Regional Economic Forecasting Panel
State of the Northwest Economy Long-term Forecasts April 2009
Produced by the Regional Economic Forecasting Panel on behalf of the
Regional Intelligence Unit www.nwriu.co.uk
This report has been published by the Northwest Development Agency Research Team as part of its continuing commitment to inform the economic development of the Northwest of England. It has been produced by SQW Ltd and Cambridge Econometrics Ltd, economic development consultancies, on behalf of the Northwest Economic Forecasting Panel. Whilst every effort has been made to ensure the accuracy of the material in this report neither panel, SQW Ltd, CE Ltd nor the Research Team can accept any responsibility for the decision based on the material that follows.
Further Information If you require further information on the work of the panel, please contact Nicola Christie. Press enquiries should be addressed to Neil Roscoe. Nicola Christie Economist Research Team, NWDA nicola.christie@nwda.co.uk 01925 400293 Neil Roscoe Senior Press Officer NWDA neil.roscoe@nwda.co.uk 01925 400232
Contents Executive Summary
i
Setting the Scene: Developments since 1990
1
Developing the Panel Forecast
14
Demography & Jobs
17
Productivity Drivers
18
Spatial Aspects of Growth
24
Forecasting Evidence
29
Panel Assessment
33
Central Panel Forecast
40
Risks
45
Executive Summary •
The Northwest Regional Economic Forecasting Panel was set up in 2003 as a service to business and to others concerned with the development of the Northwest as a thriving regional economy, and this report completes the sixth year of our work. We prepare and publish a long-term forecast once a year, together with short-term forecasts for business looking out over the next three years, each Spring and Autumn. To support our work, the Northwest Regional Intelligence Unit (RIU) also produces up-to-date factual reports about the regional and sub-regional economies.
•
This report deals with the long-term forecast and differs from our earlier reports in a number of respects. First, and most important, is the fact that the forecast is intended to provide a direct input to the Northwest’s new Regional Strategy, RS2010. In the past separate regional strategies have been produced for different purposes: for example, the Regional Economic Strategy, the Regional Spatial Strategy and the Regional Housing Strategy. A number of different forecasts have been used in these strategies and this has led to inconsistencies and a degree of confusion. Without sacrificing any of its independence, the Panel has agreed to produce a single set of forecasts to underpin the Northwest’s new Regional Strategy (RS2010). In doing so, it has drawn for the first time on the work of not just one forecasting house but three, before making its own judgements on the most likely long-term outcome for the region. This base forecast for the Northwest as a whole is an essential prerequisite to subsequent discussions on the aspirations of the region and its five sub-regions.
•
The new long-term forecast looks forward to the year 2030, in line with RS2010. Because of the length of the forecasting period, the forecasts have been divided into two shorter periods: 2008-15 and 2015-30. Developing these long-term forecasts has required us to make difficult judgments about whether the current recession is likely to have a lasting effect. This could include, for example, a permanent loss of capacity in some of the region’s key industries. We have also had to re-assess recent economic growth and the extent to which this was due to conditions that may not be repeated in future, such as a large debt overhang in household and government expenditure in a situation of low inflation.
•
The Panel expects that, in both of these periods, GVA generated in the Northwest will grow more slowly than in the UK by an average of some 0.3 percentage points (pp). In the first of these periods, GVA growth in both the Northwest and the UK is expected to be dampened by the effects of the recession. If growth in the UK turns out to average 1.7% per annum (pa), that in the Northwest should average 1.4% pa. The outlook for the second period, taking us to 2030 is brighter, with growth of 2.4% pa for the UK and 2.1% pa for the Northwest.
•
Growth in GVA is influenced by growth in the number of jobs, and in productivity when measured in terms of value added per job. Value added in turn reflects wages earned and profits generated and retained in the region. Our method is therefore to identify underlying trends in the growth of jobs and productivity, to understand why these have arisen, and to ask how various influences may affect them in future.
Page i
•
In earlier reports, we have commented on the period of rapid jobs growth experienced in the Northwest, especially between 2001 and 2004. This followed marked increases in public spending, making the Northwest more dependent on public sector jobs; it also involved the out-sourcing of ‘back office’ jobs in financial and business services from higher cost locations in the South, following a downturn in international financial markets in 2001. We continue to regard this past growth as exceptional and most unlikely to be repeated. In fact, our forecasts anticipate a small reduction (0.1% pa) in employment in the Northwest over the period 2008-15, some 0.2 pp less than the UK which is expected to grow very slightly (0.1% pa). In the second period, to 2030, employment growth in the Northwest is expected to pick up to 0.3% pa closing the gap slightly on the UK, where the corresponding figure is 0.4% pa.
•
Both population and working age population have increased in recent years, reflecting favourable economic conditions which have fuelled the flow of net in-migration to the region and a rising employment rate among women. But, there is evidence that international migration, particularly from EU accession countries, is diminishing and this leads us to forecast that future population in both periods will be modest and some 0.3 – 0.4 pp less than that for the UK.
•
The Panel continues to be pessimistic about the ability of the Northwest to close the productivity gap with the UK. Gains in productivity will be modest. We base this conclusion on an assessment of the prospects for the factors affecting productivity, namely enterprise, skills, investment and innovation. We may see an increase in the rate at which businesses are set up, as one consequence of the recession, but we think this will have a limited effect on the economy as a whole, particularly if many of these businesses fail to survive beyond the first two-three years. On skills, we can see problems if, like other regions, we put emphasis on raising higher level skills in order to meet national (Leitch) targets.
•
The Panel was not confident that investment will increase; there are sectors in which the Northwest could potentially have a differential advantage, such as renewable energy, but much will depend on how Government policy evolves. Public sector investment can be expected to decline in those areas, such as Merseyside, that have benefited substantially over the last twenty years or so. Innovation may increase, as a response to the recession, as industries seek to remain competitive and R&D, although affected by the recession, will recover in the long-term. In the Panel’s view, the region needs to consider how intellectual property can be developed more rapidly and here changes in public policy, including RS2010, may help to remove some of the constraints that limit this.
•
The Panel has extended its analysis to include spatial issues within the Northwest, and this has helped in assessing the extent to which housing markets and industrial agglomeration are likely to affect the region’s growth prospects.
•
Instead of plumping for an ‘average’ forecast, the Panel has tried to produce a reasoned argument for each of its composite base forecasts. The Panel was heartened to find a large degree of consensus among the three sets of forecasts it examined, and this has helped considerably the task of producing a single base forecast for the region.
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•
The production of this report has been supported by SQW Consulting and Cambridge Econometrics. In order to produce a single base forecast, the Panel has drawn upon forecasts from two additional forecasting houses: Oxford Economic Forecasting and Experian. The co-operation and assistance of these organisations is much appreciated, although the responsibility for the forecasts presented here is that of the Panel. While the Panel enjoys the support of the NWDA, it is fully independent in the views and material it publishes. Our papers may be found at www.nwriu.co.uk, and we would welcome any comments on our work through nicola.christie@nwda.co.uk.
Professor Peter Batey Acting Panel Chairman
Page iii
SETTING THE SCENE Developments since 1990
Page 1
Drivers of Growth in GVA and GVA Per Head •
Growth in Gross Value Added (GVA) depends to a large extent on the following three factors:
Population – changes in total and working age populations, including net internal and international migration into the region
Employment – changes in employment, and in the proportion of the working population which is economically active and available for work
Productivity – changes in the GVA generated per job in the workplace.
•
As usual, throughout this report we focus on how the region has performed relative to the UK, the factors which have influenced this, and how the region might grow relative to the UK over the next 20 years. As in previous long-term forecasts, our approach is comparative, taking a view on how trends in population, employment and productivity might widen or close relative to the UK because of various influences, leading to an overall judgement on the growth gap in GVA. This helps us to abstract from influences commonly affecting all regions, and therefore the wider UK economy as a whole. Our approach is in line with the Government’s response to Prosperous Places: Taking forward the Review of Sub-National Economic Development and Regeneration (2007), which set out new arrangements to secure sustainable economic growth in all English regions (measured by GVA per head) and the reduction of persistent gaps in GVA per head between regions over the longer term.
•
This year, our report has two parts:
This first part looks at how changes in population, employment and productivity have shaped the region’s economic performance since 1990, so setting the context for the region’s recent performance. This material is presented in a similar fashion to that of previous years to enable read-across and comparison.
The second part then explores the various influences on future growth, including the likely performance by the UK and the Northwest against the drivers of productivity, spatial aspects of growth (looking at commuting patterns in relation to housing provision across the region) and existing evidence from three forecasting houses on projections for future growth. This material is followed by the Panel’s Assessment of each influence on growth, and concludes with the Panel’s central forecast from 2008 to 2030, together with the associated risks.
•
Developing this long-term forecast has been particularly difficult given the recession. Whilst clearly we cannot ignore the current economic climate, it is important to bear in mind that much of the data presented in this report will not yet reflect the current economic situation, and at the same time the long-term forecast is looking some 20 years ahead. A key underlying question for the Panel has therefore been the extent to which the recession will affect the Northwest relatively (compared to the UK), and the extent to which such effects will persist into the long term.
