GVA and employment, were controlled from outside
the region and that, like much of manufacturing, these sectors are subject to continuing global consolidation. Competitive pressures were also leading to some service support functions being transferred to lower cost centres overseas. We saw these as risk factors on the downside to set against the likelihood on the upside that the cities, and Greater Manchester South in particular, could do significantly better than was generally expected. This year we have looked at the City Regions in far more depth, and in the light of new evidence presented in this report. In particular we have discussed the performance and potential of City Regions in terms of four economic factors that summarise a range of influences identified by academic researchers as necessary, if not always sufficient, requirements for the success of City Regions. We have used these factors - the connectivity, critical mass, quality of life, and business environment of City Regions as defined on page 43 – as comparative tests of the position and economic potential of those in the region and elsewhere. Skills might have been added, but they are universally important, and the essence of our quality of life test is the ability of a City Region to attract and retain skills of the order and kind it needs to succeed.
Page 57
Panel Assessment - City Regions 2 In the light of these economic tests, and on the evidence presented to us, Manchester appears to be the English City Region that has been performing most convincingly outside London and its surrounding City Region. We also think that Manchester has the best chance of future success outside what appears to be an increasingly integrated London centric ‘Super City Region’. Despite some congestion, the connectivity of Manchester City Region appears to be generally good, though the fact that that its metro system does not extend to the airport is seen as a weakness for a city competing with others for enough high value internationally mobile investment to help to secure its success. And not least because of evidence on pages 48 and 50 showing a lack of concentration in knowledge based services, nor are we sure that there is yet a sufficient critical mass of high value activities to enhance Manchester’s business environment, and to attract others, and the skills they need. But we think the potential is there for Manchester City Region to achieve this critical mass. We are less confident about the future performance of Liverpool City Region in comparison with Manchester. The City of Liverpool has done well in recovering rapidly from a low base, but it is relatively small, and skills constraints are already beginning to emerge. Whether Liverpool and its City Region can achieve a sufficient critical mass on its own to attract the skills it needs to go on growing strongly becomes a centrally important issue in terms of our tests.
Evidence from the map on page 18 shows that economic growth in the Northwest between 1995 and 2003 has been concentrated in a corridor that stretches from Merseyside through Manchester to Tameside and Stockport. Following the path of the M56 and the M62, this corridor is reminiscent of developments in areas around major routes from London, which have helped to integrate them into its ‘super region’, a pattern that can be seen from the maps on page 41. We understand that these developments result from socalled ‘agglomeration economies’, which follow from the advantages individuals and businesses gain in larger markets and from operating near to one another. We expect that these effects will similarly lead to increasing integration and growth within and around the Northwest corridor, in effect helping to create what may increasingly become a single City Region from an economic point of view. A fast train link between Liverpool and Manchester could only enhance integration and the potential for faster growth all round. Similarly the connectivity of Liverpool, which may be helped by its port, would be enhanced by a fast link to Manchester airport, which offers far more routes. All these factors could act dynamically to increase opportunities in the corridor, helping to attract more mobile people, as the London area does now, and to deal with potential skills problems, not only in and around Liverpool, but also in Manchester, as implied by the projections on page 32 because of its overall weight in the region as a whole.
Page 58
Panel Assessment - City Regions 2 (continued) We found it far more difficult to see Central Lancashire becoming a similarly cohesive City Region in terms of our economic tests for connectivity, critical mass, quality of life and business environment. Members variously commented that there does not appear to be sufficient connectivity, cultural identity, or existing integration to offer sound prospects in this regard. That is not to say that Preston, Lancaster, and Blackburn among several centres in Central Lancashire will not succeed in their own terms, adding to future economic growth in the region. Among other factors, there is helpful evidence of concentration in manufacturing, some of it advanced, which could help the area to prosper. But a great deal would have to happen before growth in Central Lancashire was likely to reflect the dynamic effects of agglomeration, conditions for which are reflected in our tests.