Page 2
Recent Growth Performance in the Northwest Figure 1 Annual growth in GVA in the Northwest and UK (2003 prices) (Source: Regional Accounts & Cambridge Econometrics)
Figure 2 GVA per resident head - % difference between Northwest and UK (current prices) (Source: Regional Accounts & Cambridge Econometrics)
•
Between 1991 and 2007, economic output or GVA in the Northwest grew by 42.4% in constant prices, equivalent to an annual compound growth rate of 2.2% per annum (pa).
•
Since 1991, the Northwest has grown more slowly than the UK, on average by 0.5 pp pa. However, as Figure 1 shows, the gap in growth rates between the Northwest and UK has varied considerably over the last 16 years: they were at their widest in the mid-late 1990s when recovery from the 1991 recession was more modest in the region. Given that GVA gaps can tend to widen at times of recession, the Panel has considered whether this is likely to happen again, and to what degree.
•
Since 2000, the GVA gap has averaged 0.4 pp, which is largely due to cyclical factors influencing the South more than the North, and rapid employment growth in the Northwest during the period. Latest figures show that, in 2007, GVA in the Northwest strengthened, whereas growth for the UK slowed. This upward trend for the Northwest is likely to be short-lived, with more recent data already showing a downturn for the region.
•
On GVA per head, as set out in Figure 2, the gap between the Northwest and UK was stable in the late 1990s, and then grew until around 2005 since when it has narrowed slightly. By comparison, the gap between the UK and other regions such as the West Midlands and Yorkshire and Humber has continued to widen. By 2007, the GVA per head gap between the Northwest and UK stood at 12.6%.
Page 3
Explaining the Gap in GVA and GVA Per Head •
GVA is a measure of incomes (wages and profits) generated by economic activity in places, and is the most commonly used measure of regional economic output. However, the measure has a number of weaknesses. It includes the wages of public sector workers, so GVA comparisons are not confined simply to differences in performance in the private sector. Profits that are reported to registered offices located elsewhere are excluded. No account is taken of transfers through the tax and benefits system that affect household incomes, of differences in regional price levels that also affect living standards, or of other aspects of quality of life. Nevertheless, GVA taken on a per capita basis is widely accepted as evidence of differences in the capability of regional economies to provide satisfactory incomes for their residents, and this indicator is now the government’s headline target measure of regional performance.
•
In previous years, the Panel has found it helpful in understanding regional performance to bear in mind recent research by Cambridge Econometrics and SQW, which explained the reasons underpinning the general GVA gap between the Northwest and the UK. To reiterate, the explanation for the region’s GVA gap with the UK has three components:
About one quarter of the gap is accounted for by labour market differences, mainly lower participation, but also somewhat fewer hours worked and less doublejobbing in the Northwest, despite broadly similar patterns of part-time working
About one third reflects the fact that employees in the Northwest earn less for similar kinds of work, reflecting the existence of lower general price level on wage settlements, which has been falling relative to the UK
The rest reflects an additional gap in earnings because of the nature of jobs in the Northwest compared to the UK - higher-level jobs are under-represented in the Northwest, and lower-level jobs overly so.
•
Against this background, the remaining content in this section explores recent trends in population, jobs and productivity since 1990 to help explain the GVA and GVA per head data summarised in Figures 1 and 2.
Page 4
Population Trends 1990-2007 Figure 3 Working age population in the UK (Source: ONS)
Figure 4 Working age population in the Northwest (Source: ONS)
•
The working age population of the UK increased by 7.8% between 1990 and 2007, equivalent to an annual growth rate of 0.4%. However, this masks much stronger growth since 2000 at 0.7% pa, largely due to net immigration, compared with a rate of 0.3% pa prior to the turn of the century.
•
Turning to the Northwest, the working age population expanded more slowly at 2.4% between 1990 and 2007, equivalent to just 0.1% pa. Again, this comprised two phases: pre-2000 (of -0.1% pa) and post-2000 (of 0.4% pa). Net immigration (especially of international migrants) is the prime explanation for improved performance since 2000.
•
The total stock of young adults in the Northwest (those aged between 20 and 34) fell by 13% between 1990 and 2000. This outflow has been stemmed since, but the region continues to lose young adults to other regions; the number of people aged 20-34 fell by 2.5% between 2000 and 2007, despite significant work to boost HE activity and retention in the Northwest. Conversely, Great Britain saw an increase in the number of young people in the population of 2.8% between 1990 and 2000, rising to 3.5% over 2000-07.
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The Role of Migration and Immigration Figure 5 Internal and international net migration to the Northwest (Source: ONS)
•
Total net immigration to the Northwest between 2000 and 2007 was some 55,400 people, with an annual peak in 2002 of 18,4001. International migration has dominated the region’s migration inflows since the late 1990s, peaking in 2002 at a net gain of 17,000 people (largely of working age), although this has gradually declined to around 5,000 annually in 2007, as Figure 5 illustrates. During the early part of this decade, net internal migration also favoured the region, but this benefit now appears to be over - in 2005, we returned to a position of net internal loss (of 1,000 people to elsewhere in the UK).
This trend has continued to worsen recently – in 2007, the region lost about 7,000 UK nationals (primarily to London, the South East, Yorkshire & Humberside, and the West Midlands). If continued, this trend could have serious implications for the working age population in the Northwest, especially when set alongside the data showing the loss of young adults from the region.
•
The recent 2006-based ONS projections now incorporate a projected decline in overall net migration to the region from 14,900 people in 2009 to 13,400 in 2016 (that is -1.5 pp pa). However, from 2016 to 2026, annual net migration to the region is projected to increase steadily at a rate of 1.7% p.a. to 15,900 in 2026 (predominantly due to the growth in internal migration).
•
Despite a decrease in net immigration of international migrants in recent years, there continues to be a relatively strong flow of foreign nationals to the region. In 2007/08, over 51,000 National Insurance Numbers (NiNos) were allocated in the Northwest, accounting for 7.0% of the UK total allocations (up from 6.3% in 2002/03). The majority of these NiNo allocations went to EU accession state members (51%). However, the impact of the recession on migration patterns – and local competition for jobs - will vary across the region.
Significant revisions have been made to the migration data by ONS since the publication of last years REFP report due to revisions in international migration data. Total migration has been revised down slightly since 2000, and data now show a peak in 2002 rather than 2003.
1
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Jobs Figure 6 Number of jobs2 in the Northwest and UK (Source: Cambridge Econometrics)
•
Between 1994 (when the recovery from the 1991 recession began) and 2007, the number of jobs in the Northwest grew at 0.9% pa, compared to 1.1% pa growth for the UK as a whole over the same period.
•
With an increase of 4.4% over the period 2001-2004, the growth in the number of jobs in the Northwest exceeded the UK (cf 2.5% for the UK), and by 2004, there were 141,000 more jobs in the region than in 2001. This produced an
2
average gap with the UK in the growth of jobs per annum of -0.6 pp compared to the UK over this period, reflecting increases in public sector spending and the size of financial and business services in the Northwest.
•
However, this performance has not been sustained since 2004. Between 2004 and 2007, the number of regional jobs increased by only 0.8% (compared to 2.9% across the UK), equivalent to an increase of 27,600 jobs in the region over this period. By the end of 2007, the total number of jobs in the region was 3.4m. Over 2004-07, employment growth in the UK was some 0.7 pp higher than in the Northwest.
•
On unemployment, since 2004/05 the data show an increase of 1.2 pp in the Northwest (by 2007/08), compared with only 0.5 pp in the UK for the same period. This difference reflects the variances in employment trends between the Northwest and UK observed above.
•
The latest data available show that 6.0% of the region’s working age population was unemployed between July 2007 and June 2008, compared to 5.3% in the UK. Despite improvements in closing the unemployment gap with the UK (to 0.1 pp in 2006/07), which we reported in last year’s long-term forecast, it appears the gap has reopened to 0.7 pp by July 2007 to June 2008.
Count of the total number of jobs (full-time & part time jobs)
Page 7
Labour Market Developments Figure 7 Employment rates – the proportion of those of working age in employment (Source: LFS/APS)
Figure 8 Part time jobs as a % of total jobs for the Northwest, Great Britain and England & Wales (Source: ABI)
•
In terms of employment rates, the gap between the Northwest and UK was at its widest in 2000/01 at 3.4 pp. From this position, over the next three years the region made a rapid improvement in narrowing the gap to only 1.5 pp in 2003/04.
•
Since 2003/04, whilst the national employment rate has increased by 0.2 pp to 74.5%, the region’s gap with the UK has reopened with the Northwest employment rate falling by 0.7 pp to 72.1% by 2007/08.
•
For men in the Northwest, the employment rate stood at 75.4% in 2007/08, 3.3 pp below the Great Britain average; by contrast, the employment rate for women was 68.5%, some 1.6 pp lower than the national average.
•
On part-time working (Figure 8), the most recent data show that part-time jobs accounted for 31% of jobs in the Northwest in 2007, in line with national comparators. After a peak in part-time working in 2004, when over 32% of jobs were part-time, there has been a slight fall back in favour of full time working. As yet, it is difficult to see how labour market patterns in terms of the age and gender of those in employment, or the location of jobs, are going to be impacted by the recession and its consequences.
Page 8
Inactivity Rates Figure 9 Male and female inactivity rates (% of working age) in the Northwest and Great Britain (Source: LFS/APS)
Figure 10 Benefits claimants as a proportion of the working age population in the Northwest and Great Britain (Source: DWP)
•
Having summarised the position on jobs and employment rates, we now turn to inactivity rates.
•
Since 1999/2000, economic inactivity rates in the Northwest have fallen more quickly than the national average (0.9 pp compared to 0.3 pp respectively). That being said, absolute rates remain much higher in the Northwest (23.3% of working age population) than for Great Britain (21.2%).
•
The evidence in Figure 9 shows a steady and sustained fall in the economic inactivity rate for females in the Northwest (by 2.9 pp between 1999 and 2007), which coincides with rapid job growth at the start of this decade. At 27.5%, the Northwest’s current female inactivity rate is now similar to the national average of 26.1%. By contrast, male economic activity rates continue to be a major issue for the Northwest, and the region has failed to close the inactivity gap for this segment with the national average. Since 1999/2000, the male economic inactivity rate has increased by 1 pp, despite increases in jobs in the region, and now stands at 19.4% of the working age population, compared to a national average of 16.8%.
•
In May 2008, almost 732,000 people in the Northwest claimed benefits, equating to 17% of the working age population (compared to 14% for Great Britain). The number of people claiming benefits has declined by 8% since 2000 (more quickly than the national decrease of 4%), with the number of Incapacity Benefit (IB) claimants seeing a fall of 56% between 2000 and 2008. That being said, IB claimants accounted for 14% of all claimants in May 2008.
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Productivity Figure 11 GVA per job in the Northwest and UK (Source: Cambridge Econometrics)
•
Productivity in the region, measured by GVA per job, was £31,900 in 2007, compared to £34,800 for the UK (2003 prices). Within the region, productivity varies considerably, from £36,500 per job in Cheshire, to £32,000 in Greater Manchester and £31,500 in Lancashire, through to £30,000 in Merseyside and £27,000 in Cumbria, reflecting the sectoral mix and job type in each sub-region.
•
Overall, Northwest productivity has grown by 1.8% pa since 1997, 0.1% pa slower than the UK average. However, as illustrated by Figure 11, the GVA per job gap has progressively widened since the late 1990s, which coincides with rapid job growth in the region, although often in lower value added occupations. Since 2005, there has been a marginal narrowing of the gap, although there is still a good way to go to match the extent of the gap experienced in the mid-1990s.
•
Since 2000, productivity growth in the Northwest has been 1.4% pa, 0.4 pp below the UK average. Over the same time period, jobs grew by 0.9% pa (in line with the UK). When combined, these figures give a GVA growth gap of 0.51 pp .
•
These figures compare to differentials in our Panel forecasts last year of 0.3 pp for productivity growth and 0.1 pp for job growth, giving an aggregate GVA growth gap of 0.4 pp. This was based on the view that the recent worsening in relative productivity growth in the Northwest would not persist, and a narrower productivity gap of that experienced previously of about 0.3 pp would reassert itself. However, the marginal improvements in recent years suggest the scale of the productivity gap with the UK is proving stubborn to shift, and a return to a 0.3 pp gap may take longer to achieve than expected.
1
Due to rounding
Page 10
Employment & Productivity – Trends by Broad Sector Figure 12 Employment as a % of total by main industry grouping for the Northwest and UK, 1990-2006 (Source: Cambridge Econometrics)
•
As Figure 12 shows, since 1990 the Northwest has experienced a structural shift in employment away from manufacturing (generally comprising higher value added sectors in which the Northwest has a productivity advantage) to services (where productivity tends to be lower, and comparatively so in the Northwest given the types of services here). This shift is playing a significant role in the falling productivity of the region relative to the UK, as Figure 11 confirms, and recent trends show no sign of the gap closing.
•
Notwithstanding this, the Northwest continues to retain a higher share of employment in manufacturing than the UK average (12% compared to 10% respectively), and the Northwest’s manufacturing sector is more productive
than the national average - productivity was £48,100 per job in the Northwest in 2006, compared to £46,300 per job in the UK.
•
Public services have seen the greatest increase in employment share since 1990, and are now the largest employer in the Northwest, accounting for 32% of jobs in 2006. But the productivity of these jobs is notably lower in the Northwest (£22,200 per job) than the UK as a whole (£24,800 per job). ‘Other services’ has also become a major employer in the Northwest, accounting for one quarter of jobs in the region. Again, productivity in this sector (at £30,000 per job) is significantly below the UK average (£36,000 per job). How the Northwest works to improve the performance of its existing sectors, as well as pursuing new higher value added activities, is a major strategic issue for the region’s development.
•
Trade data suggest that 51% of Northwest exports were to the EU in Q3 2008 (compared to an average of 55% across the UK) so if the Pound does find a new lower equilibrium with the Euro, this will favour export orientated businesses in this market – a key question is the extent to which the region is well placed to take advantage of this opportunity.
•
During the recession there have been, and will be, major job losses. There is a risk that large employers will be lost from the region permanently, which could make recovery particularly difficult.
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Productivity by Industry Figure 13 Labour productivity in Services, 2006 (£000s per person employed) (Source: Cambridge Econometrics)
Figure 14 Change in relative labour productivity in Services in the Northwest (UK=100), 1996 and 2006 (Source: Cambridge Econometrics)
•
All Northwest sectors are less productive than their national counterparts, with the notable exception of three industries: motor vehicles (the Northwest is 26% more productive than the UK average), textiles, clothing and leather (7.5% more productive) and chemicals & man-made fibres (0.9% more productive).
•
As Figure 13 shows, labour productivity in all sub-sectors of the region’s service economy is below the UK average, with the greatest productivity gaps seen in insurance (productivity is 25% lower in the Northwest compared to the UK), other business services (22% lower than the UK), banking and finance (19% lower) and other services (17% lower). Furthermore, as Figure 14 shows, the productivity gap in most services has widened over the last ten years, partly because of changes in regional price levels but also because of, the nature of occupations in the Northwest (which have a greater weight of lower skill, lower value added jobs) and the scale of business transactions/fees achieved in London and wider South East (with which the Northwest frequently does not compete). This structural issue remains a major concern for future prospects, not least as the region becomes potentially more service-sector orientated.
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Summary of the Panel’s Long-Term Forecast in March 2008 Table 1 Average per annum growth and Future Economic Growth (2007-27) (Source: Panel Forecast, 2008)
NW differential (pp)
0.0 0.2 0.5
0.4 0.5 0.7
-0.3 -0.3 -0.1
Working age population growth
1990-2007 2000-2007 Panel Forecast in Spring 2008
UK (%)
Population growth
1990-2007 2000-2007 Panel Forecast in Spring 2008
Northwest (%)
0.1 0.4 0.4
0.4 0.7 0.6
-0.3 -0.2 -0.1
0.5 0.9 0.7
-0.2 0.0 -0.1
Employment growth
1990-2007 2000-2007 Panel Forecast in Spring 2008
1990-2007 2000-2007 Panel Forecast in Spring 2008
1990-2007 2000-2007 Panel Forecast in Spring 2008
0.3 0.9 0.5
•
Table 1 summarises the latest estimates for past growth in the Northwest and UK over the longer (1990 to 2007) and shorter (2000 to 2007) terms, and compares these to the Panel’s long-term forecast which it produced in Spring 2008.
•
In all three cases, GVA growth in the Northwest has been slower than the UK average, but since 2000 absolute GVA growth in the Northwest has shown signs of improvement (as compared with the previous 17 years), reflecting strong employment growth. However, the Panel’s view in Spring 2008 was that this period of rapid job growth would not continue, and long-term prospects for the Northwest economy would lag those in the UK, particularly in terms of productivity growth.
•
Overall, the expected outcome at Spring 2008 was a widening of the gap between the UK and Northwest both in terms of GVA and GVA per head. In the context of this past profile, in the following part of this report we set out the Panel’s thinking on prospects through to 2030.
Productivity growth (GVA per job) 1.7 1.4 1.6
2.0 1.8 1.9
-0.3 -0.4 -0.3
2.4 2.8 2.6
-0.5 -0.5 -0.4
GVA growth 1.9 2.3 2.2
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DEVELOPING THE PANEL’S LONG-TERM FORECAST FOR 2008-2030
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Developing our New Long-Term Forecast Developing the Panel’s forecast – the wider context, the Panel’s role in the SRS process and the programme to 2010 •
As highlighted in the Executive Summary of this report, the Panel has committed to input into the Northwest’s new Regional Strategy (RS2010) in response to a request from the NWDA for assistance in developing a single set of forecasts for the region. Whilst the Panel will maintain its independence, it is also keen for the forecasts produced to be as useful for regional partners as possible. The Panel will therefore contribute actively to the development of long-term base and aspirational forecasts for the region as a whole and the sub-regions, alongside the Panel’s regular annual programme of developing two short term forecasts looking three years ahead (in the Spring and Autumn 2009) and one long-term forecast looking 20 years ahead (in Winter 2009/10).
•
The Panel’s inputs to the RS2010 process, and the timeline for implementation, are planned as follows:
A Regional Base Forecast for the RS2010 – the long-term regional forecast developed by the Panel in this report will provide the base regional forecast for RS2010. This will provide a single set of forecasts to 2030 (in line with the time horizon for the RS) on population, employment, productivity and GVA for the Northwest, against which the objectives and actions of the new strategy can be developed.