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Panel Assessment - Overall Conclusion Where does this analysis of City Regions leave the prospects for productivity and employment growth in the Northwest against those in the UK? On evidence of their present relative weights, recent growth performance, and likely prospects, we expect that Manchester City Region will tend to perform better than others outside the London ‘Super City Region’. However, we doubt that productivity will grow as rapidly on average across this space, or across the regional corridor, as we think is likely across the London Super Region’. This is essentially for reasons of scale, and because of dynamic effects that are known to follow from scale. Bearing in mind the relative weight of the City Regions across the country as well as the rest of our assessment, we think our central forecast of productivity growth in the Northwest as a whole of 0.1pp a year below the UK average should stand, though there could be risks either way around it. We also think that our understanding of the potential growth and contribution of the country’s City Regions is consistent with our forecast of employment growth of 0.2pp a year below the UK.
All in all, we therefore believe that the long term forecast we decided on last year should stand as our central view – that GVA growth in the Northwest can be expected to average 0.3pp a year below that in the UK over the next 20 years. Anticipating our discussion on risks that also follows, any upside would depend most clearly on the potential of the City Region around Manchester, both in terms of levels of productivity and of possible patterns of migration affecting the outturn on employment in the region. The clearest downside risk rests in the future potential of London, enhanced for a period by investment for the Olympics. It is also enhanced by the overall weight, recent growth, and potential of London and its surrounding ‘Super City Region’. If this region were to perform more strongly than we expect, the result could easily be sufficient to widen the growth gap between the Northwest and the UK by more than our central view.
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The Panel’s Central Forecast
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Panel Forecast - Growth Table 11: Summary of growth projections, 2005-2025
Northwest
UK
NW differential with UK
Population
0.2
0.4
-0.2
Working age population
0.2
0.4
-0.2
Employment
0.3
0.5
-0.2
Productivity (GVA per worker)
1.9
2.0
-0.1
GVA
2.2
2.5
-0.3
•
The Northwest economy has experienced relatively strong growth in recent years, outpacing the UK as a whole in 2003 and perhaps in 2004 and 2005, partly for cyclical reasons. Though there have been changes in structure that make the picture more difficult to read, we do not believe that this recent performance is evidence of a step change in the underlying performance of the region’s economy
•
Our forecast for growth in the Northwest relative to that in the UK is unchanged from last year: our view is still that the most likely prospect for the Northwest economy over the next twenty years is that growth will be weaker than in the UK. In forming population assumptions, we have taken account of the evidence of higher immigration to the UK, but over 20 years this does not affect the annual growth rate at the level of precision shown in the table
•
We forecast a difference in growth rates of 0.3 percentage points a year. So if, as we assume, growth in the UK economy averages 2.5% a year, growth in the Northwest will average 2.2% a year
Source: Panel Forecast
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Panel Forecast - GVA per head Figure 61: GVA per Capita in the Northwest
•
Currently, GVA per head in the region is around 90% of the UK average. While we expect GVA in the Northwest to grow more slowly than in the UK as a whole, this difference reflects in part our assumption that the growth of population, and hence of the labour force, will also be slower in the Northwest
•
We believe that it will be difficult for the gap in GVA per Capita to be closed through higher rates of economic activity in the Northwest compared with the UK average. This is not to say we believe that efforts to improve labour force participation will be unsuccessful, but rather that they will be no more successful than elsewhere
•
If this assumption is correct, the implication is that the underlying gap in GVA per head can be expected to widen gradually, unless productivity growth improves to match that in the UK. However, our forecast concludes that productivity is likely to grow more slowly in the region than in the UK by 0.1 of a percentage point a year
25 23
£000, 2001 prices
21 19 17 15 13 11 9 7 1990
1995
2000
2005 NW
2010
2015
2020
2025
UK
Source: Panel Forecast
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Panel Forecast – Economic Activity in the working age population Figure 62: The share of the working age population that are economically active 2005 & 2025 % 87 85 83 81 79 77 75 2005
2025
Figure 63: Employment rates (number of jobs as a proportion of the working age population), 2005 & 2025 % 87
•
Our UK forecast assumes that average economic growth of 2.5% a year will reflect productivity growth of 2.0%, growth in the working age population of 0.4%, and an increase in economic activity, the proportion of the working age population in work, by 0.1% a year
•
The equivalent figures for the Northwest behind our forecast of GVA growth of 2.2% a year are productivity growth of 1.9%, growth in the working age population of 0.2%, and an increase in economic activity again of 0.1% a year
•