Sub-regional Base Forecasts – a set of sub-regional base forecasts will be produced by the five sub-regional partnerships (SRPs) and the NWDA in draft format (which should sum to the regional base forecast referred to above) for the Panel to check and challenge in Summer 2009. SRPs/NWDA will then finalise the sub-regional base forecasts in response to comments and advice from the Panel.
Sub-regional Aspirational Forecasts – Following the development of base forecasts for the sub-regions, the SRPs/NWDA will develop aspirational forecasts for each sub-region. Within the context of the emerging Regional Strategy, these sub-regional aspirational forecasts will set out partners’ aspirations for growth against sub-regional intents and broad actions, the sum of which may exceed the regional base forecast. Again, the aspirational draft forecasts will be produced by the SRPs/NWDA in draft format for the Panel to check and challenge in Summer 2009, and revised by SRPs/NWDA in response to comments and advice from the Panel for early Autumn.
A Regional Aspirational Forecasts for RS2010 – the NWDA will present the draft aspirational forecasts for the region as a whole to the Panel at its Winter 2009/10 meeting. In addition to developing their base regional forecast at this meeting (as usual), the Panel will also check and challenge the NWDA’s proposals for the aspriational forecast underpinning RS2010.
•
In the round, these contributions will inform the development of the RS2010 and its component actions, which together are due for publication in 2010.
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Developing our New Long-Term Forecast •
Developing its new long-term forecast for the period through to 2030, at its January 2009 meeting the Panel considered whether Northwest growth will continue to lag behind the UK by 0.4 pp pa, as the Panel thought in March 2008, and whether this view should be changed to reflect recent evidence or changed views about the future. Clearly, whilst the short-term issues are pressing, it is important to remember the long-term nature of this forecast.
•
To inform our view on the forecast growth differential between the Northwest and UK, we have updated our analysis on recent trends in the following indicators:
Demography and jobs – population, working age population and economic participation
Drivers of productivity – as in our previous long-term reports, we have considered the Treasury’s supply-side drivers of productivity - Skills, Enterprise, Investment and Innovation (the fifth driver, competition, has not been included given that it largely flows from macro economic, rather than regional, policy). Where appropriate, we compare performance in the Northwest with the West Midlands and Yorkshire and Humber. This year, we include some new material based on recent research which explores the relationship between skills and productivity and the prospects of the Northwest closing the skills gaps in order to meet Leitch targets.
Spatial factors – here, we move on our early exploration of where growth has been occurring to look at the functional relationship between places. In the relevant section, we explore commuting patterns and housing allocations across the Northwest, and implications of this for future growth.
•
In a change to our previous long-term forecasting practice, the Panel has also considered projections on population (and working age population), jobs, productivity and GVA from three forecasting houses as part of the evidence base on which a judgement on long-term prospects was made. The process we have gone through here is set on pages 29-32.
•
This part of the report then provides a Panel assessment on each of the elements above, and concludes with the Panel’s Central Forecast through to 2030, and view on risks to which the Panel’s view might be subject.
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Demography & Jobs Figure 15 Working age population in the Northwest and UK (Source: ONS mid-year population estimates, ONS 2006-based sub-national population projections)
Figure 16 Indexed Employment Growth the UK, Northwest by sector (Index 100 = 1990) (Source: Cambridge Econometrics)
•
The recent upward trend in population in the Northwest began in 2001. Over 2001-07, the region’s population has grown by 1.3%, an increase of 91,300 people. This equates to a growth rate of 0.2% pa.
•
Over the next 20 years to 2028, ONS predicts the population growth in the Northwest will average 0.5% pa, a rate slightly below that expected for the UK (0.7% pa).
•
With regard to the working age population, growth is projected to be slower than that of the total population, at 0.4% pa in the Northwest (and 0.5% pa in the UK as a whole). Growth in the working age population is expected to accelerate between 2010 and 2020 as the state retirement age for women aligns with that for men, but there will nonetheless be an increase in dependency ratios.
•
Forecasts published by Cambridge Econometrics expect employment to grow by 0.3% pa in the Northwest over the next 20 years, marginally behind the UK at 0.4% pa (based on the relative population growth discussed above). As best as we can tell at this point, the strongest growth sectors will be public services and leisure-related services and to a lesser extent distribution, hotels and catering.
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Productivity Drivers – Skills 1 Figure 17 Highest qualification attained (Source: LFS/APS)
Figure 18 Proportion of employees receiving job related training in the last 4 weeks (Source: LFS/APS)
•
There has been a significant up-skilling of the Northwest’s working age population in recent years. The proportion with no qualifications improved by 4.1 pp between 1999 and 2007, outpacing national improvements, whilst the proportion with Level 4+ increased by 5.8 pp over the same period, matching the pace of improvement across England and Wales. In both the No Qualifications and Level 4+ categories, the Northwest has improved more rapidly than both the West Midlands, and Yorkshire and the Humber.
•
That being said, the Northwest continues to underperform in skills relative to the national average. Latest data for 2007 show that 15.0% of the Northwest’s working age population have no qualifications, compared to 13.1% in England and Wales, and 25.4% have Level 4+ qualifications, in comparison to a national average of 28.1%. Comparator regions perform worse than the Northwest at the top end of the qualifications spectrum, with 24.6% and 23.8% of working age residents qualified to Level 4+ in the West Midlands and Yorkshire and the Humber respectively.
•
Engagement in job related training declined in all comparator areas between 1999/00 and 2007/08, but in the Northwest this remained stable at just over 13% (the Northwest actually saw a small increase of 0.1 pp in the proportion of employees receiving job relating training in the last four weeks). However, during recessions spend on training is often cut first, which may have longer term implications for the region’s productivity.
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Productivity Drivers – Skills 2 Figure 19 Occupations by occupational category in 2008 (% of total jobs) (Source: APS)
Figure 20 Relative earnings by occupational category in 2008 England = 100% (Source: ASHE)
•
Above and beyond qualifications, there remain significant differences in occupational structures across the regions. Compared with England, and especially with the Wider South East (East of England, London, and the South East), the Northwest has a relatively low proportion of high-level occupations. Similarly the region, together with Yorkshire and the Humber and the West Midlands, continues to have a higher share of low-level occupations than England and the Wider South East.
•
In addition to a lower share of high-level occupations, earnings in these occupations regionally are significantly lower than in England, and especially so compared with the Wider South East. The gap in earnings between England and the Northwest is narrower than in comparator regions, although latest figures show that the West Midlands and Yorkshire and the Humber have experienced increase earnings relative to the Northwest.
•
There could be an issue about the future supply of experienced high level skills in the region if the ambitious growth plans for its major city regions are to be realised, effective employment densities are to be maintained, and if some manufacturing sectors are to protect their competitiveness internationally.
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Productivity Drivers – Skills 3 Skills and Productivity Recent research … •
In mid-2008, research was undertaken by Pion Economics for the NWDA to explore the relationship between skills and productivity across the Northwest, and to assess whether skills progression patterns in the region are adequate to meet future employer needs and to achieve the region’s Leitch targets (of 40% of the working age population possessing Level 4+ qualifications by 2020).
… and the findings •
The link between skills and productivity is undisputed, but encouraging skills progression, particularly through Levels 2 and 3, and on to Level 4, is a major challenge for the Northwest. The Panel considered whether there is any evidence to suggest that recent trends will be turned around, and if so, what might trigger a change in direction. However, even if a major step-change in skills progression was achieved, Pion suggest that ‘payback’ in terms of productivity gains from improved skills ‘can take more than a decade to fully realise’.
•
Overall, the labour market seems to be operating in some form of broad equilibrium of demand and supply (although this is a lower level equilibrium, where employers in the region may be either less ambitious or more constrained in their choice of staff). However, as might be expected, the skills demands of employers are shifting further towards higher, and away from lower, level skills, forcing a realignment of the region’s skills base. Whilst the net change in jobs is projected to increase by 13,000 by 2016, the (gross) Level 4 requirement will be some three or four times that figure. Progression patterns are broadly in line with projected need, although the balance of Level 4 is anticipated to remain in deficit in the medium term.
•
One of the most startling findings from the research is that at current progression and Level 4 pursuit rates, the region is unlikely to meet the Leitch target of 40% at Level 4+ by 2030, let alone by 2020. The scale of the challenge is huge, and the implications of this will be critical for future regional competitiveness. Even though the region is currently matching national rates of skills improvement, this will not be enough to close the high level skills gap.
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Productivity Drivers – Enterprise Figure 21 VAT registrations per 10,000 of working age population (Source: NOMIS & ONS)
•
An important proxy measure for the degree of entrepreneurial activity in an economy is the number of VAT registrations per 10,000 of the working age population. In 2007, the number of VAT registrations per 10k WAP rose to 47.6 in the Northwest, although this rate remains below that observed across England and Wales (54.5 registrations per 10,000 of the working age population).
•
The Northwest’s VAT registration rate rose by 13% over the last decade, which outpaced improvements at the national level. In 1997, enterprise rates in the Northwest were 18% lower than England and Wales, but this has narrowed to 13% by 2007, suggesting the Northwest is closing the enterprise gap (albeit rather slowly).
•
Ten years on, in 2007 the Northwest was achieving higher registration rates than both the West Midlands (46.8 per 10,000 population) and Yorkshire and Humber (44.1 per 10,000 population), demonstrating an improvement on last year’s long-term forecast report where levels of enterprise observed in the West Midlands exceeded those in the Northwest. However, it is yet to be seen whether this improvement will continue given that registrations may fall during the recession. Furthermore, these data do not include businesses below the VAT threshold (turnover of £64,000 or above) and provide no indication of whether firms wish to grow and employ others.
•
Positively, the one-year survival rate for businesses in the Northwest and UK were on a par with each other in 2004 (latest available data) at 92.1%. Again, the Northwest is closing its deficit in survival rates with the UK, as demonstrated by the 5.8 pp increase in survival rates between 1995 and 2004 in the Northwest compared to 4.0 pp in the UK.
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Productivity Drivers – Investment Figure 22 Manufacturing & services investment (by UK-owned companies) as a percentage of regional GVA (Source: ABI and ONS)
Figure 23 Average net capital investment per business (Source: ABI and NOMIS)
•
Investment (as measured by net capital expenditure) by UK-owned firms accounts for a greater share of GVA in both manufacturing and services in the Northwest than the UK. For example, in the Northwest investment by manufacturing firms accounted for 1.2% of regional GVA and investment in services accounted for a further 5.2% of GVA (0.5 pp and 0.8 pp higher than UK levels respectively). However, since the late 1990s, investment as a proportion of GVA in both manufacturing and services has declined significantly.
•
Average net capital investment per business has remained consistently high in the Northwest since the late 1990s, partly reflecting the region’s industrial structure. Encouragingly, by 2006, average net capital investment per business for the Northwest was £51,200, compared to £47,100 for Great Britain.
•
Gross Fixed Capital Formation (GFCF)1 per 10,000 population was 19% lower than the national average in 2000, with the gap having widened from 12% in 1998. ONS have not released new data on this for sometime, so whilst this may suggest some under-investment across the Northwest, this data is now becoming dated.
1
ONS define GFCF as the acquisition, less disposals of new or existing fixed assets.
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Productivity Drivers – Innovation Figure 24 Gross domestic expenditure on R&D, as a percentage of total GVA (Source: ONS)
Figure 25 R&D expenditure by manufacturing, as a proportion of sectoral GVA (Source: ONS)
•
Expenditure on R&D can be used as a proxy for innovative activity within an economy, as well as an increasingly important indicator as we look to enable more knowledge base economies. R&D expenditure has been consistently strong in the Northwest, helped in part by the prominence of advanced manufacturing, aerospace and pharmaceuticals in the region (although this dominance by a few sectors does potentially obscure under-investment in R&D across other sectors in the region).
•
In 2005, Northwest expenditure on R&D accounted for 2.2% of regional GVA, which was notably higher than the UK average of 1.8%. Furthermore, latest figures show an increase in R&D expenditure as a share of GVA in the Northwest, compared to a continuous decline at a national level. As mentioned above, manufacturing investment in R&D is relatively high, accounting for 8.6% of GVA in 2004 compared to 6.8% in the UK. However, the Northwest’s service-related businesses invested less in R&D in 2004 (latest data available) than their counterparts across the UK (0.1% of GVA compared to 0.3% respectively). This correlates with the lower value nature of services activity we have commented on earlier in this report.
•
Business ICT usage can also be used as an indicator of innovative behaviour. In 2007, 66% of the Northwest’s businesses used broadband, equating to a 43 pp increase since 2004. Similarly, 54% of businesses had a website and 14% traded on line, up by 11 pp and 2 pp from 2004 respectively.
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Introduction to Spatial Aspects of Growth In previous long-term reports, we have introduced progressively spatial considerations into the Panel’s forecast in recognition that place-based economic performance within the region can help to inform our view on prospects for the Northwest as a whole. Increasingly, economic agglomeration comprising both urbanisation and localisation effects is playing a major role in spatial economic developments. This is likely to impact going forward as urbanisation (driven by factors as diverse as lifestyle through to the need to manage resources more effectively) continues. Figure 26 illustrates GVA per head for NUTS 3 geographies, and shows strong performance in the Greater Manchester South and Halton/Warrington NUTS2 3 areas. Already, for example, 42% of regional GVA is generated in the area of Liverpool and Manchester City Regions and Warrington. Recent work by SQW Consulting for NWDA confirm that these specific nodes are responsible for generating the great proportion of growth identified in headline terms by the Panel 15 months ago when it coined the phrase ‘the Liverpool-Manchester corridor’, based on changes in shares of GVA within the region between 1994-2005. That being said, the degree of agglomeration within and across the geographies still looks limited, offering significant opportunities going forward. Building on our past exploration of spatial issues, in this section, we examine in more detail the interrelationships among areas in the Northwest, drawing on evidence that can be inferred from commuting patterns in the 2001 Census and more recent data, and discuss the implications for spatial development and planning policy.
Figure 26 Residence-based GVA per head (2006)
West Cumbria (NUTS3)
East Cumbria (NUTS3)
Key Towns with over 100k population NUTS3 boundary
GVA per head, resident based (2006) £11,199 - £13,000
Lancashire CC (NUTS3) Blackpool (NUTS3)
Blackpool Preston Blackburn
£13,000 - £15,000
Blackburn with Darwen (NUTS3)
£15,000 - £17,000 £17,000 - £19,000 £19,000 - £21,000 Above £21,000
Sefton (NUTS3) East Merseyside (NUTS3)
Bolton Greater Mcr North (NUTS3) St Helens Liverpool
Wirral (NUTS3) Liverpool (NUTS3) Halton and Warrington (NUTS3)
2
Nomenclature of Territorial Units for Statistics
Oldham Manchester
Greater Mcr South (NUTS3) Stockport
Cheshire CC (NUTS3)
Produced by SQW Consulting 2008 © Ordnance Survey. Crown Copyright. License number 100019086 Digital Map Data © Collins Bartholemew Ltd (2006). Data Source: ONS
Page 24
Functional Geographies – Commuting Patterns •
Commuting can serve to improve the opportunities to exploit agglomeration economies by providing an urban centre with access to a larger workforce. But it also increases problems of congestion and pollution, including CO2 emissions. In the long term, sustainable development must involve some curbs on the growth of road transport, possibly through the greater use of broadband and mobile technologies to allow remote working, smarter road demand management, and/or through greater co-location of work and residence. The latter has clear implications for planning the location of development of commercial property and housing, which we explore below.
•
Co-location of work and residence tends to be higher in areas that are more remote from other centres of employment, and in urban centres. The Census 2001 reported the highest rates of co-location among workers were in Cumbria and Lancaster, at over 80%, but they were also high in Blackpool, Blackburn, Liverpool and Crewe and Nantwich. Figure 27 updates the Census analysis using results from the 2006 Annual Population Survey.
•
The broad pattern in 2006 is similar to that in 2001, with the highest rates of co-location still in the north of the region. A number of those districts which had high rates of retention of workers in 2001 have seen these rates increase further, such as Blackburn and Blackpool. Other districts have also seen higher rates of co-location, including Preston, Manchester and Chester, where more that 70% of residents in work were employed in the district. For Manchester this will reflect the sharp increase in city-centre living that accompanied the jobs growth over the period.
•
Figure 28 provides an assessment of the proportion of people working in a district in 2006 who have commuted from elsewhere. In-commuting tends to be highest in urban centres. The pattern is broadly the same as in 2001, when commuters accounted for highest proportions of workplace jobs in Manchester (64%), Knowsley, Trafford, Salford and Preston and lowest in Lancaster (13%), Wirral and districts to the North and east of Manchester.
•
Over 2001-06, the importance of in-commuters has increased in the major employment centres of Liverpool, Preston and Chester. The same does not seem to have occurred in Manchester, which would be consistent with the increase in city-centre living. Other districts where the importance of commuters has increased over this period include Crewe and Nantwich, and Lancaster. In contrast, areas where there has been a fall in employment taken by commuters include Fylde, Knowsley, and Salford and Congleton.
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Functional Geographies – Commuting Patterns Figure 27 Percentage of residents in work and working in the same district (2006) (Source: Cambridge Econometrics using APS data)
Figure 28 Percentage of Workplace jobs filled by commuters (2006), (Source: Cambridge Econometrics using APS data)
Carlisle
Carlisle
Allerdale
Allerdale
Eden
Eden
Copeland
Copeland
South Lakeland
South Lakeland
Barrow-in-Furness
Barrow-in-Furness Lancaster
Key
33.7% - 50%
% of workplace jobs taken by commuters 2006
Ribble Valley
Wyre
Pendle
50.1% - 60% 60.1% - 70%
Blackpool Fylde
Burnley
80.1% - 90%
West Lancashire Wigan
Sefton
Wirral
Bolton
St Helens Knowsley Warrington Liverpool
Bury
Ribble Valley
Wyre
14.0% - 20.0% 20.1% - 30.0%
Preston
Pendle Blackpool Fylde
30.1% - 40.0%
Hyndburn South Ribble Blackburn with Darwen Rossendale Chorley
70.1% - 80%
Lancaster
Key
% of residents in work and working in the same district 2006
Preston
South Ribble
40.1% - 50.0%
West Lancashire
Oldham
Wirral
Chester
Produced by SQW Consulting 2008 © Ordnance Survey. Crown Copyright. License number 100019086 Digital Map Data © Collins Bartholemew Ltd (2006). Data Source: Annual Population Survey
Bolton Wigan
Sefton
Salford
St Helens Knowsley Warrington Liverpool
Bury
Rochdale Oldham
Salford
Tameside Manchester Trafford Stockport
Halton
Halton Ellesmere Port & Neston
Hyndburn Blackburn with DarwenRossendale
Chorley
Over 50.1%
Rochdale
Tameside Manchester Trafford Stockport
Burnley
Macclesfield
Ellesmere Port & Neston
Macclesfield Vale Royal
Vale Royal Congleton Crewe and Nantwich
Chester
Produced by SQW Consulting 2008 © Ordnance Survey. Crown Copyright. License number 100019086 Digital Map Data © Collins Bartholemew Ltd (2006). Data Source: Annual Population Survey
Congleton Crewe and Nantwich
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Functional Geographies – Future Implications for Housing •
Figure 29 shows the spatial distribution of the 416,000 additional dwellings that current plans accommodate in the Northwest over 2003-21 sourced from the current Regional Spatial Strategy. Over this period, the region’s population is projected to increase by 562,000. The largest numbers of additional dwellings are planned in Manchester (63,000), Liverpool (25,000) and Salford (28,800). Wigan, Trafford, Bolton, St Helens and Tameside also have provision of increases of over 10,000.