This increase in activity is much less than has been seen recently, especially in the region, which we have interpreted as a period of marked structural adjustment that is now complete, or nearly complete. It accords with other factors influencing employment discussed earlier in this report
•
The forecasts assume supportive spatial strategies concerning housing, transport infrastructure, and employment sites
85 83 81 79 77 75 2005
2025
Source: Panel Forecast
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Panel Forecast – Jobs and Unemployment Figure 64: Northwest employment to 2025
•
We do not expect the strong rate of job creation seen recently to persist. Over the next twenty years, we expect job growth to average 0.3% a year, slightly below the UK average of 0.5% a year, in line with projections of working age population in the region and the UK, and our forecast of gradually increasing labour market participation. This implies an additional 230,000 jobs in the region by 2025
•
Manufacturing employment is expected to continue to fall as a result of competition and continued pressure for productivity improvements
•
Many of the additional employment opportunities are likely to be in financial & business services, and in education and health
•
Despite continuing job creation, the number of people unemployed is expected to increase slightly in the long term, but the incidence of unemployment as a proportion of the working age population should remain low
000s 4000 3800 3600 3400 3200 3000 2800 1990
1995
2000
2005
2010
2015
2020
2025
2015
2020
2025
Figure 65: Numbers unemployed to 2025 000s 400 350 300 250 200 150 100 50 1990
1995
2000
2005
2010
Source: Panel Forecast
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How do our Long Term and Short Term Forecasts Relate? Our long term forecast anticipates that GVA growth in the Northwest over the next 20 years will average 0.3 percentage points a year below that in the UK. What has happened over the past 15 years is set out page 2. This shows that there has been a growth gap between the region and the UK that has tended to narrow in recent years, but that growth in the Northwest has only exceeded that in the UK in two periods of cyclical slowdown, both of which have tended to influence Southern rather more than Northern regions, including the Northwest. The more recent slowdown, which began in 2001, and has now worked through, involved an international downturn in financial activity and in spend on IT equipment and services to which London and its surrounding areas were more exposed than the Northwest because of differences in what goes on. In addition, we have argued that growth in the region has also benefited from a helpful combination of short term factors, including the relative impact of the growth of public expenditure, and that these factors are also tending to work their way through.
It is true that a 0.2 percentage point growth gap in our short term forecast in each of these three years is narrower than the average of 0.3 percentage points a year over the next two decades in our long term forecast. These figures are not very different, especially bearing in mind what we say about likely developments in the City Regions. The more important point is that they both predict a slight widening year by year in the gap between income levels in terms of GVA and GVA per head in the region and those in the UK. It is also true that our short term forecasts show figures for growth of 2.7 per cent a year in the UK and 2.5 per cent a year in the region in each of 2007 and 2008 that are higher than the projected averages of 2.5 and 2.2 per cent a year in our long term forecast. The long term figures are based on an underlying ‘trend rate of growth’ of 2.5 per cent a year for the UK. Reflecting economic performance over many years, this abstracts from short run variations, such as in our short term forecasts. The relatively rapid growth rates they show in 2007 and 2008 effectively take up the slack left around the long run trend because of much slower growth in 2005, and only partial recovery in 2006.
So while our short term forecasts show that growth in the Northwest economy was a shade ahead of the UK in 2003 and 2004, and possibly again in 2005, they also show the re-emergence of a gap in growth between the UK and the region in each of 2006, 2007, and 2008.
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Risks to the Long-Term Forecast 1 Our central forecast assumes that developments in the world economy and in the UK will allow UK GDP to grow at 2.5% a year on average over the next twenty years. If the UK economy departs from this average growth path in either direction, a corresponding impact on growth in the Northwest is likely to follow. Potential risks to UK economic growth include geopolitical events; major shocks in key markets, such as markets for energy; a possible flu pandemic; and prolonged weakness of the dollar, which would hold back UK exports of goods and services, even if it should help various input prices. We expect the region to experience growth in its population, reversing the decline that has been seen over many years. An important factor behind this increase is net international immigration. There is a risk that the projected increases in immigration into the region and into the UK will not occur as predicted in the projections we have adopted for our forecasts. Local budget flights between the region to Eastern Europe are already encouraging an inward flow of younger migrants, which may raise the growth of the region’s working age population above our forecast, at least for a period. Later on, much will depend on the numbers who settle, and on the direction of net flows as opportunities in Eastern Europe increase.