•
Over 2006-21, some 109,000 net additional jobs are expected to be created in the Northwest (CE). Figure 30 gives an initial indication, on the basis of simplifying assumptions such as the continuation of current commuting patterns, where the people taking these jobs may wish to reside. The largest increases are in the urban centres of Manchester and Liverpool, where the majority of the jobs are being created. Nevertheless, the increase in people employed here is more than the projected increase in employed residents. The same is also the case, but on a lesser scale, in Warrington, Chester and Blackpool. Elsewhere, there would be an increase in employed residents in excess of the increase in employment opportunities, with the largest differential in Tameside, Stockport, Macclesfield, Knowsley, Sefton and Wirral.
•
A simple comparison of the additional housing plans and the likely increase in employment suggests that the housing plans in all districts are sufficient to accommodate the impact of additional employment. However, the planned housing is to address more than just the population changes associated with net additional employment opportunities, the effects of the dynamics of the existing population base, and the continuing trends towards smaller average household sizes. Nevertheless, using the ratio between planned additional housing and additional residents in work as a first approximation for over/under supply of additional dwellings indicates that there could be oversupply in Blackpool, Preston, Macclesfield, Vale Royal, and Ellesmere Port and Neston, and potential undersupply in Warrington, Oldham, Stockport, Trafford and Sefton.
•
A key question, therefore, for policy makers will be the extent to which this under/over supply of housing may enable or constrain growth in particular places, some of which have been critical in driving regional growth in the past. An additional issue to consider here is the capacity of resources, utilities provision and transport infrastructures in areas such as within/between Manchester and Liverpool (where planned growth and demand is highest, but infrastructures are already under significant pressure) to accommodate future growth – and the possible scale and timing of any potential constraints that might bite over the next twenty years. These issues have already been explored in some detail as part of the regional work to assess the Environmental Considerations of Sustainable Economic Growth (published in January 2009).
Page 27
Functional Geographies – Future Implications for Housing Figure 29: Additional housing planned in the Northwest 2003-2021 (Source: RSS)
Figure 30: Growth in employed residents 2006-2021 (Source: Cambridge Econometrics using APS data)
Carlisle
Carlisle
Allerdale
Allerdale
Eden
Eden
Copeland
Copeland
South Lakeland
South Lakeland
Barrow-in-Furness
Key
Barrow-in-Furness
Additional Housing 2003 - 21 (000s)
Lancaster
Lancaster
Key
2.3 - 4.2 7.5 - 8.7
Ribble Valley
Wyre
4.3 - 7.4
Pendle Blackpool
8.8 - 9.0
Fylde
9.1 - 63.0
Preston Hyndburn
South Ribble
Wigan
Sefton
Wirral
Bolton
St Helens Knowsley Warrington Liverpool
Bury
-0.5 - 0.6 0.7 - 1.0
Burnley
Pendle Fylde
Preston
Burnley Hyndburn South Ribble Blackburn with Darwen Rossendale Chorley
2.6 - 3.3
Rochdale
Ribble Valley
Wyre Blackpool
1.1 - 2.5
Blackburn Rossendale with Darwen Chorley
West Lancashire
Change in employed residents 2006-21 (000s)
3.4 - 12.4
West Lancashire
Oldham
Salford
Tameside Manchester Trafford Stockport
Wigan
Sefton
Wirral
St Helens Knowsley Warrington Liverpool
Halton Ellesmere Port & Neston
Chester
Produced by SQW Consulting 2008 © Ordnance Survey. Crown Copyright. License number 100019086 Digital Map Data © Collins Bartholemew Ltd (2006). Data Source: RSS
Bolton
Bury
Rochdale Oldham
Salford
Tameside Manchester Trafford Stockport
Halton
Macclesfield
Ellesmere Port & Neston
Vale Royal
Macclesfield Vale Royal
Congleton Crewe and Nantwich
Chester
Produced by SQW Consulting 2008 © Ordnance Survey. Crown Copyright. License number 100019086 Digital Map Data © Collins Bartholemew Ltd (2006). Data Source: Cambridge Econometrics
Congleton Crewe and Nantwich
Page 28
Forecasting Evidence for the Region •
In previous years, the Panel has based its long-term forecast on trends in demography and jobs, drivers of productivity and spatial aspects of growth detailed above, and Cambridge Econometrics’ long-term projections adjusted to reflect the Panel’s view in the preceding year.
•
Reflecting the opportunity going forward for the Panel to oversee regional base and aspirational forecasts to inform RS2010, the evidence base this year has been expanded to include the most recent forecasts produced by all three forecasting houses that are active in the Northwest region, namely Cambridge Econometrics, Oxford Economics and Experian.
•
In making a judgement on growth prospects, the Panel was presented with a set of projections for population (and working age population), jobs, productivity and GVA from each forecasting house. Projections for each indicator were sub-divided into the following two time periods:
2008-2015, to reflect the recession and the likely recovery period thereafter
2015-2030, by which time the UK and regional economies are expected to return to longer term growth trends.
•
In the next sub-section, we present sequentially Cambridge’s, Oxford’s and Experian’s views for population, jobs, productivity and GVA, before then bringing this material together to provide the Panel’s aggregate long-term forecast.
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Forecasting Evidence – Population Figure 31 Population projections 2008-2015
Figure 33 Working Age Population projections 2008-2015
Figure 32 Population projections 2015-2030
Figure 34 Working Age Population projections 2015-2030
•
The differential in population growth projections between the Northwest and UK for the 2008-2015 period varies from -0.2 pp (Experian) to -0.3 pp (CE and Oxford). Similarly, the differential for the 2015-2030 period ranges from -0.1 pp (Experian) to -0.3 pp (CE).
•
The differential between UK and Northwest working age population (WAP) during the 2008-2015 period is slightly larger than that for population, ranging from -0.2 pp (Experian) to -0.4 pp (CE). The differential for the 2015-2030 varies between -0.1 pp (Experian) and -0.4 pp (CE). Much of the differences between the forecasts here is probably due to different views on net migration into/out of the region. All three forecasters expect the growth in WAP in the Northwest and UK to be slower than growth in total population in the long term (2015-30). Page 30
Forecasting Evidence – Jobs & Productivity Figure 35 Jobs projections 2008-2015
Figure 37 Productivity projections 2008-2015
Figure 36 Jobs projections 2015-2030
Figure 38 Productivity projections 2015-2030
•
In terms of jobs growth, views for the region over the first period to 2015 vary from -0.1% pa to +0.2% pa. The differential in jobs growth projections between the Northwest and UK over this period varies from 0.0 pp (Experian) to -0.2 pp (CE and Oxford), and similarly the differential for the 2015-2030 period range from -0.1 pp (CE and Oxford) to -0.3 pp (Experian). None of the forecasters expect jobs growth in the Northwest to be stronger than the UK. In the long term, Experian expect growth in jobs to match the growth in WAP, while CE and Oxford expect the growth in jobs to be stronger than in WAP.
•
The differential in productivity growth projections between the Northwest and UK between 2008 and 2015 vary from 0.0 pp (Experian) to -0.1 pp (CE and Oxford), and the differential for the 2015-2030 period ranges from 0.0 pp (Experian and Oxford) to -0.2 pp (CE). Over the long term, all three forecasting houses see Northwest productivity growth to be slower than the UK as a whole. Importantly, those forecasting houses with the strongest employment forecasts tend to have weaker productivity forecasts. Page 31
Forecasting Evidence – GVA Figure 39 GVA projections 2008-2015
•
Over the 2008-2015 period, the forecasting houses expect Northwest GVA to grow at a rate of between 1.5% pa (CE) and 2.0% pa (Oxford). Experian forecasts no growth rate gap between the Northwest and UK over this period, whereas Oxford expects the growth rate for the region to lag behind the UK by 0.2 pp. CE has the gap at 0.3 pp.
•
There is very little variation amongst the three forecasts for the long term growth for the Northwest. This ranges from 2.1% pa (CE) to 2.2% pa (Experian and Oxford) between 2015 and 2030. As a result, the growth rate gap with the UK ranges from -0.1 pp for Oxford to -0.3 pp for CE and Experian.