Changes in migration within the UK could also be important. The projections of working age population accepted for the forecast assume some net increase in favour of the Northwest, in contrast to gradual out migration over many years. Potentially far more significant for potential economic growth in the Northwest is the migration of younger people out of the region. This has grown in recent decades, but may now have been stemmed. If migration trends within the UK can be permanently shifted, for instance by the region’s cities becoming increasingly attractive places in which to live and work, higher than forecast productivity growth should become possible in the Northwest through improving skills, enterprise and innovation in the widest sense. The skills needed for the occupational mix predicted on page 32 might also be achieved. On the other hand, further net out migration could be a threat to sustainable growth in the region, meaning that significant numbers of new job opportunities would move elsewhere, and that our central forecast would be exposed to a significant downside risk.
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Risks to the Long-Term Forecast 2 Public policy in the Northwest and elsewhere could play into patterns of migration, especially those linked to the City Regions. We have assumed that spatial policies in the region, including planning, will allow our forecast to be met. Major house building programmes in the South, including the Thames Gateway and around Milton Keynes, represent a downside risk. This is because they could affect the relative attractiveness of the region more than we have assumed. We have also taken account of the potential impact of the Olympics, but this could have been under-estimated. On participation there is a risk is that the structural shift in the proportion of women of working age who work in the region is not coming to an end, as we have assumed, and that it might have significantly further to go to meet the needs of a continuing shift into services. This would tend to depress productivity growth for a period, while adding to the growth in GVA. On the whole it should represent an upside risk to our forecast of growth in GVA, but it could increase the problems the region already faces in moving from its recent path of much slower overall productivity growth onto a path like that assumed in our forecast.
There is a possible upside risk on participation if government programmes to encourage especially older men on incapacity benefit back into work were more successful than we anticipate, because the region has relative high numbers of such people. One reason why we do not anticipate particularly marked success is because people on invalidity benefit tend to be concentrated in areas with a relatively low pressure of demand for labour as well as relatively high rates of unemployment. This means that many of those on Incapacity Benefit are likely to be without effective role models to help them back into work, even if they are not too clinically depressed or disabled to return. On investment, and in addition to worries about the Olympics, the Panel recognised that EU Structural Funds have played quite a significant role, especially on Merseyside in recent years. Though confidence on Merseyside is much increased, there is a risk that private sector activity will nevertheless grow at an insufficient rate to fill the gap once support from these Funds is at an end.
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Risks to the Long-term Forecast 3 Our analysis in this year’s paper has put the future performance of the region’s City Regions centre stage. We believe as a Panel that Manchester City Region has the potential to become a centre of future growth like many other major regional cities in Europe and the United States, and especially if public policy is benign. This potential is already partly reflected in our forecast, but we may have under-estimated its effect. This represents an upside risk to our forecast, and is clearly linked to what might happen on UK migration and on international immigration. On the other hand, further comparative work on City Regions prepared for this year’s forecast makes clear both the relative weight and even stronger recent performance of the London ‘Super City Region’. There is a serious downside risk that dynamic effects could lead London and its surroundings to draw away faster than we have forecast, which matters because their weight is sufficient to affect the figures for the UK as a whole. Relatively few of the region’s major employers in manufacturing, and even fewer in financial and business services, is controlled within the region. Our forecast assumes that the region will continue to benefit from a significant
presence of such employers, partly because of the relative costs it is likely to continue to offer. But UK as well as international businesses controlled from outside the region face constant competitive pressures to organise and consolidate their businesses in the face of global developments of their markets. As one member put it, ‘growth can be fickle if it depends too much on branch plants and call centres’. Likely developments over the forecast period in Asia and in Eastern Europe may represent a risk that is greater in the Northwest than in the UK economy, which is dominated by London and its surrounding areas, not least because of the structure of their output in comparison with that of the Northwest. Our central forecast is that GVA in the Northwest will grow 0.3 percentage points below that of the UK over the next twenty years. We conclude that the balance of risks leaves our central forecast intact. But outcomes associated with the range of risks on either side of this central view continue to spread rather than narrow, and we think they are gathered rather more on the downside than on the upside. This adds an important degree of overall caution to our forecast.
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