Figure 40 GVA projections 2015-2030
Page 32
The Panel’s Assessment
Page 33
The Panel’s Assessment •
The Panel’s approach to the long-term forecast is to identify underlying trends in the growth of jobs and in productivity before exploring how various influences might affect these over the forecast period, typically of 20 years. We concentrate on a comparison of trends in the Northwest relative to those in the UK more than absolute values since our aim is to forecast the likely ‘growth gap’ in GVA between the region and the UK. This depends on differences in trends in jobs and in value added per job, our definition of productivity. The growth gap in GVA per resident head, the wider measure of regional wealth, also depends particularly on any expected changes in the relative growth in productivity, with which it moves very closely.
•
This section of the report begins by considering the Panel’s discussion on recent changes in jobs, in demography and in productivity, and on possible supply and demand influences on underlying trends in growth gaps in jobs and in productivity over the next twenty years or so. We review the main drivers of productivity. We also briefly examine the spatial aspects of growth within the Northwest, including commuting patterns and the future implications for housing, matters which could have a bearing on growth in the region as a whole. Our assessment then leads into a short account of the prospects we think are most likely for the region over the next twenty years focusing especially on GVA, jobs and GVA per head, and we have added a summary of what we see as the most significant risks to our forecast being correct.
Demography and Jobs •
The first part of this report, which examined developments since 1990, pointed to the fact that the past few years have broken with historical trends. The region’s working age population declined in the 1980s and 1990s, as shown in Figure 4, reflecting an out-movement of workers to other regions where job prospects were judged more favourable. In the earlier part of this decade, the downward trend reversed. Thanks mainly to a shift in trends in net international migration (see Figure 5), the region’s working age population began to grow again.
•
During the same period, the rate of jobs growth in the Northwest more than matched that in the UK as a whole. The peak was reached in 2004, since when it has fallen away somewhat (see Figure 6). As well as attracting in-migrants, this period of employment growth contributed to a reduction in female inactivity rates in the region. While in-migration has been stemmed by the slowdown in job growth, female labour force participation rates have been maintained (Figure 9).
•
The period of jobs growth appears to be the result of two main changes: a substantial increase in public sector activity, particularly in health services, and a period of strong jobs growth in financial and business services. We commented in our long-term forecast report this time last year that the public sector changes were the product of rapidly increasing government spending that is unlikely to continue to grow at the same rate. The growth in financial and business services was likely in large part to be the result of out-sourcing from national firms, who were looking for less expensive alternatives to the South East where costs had risen sharply.
Page 34
•
We remain convinced that the period of rapid jobs growth experienced earlier in the current decade, in which GVA growth in the Northwest matched and subsequently outstripped that in the UK, was exceptional. The combination of circumstances which brought it about is unlikely to be repeated. Given this, we consider that for long-term forecasting purposes it is prudent to assume that job growth in the region will continue to lag behind that in the UK to the extent of 0.1 pp pa.
Productivity •
As Figure 12 shows, the long-term trend since the early 1990s has been a structural shift in jobs from manufacturing into services. Over the ten years to 2006, concerningly the productivity of services in the region declined relative to that in the UK (see Figures 13 and 14). This productivity gap has been widening for several reasons: changes in regional price levels; the occupational structure of the Northwest (with its emphasis on lower skill, lower value-added jobs); and the scale of business transactions and fees achieved in London and the Southeast. We expect these structural factors to continue to affect productivity differentials, particularly if the Northwest becomes increasingly dependent on service employment.
•
The Panel has considered the likely impact of the recession on particular sectors in the region’s economy. Car manufacturing has been hit badly in the past and has adjusted, to some extent, by rebalancing, modernising, and rationalising production. It is less likely to experience the ‘ratchet effects’ (i.e. a large scale, permanent fall in employment levels at times of recession) it has in the past. The Panel sees no reason to be complacent, however, and if the region were to lose one or more of its car plants, this production capacity would probably be lost for good. Aerospace is felt not be as vulnerable as other sectors as a result of a continuing steady supply of government contracts and diverse markets overseas. Small manufacturing businesses are felt by the Panel to be more vulnerable, particularly if they have very sensitive cash flow. Among larger companies, there might be a tendency for some to use the ‘cloak’ of the recession as an opportunity to introduce new technology to improve productivity. To the outside world, this may appear to be job loss resulting from recession when in fact the real reason could be different.
•
The Panel is also concerned that many businesses in the region have been built up with unhealthy ratios of debt-to-equity. These industries, which include chemicals and parts of the automotive sector, are particularly vulnerable during the current recession and this could lead to a permanent loss of capacity in the region.
•
Construction is a large regional employer and the Panel’s view is that growth in this sector will be very limited. In the period 2008-15, public spending on schools and health will serve to offset the downturn in house-building activity. Looking beyond this, nuclear re-build and decommissioning and the expansion of environmentallyrelated industries will provide the region with significant opportunities in the construction sector. On the other hand, the Panel does not see much scope for an increase in construction activity in the retail, manufacturing, and leisure sectors, and the Panel sees little prospect either of much construction activity in the transport sector (especially roads), with the almost inevitable consequence that road congestion will increase further. This could have the unfortunate effect of constraining economic growth in precisely those parts of the region that are currently most successful.
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•
The Panel thinks that the cutbacks in the banking industry are bound to affect the Northwest, but feels that in this sector the region could fare better than London and the Southeast because it has not experienced the same degree of expansion and intensification in recent years as seen in London and the South East. Structurally, the Northwest is not as exposed to the changes in the international banking arena, and does not have the reliance, in product terms, on the complicated financial instruments that the recession has put the spotlight on.
•
The devaluation of Sterling could bring some benefits to the region. The Panel thinks that the region is well placed to attract more tourists, particularly to the cities, thanks to recent public and private investment in regeneration. It feels that there are complementary roles that could be played by cities, rural and coastal areas in the region and that still more could be done to emphasise, and coordinate, their distinctive offerings. Devaluation could also benefit the recruitment of international students to the region: the Northwest is already relatively successful in this regard, but there is potential to expand this.
Drilling down into productivity – the Supply Side Drivers •
We have examined the four main drivers likely to improve productivity, namely skills, investment, enterprise, and innovation. Figure 17 shows that there has been an improvement in the level of skills among the Northwest’s working population during the course of the current decade, but that the rate of improvement is not much better than that for the country as a whole. Since skill levels are historically lower in the Northwest, existing skill differentials are likely to remain. Job-related training has remained static in the Northwest, against a general pattern of decline in such training.
•
The Panel is concerned at the findings of a recent research study commissioned by the NWDA exploring the relationship between skills and productivity in the region. This points to the long payback time in terms of productivity increases associated with improving skills. It also draws attention to the slow progress in meeting the national ‘Leitch’ target, set at 40% achieving NVQ Level 4+ qualifications. This target is a critical factor if the region is to become more competitive in future. On the other hand, the Panel has seen some evidence that the region is unable to provide sufficient graduate level jobs for those that are seeking them. It remains concerned that the drift of well-qualified young people to London and the Southeast might accelerate in future if this does not happen.
•
The most recent data (see Figure 22) suggest that investment as a proportion of GVA is generally higher in the Northwest than in the UK, but in both cases it has been declining for several years. As Figure 23 shows, average net capital investment per business is relatively high in the Northwest, reflecting the region’s industrial structure, but this tends to fluctuate from year to year with no clear pattern. We are not confident that investment will increase in future: there are sectors in which the Northwest could potentially have an advantage, such as renewable energy, but much will depend on how Government policy evolves and benefits the region. We think it likely that public investment in the round will decline in many of the areas, like Merseyside, that have benefited most in the last twenty years or so. It is not yet clear the extent to which the push for advancing publically-funded investments, as part of the response to the recession, will differentially affect the Northwest.
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•
The data on enterprise are difficult to interpret because VAT registrations, the main indicator (see Figure 21), include many self-employed professionals who may have no intention of taking on employees. We anticipate some increase in business formation as a result of the recession, as those displaced by existing businesses seek to set up on their own, but we know little about the likely survival rate of such businesses in the current context, and whether this is likely to be higher or lower in the Northwest than in the UK as a whole. We do not have sufficient evidence to suggest that enterprise will be of a major influence in reducing the productivity gap and, so like last year, it seems appropriate to assume a neutral influence.
•
Expenditure on R&D is a useful proxy for innovation within an economy and the Northwest tends, because of the presence advanced manufacturing, aerospace and pharmaceuticals in the region, to have a higher overall level of R&D spending than other UK regions (see Figures 24 and 25). This may, however, be rather misleading as the dominance of a few sectors may hide a substantially lower level of R&D expenditure in other sectors. The Panel feels that innovation might increase in future, in response to the recession, as firms seek to remain competitive. In the Panel’s view, the region needs to consider how intellectual property can be developed more rapidly and here changes in public policy, including RS2010, may help to remove some of the constraints that limit this. As things stand, the Panel finds it hard to establish, however, whether the Northwest is likely to be more or less innovative than other regions over the forecasting period.
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Spatial Aspects of Growth •
Previous Panel reports have started to consider the extent to which spatial issues affect the growth of the region as a whole. We have commented on the concentration of regional GVA within the space linking Liverpool and Manchester. Figure 26 demonstrates clearly the sharply-defined contrasts in residence-based GVA per head across the region. Agglomeration economies are of increasing importance at both national and regional levels and this means that in growth terms the Liverpool-WarringtonManchester space could be to the Northwest what London and the South East are to the country as a whole.
•
Commuting patterns could be an important factor at the sub-regional level. On the positive side, they provide opportunities to exploit agglomeration economies. Against this, however, is the fact that commuting increases problems of congestion and pollution. In promoting long-term sustainable development, there is a strong case for curbing the growth of car usage, for providing more opportunities for IT-supported remote working and for promoting greater co-location of work and residence. The Panel was interested to see that in some parts of the Northwest, particularly in those areas closest to urban centres, commuting is on the increase. Liverpool, Preston, and Chester are now more important as generators of in-commuters than they were. Manchester’s experience is different, and here the effects of more city centre living are being felt, as more people choose to live close to where they work. The Panel is unsure whether this phenomenon will ,in time, extend to other urban centres in the region: much will depend on the take-up of the abundant supply of new and converted property in these centres.
•
The analysis of the spatial distribution of additional dwellings in the region and the comparison of this with the likely distribution of additional jobs has provided the Panel with much food for thought. There are parts of the region where the under-supply of housing may serve to constrain economic growth; equally, there are areas where the provision of additional housing may stimulate growth. The Panel feels that there could be pressure points with respect to housing in some of the areas that have been most successful in achieving growth in the recent past. And it is vital to remember that increasingly mobile workers face widening housing choices – if the Northwest cannot provide a ‘housing package’ that meets their requirements, such individuals can routinely look in other regions. Overlaying all of this, it is a matter for concern that these are also generally the areas in which resources, utilities provision and transport infrastructure are under greatest strain. This is clearly an issue that needs to be addressed, probed, and evidenced further as the RS2010 process progresses.
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Conclusions •
The Panel is only too aware of the difficulties involved in taking a long-term view when the country as a whole is in the midst of a recession. It recognises that in the shortand medium-term, covered by the first of our two periods, 2008-15, the recession is bound to colour any forecasts that are made. However, looking further ahead to 2030, the Panel feels that a wider set of influences will come into play, some driven by demographic factors, some reflecting the industrial structure of the region, and some reflecting particular opportunities where the Northwest has a comparative advantage. In making its overall assessment, the Panel has tried to identify and weigh up these opportunities, at the same time as drawing attention to some of the constraints that the region may face without appropriate public policy interventions and investment.
•
After taking these factors into account, the Panel concludes that it is realistic to assume a gap in GVA growth between the Northwest and the UK of an average of 0.3 pp pa. This would apply to both of the long-term forecasting periods: 2008-15 and 2015-30.
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The Panel’s Central Forecast
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Panel Forecast – Growth in GVA and GVA Per Head •
In light of the preceding discussion, table 2 presents our long-term forecast for the period 2008-2030. We consider the prospects for 2008-15, the period covering the current recession and subsequent recovery, separately to those for 2015-30, the period when on current knowledge, underlying fundamentals will determine growth.
Table 2 Summary of growth projections, 2008-2030 (Source: Panel Forecast, February 2009)
2008-15
2015-30
Northwest (%)
UK (%)
NW differential with UK (pp)
Northwest (%)
UK (%)
NW differential with UK (pp)
Population
0.2
0.5
-0.3
0.3
0.6
-0.3
Working age population
0.1
0.5
-0.4
0.1
0.4
-0.3
Employment
-0.1
0.1
-0.2
0.3
0.4
-0.1
Productivity (GVA per worker)
1.5
1.6
-0.2
1.8
2.0
-0.2
GVA
1.4
1.7
-0.3
2.1
2.4
-0.3
GVA per head
1.2
1.2
0.0
1.8
1.9
-0.1
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Panel Forecast – Growth in GVA and GVA Per Head •
Trend GVA growth in the Northwest has been weaker than in the UK as a whole for at least the last 35 years. Having reviewed the latest evidence, it remains our view that the most likely long-term prospects for the Northwest economy is that it will achieve weaker growth in GVA over both periods, although the scale of the underperformance is likely to be less marked than in the past. However, the Northwest is expected to see relatively modest growth in population and this will limit the impact of weaker growth on the relative growth in GVA per capita.
•
In the period to 2015, the overall effect of the recession and subsequent weak recovery (expected from the end of 2010) is for GVA growth in the UK economy to average 1.7% pa. Over the 2015-30 period, when the current cyclical factors will have played out, we expect growth to return to a steady underlying growth of 2.4% pa, a marginally lower rate than we were predicting a year ago. Over the same periods, we forecast growth in the Northwest to average 1.4% pa and 2.1% pa. Growth in GVA per head would average 1.2% pa and 1.8% pa over the two periods, slightly slower than in the UK as a whole. This compares with trend growth of over 2% pa since 1990 (which was still 0.2 pp slower than for the UK as a whole).
• There remains little evidence to indicate that the Northwest economy’s relative productivity performance will alter dramatically. We anticipate that productivity growth in the Northwest will lag that in the UK by 0.2pp, a differential that is broadly in line with that experienced over the 1990s.
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Panel Forecast – Jobs Figure 41 Jobs Growth in the Northwest and UK (Source: Panel Forecast, February 2009)
•
Our view is that the Northwest population will rise by 0.2% pa to 2015, and the working age population by just 0.1% pa. We expect the period to be one where international migration into the UK will be lower than has been experienced recently, and this will have a larger relative impact on working age population than total population. We expect the current recession to have a significant impact on jobs in the region. Employment is expected to fall year-onyear for the four years 2008-2011, with the subsequent recovery sufficiently modest to mean that employment in 2015 would still be below the level in 2008.
•
In the longer term from 2015 to 2030, the rate of growth in the population is likely to increase, to average 0.3% pa, some 0.3 pp slower than is expected for the UK as a whole, although the growth in the number of working age is expected to remain relatively weak at just 0.1% pa. The underlying rate of employment growth in the long term is forecast at 0.3% pa, below the 0.4% pa forecast in the UK as a whole.
•
Overall, employment in 2030 is projected to be 4% (150,000) higher than currently. We expect the past structural trends in employment largely to continue, with financial and business services continuing to be the largest source of additional employment over the period, notwithstanding the jobs that will be shed from the sector through the current recession.
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Panel Forecast – GVA Per Head Figure 42 GVA per capita in the Northwest and UK (Source: Panel Forecast, February 2009)
•
•
The relative size of the gap in 2015 is expected to be similar to that in 2008, although a modest improvement could be seen during the recession and the initial stages of the recovery. However, in the longer term, when the recovery is established we expect the gap to widen again, by around 0.1% pa. By 2030, the gap is projected to be around 13% of UK GVA per head.
•
The weak performance in GVA per head reflects our assessment that, on current evidence, productivity growth in the Northwest is likely to be weaker than in the UK as a whole, over both 2008-15 and 2015-30. In the long term, the gap in productivity growth, as measured by GVA per job, is likely to average 0.2 pp.
•
A relative improvement in participation rates would help reduce the gap in GVA per head, by increasing the number of people engaged in economic activity, and so the level of output. Inactivity rates are higher in the Northwest than in the UK, and while public policy continues to increase rates of participation, there is little evidence yet to indicate that success in the Northwest will be greater differentially to other regions. Furthermore, in the medium term, policies will be implemented against a backdrop of job losses across both manufacturing and private services, and then weaker job creation than has been seen in the recent past.
Recent movements in GVA per head are normally quoted in current prices, as in Figure 2, which shows GVA per head in the region measured in current prices was 12.6% lower than the UK in 2007. As our forecasts are in constant prices, Figure 42 shows past and projected developments in this measure which indicates that, in 2007, the gap in GVA per head was estimated to be 12% of UK GVA per head.
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Risks to the Long-term Forecast In concluding this long-term forecast, we anticipate six risks, on both the downsides and upsides: • The current global recession may have a more detrimental impact on those firms active in global production networks than is currently our central view. The automotive sector is particularly at risk in this way. Were a major manufacturer in the region to close, then the risk is that the impact on regional ‘critical mass’ could not be recovered. • There is a general economic risk that the recovery from the current recession is more subdued than we have assumed, and that it takes much longer for credit markets to begin to operate ‘normally’. This will lower the average rate of growth to 2030, but will impact on the UK and global economies similarly. Conversely, the recession may be shorter and quicker than expected in the Northwest and the UK. •
The state of the public finances will require levels of public-sector investment to be cut back in the medium term. This matters because the public sector currently accounts for 32% of the region’s jobs. There is a risk that this adjustment could be borne by the Northwest more than other regions over and above any reallocation of funding that could occur as a result of funding investment in London for the Olympics. This could prevent the infrastructure improvements that the region sees as necessary to underpin the level of future growth we are expecting.
• The current demographic projections were prepared without foreseeing the current economic recession, which would lower confidence in the assumptions for international migration in particular. Levels of net immigration to the UK could well be lower than projected during the period of global recession and subsequent recovery. In addition, the Northwest may attract a smaller share of any in-migration than is currently predicted. • Striking a sustainable balance between economic growth and housing, wider infrastructures (such as electricity and water supply, waste management and transport) and legislative frameworks for carbon reduction will be demanding and complex. It is vital that the RS2010 provides a real lead on this seriously difficult issue. • On the upside, the Northwest is well placed to take advantage of opportunities in energy and green power, and with pro-policies could potentially build competitive advantage in this area.
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VIVID 04/09 NWDA 43:33