North-west to have strongest economic recovery outside SE England, says EY

North-west England is predicted to have the strongest recovery from the economic impact of the coronavirus pandemic outperformed only by London and the South-east, according to a report from Big Four accountancy firm, EY.

While economic output in the North-west has been hard-hit by the coronavirus, the region’s economy is set to grow by an average of 0.11% year on year in the period 2019-23, the fastest rate of recovery of any region besides London (0.51% year on year growth) and the South-east (0.39%). However, London and the South-east are the only regions that are expected to fully recover pandemic job losses by 2023.

The report also painted a mixed picture for some industries, and for the economies of smaller towns, which will recover much more slowly. Stephen Church, EY’s North Markets Leader and Managing Partner for Manchester, explained:

The North West region is fortunate to have a fairly mixed economy and therefore it remains resilient. While it’s encouraging to see positive GVA growth across our core North West cities, it’s also important that our towns are not be left behind as the economy recovers from the Covid-19 pandemic.

“Manufacturing, arts and leisure, and hospitality – crucial parts of the economies in towns, and the North – have been most affected during the pandemic or are likely to take longer to recover.”

While the region as a whole is expected to have recovered in output by 2023, there is a sharp divide in the progress of economic recovery between towns and cities in the North-west. Manchester and Liverpool are both expected to outperform the regional economy, seeing gains in output and employment at rates comparable with London.

Smaller towns may continue to fall behind without additional intervention. EY’s report suggested that the government’s levelling-up agenda to invest in smaller towns and cities in the regions, if deployed in a targeted way. Stephen Church continued:

The pandemic has put the levelling up agenda in sharp focus and this report clearly shows that is about so much more than the economies of the North catching up with the South.

“Some of the recent shifts in how we organise work and home life have been positive for economic rebalancing and mean there could be opportunities to create ‘virtual’ jobs in places that have found it difficult to attract higher value-added sectors.

“The Government’s recent initiatives, including the Levelling-up Fund and National Infrastructure Strategy, are welcome, but new approaches are required to avoid a growing gap between towns and cities, as well as North and South.

“A policy focus on supporting sectors, like manufacturing, which matter to both investors and towns would help, while the shift to ‘net zero’ can transform the economy.

“Crucially, the Government must avoid a top-down approach: boosting local capabilities and understanding local characteristics should be the starting point for working up to national policy frameworks.”

EY also found that the health, professional services and IT industries would see the strongest economic recovery nationally, with manufacturing, hospitality and the arts and leisure sectors to have shrunk in the period 2019 to 2023. The best performing industries however tended to be those that are concentrated in larger cities, such as healthcare, IT and professional services.

Rohan Malik, EY’s UK&I Managing Partner Government and Infrastructure, added:

Growth is forecast to be driven by high-end services which dominate city economies so, while the outlook for levelling up is disappointing, it is perhaps not surprising. By weakening the sectors that towns are most dependent on, COVID-19 has made levelling up harder.

“Looking ahead, manufacturing will be key to the levelling up agenda. An estimated 86% of manufacturing activity is located in towns or smaller cities outside the South East, while our recent UK Attractiveness Survey found significant investor interest in reshaping manufacturing supply chains and reshoring activity to the UK. Although a difficult near-term is forecast for the sector, opportunities are there longer-term.

“Technology will play a major role in the sector’s future, so the UK can compete in a way that was not possible when labour costs drove location decisions. A relaunched Industrial Strategy should target emerging opportunities here.

“To accelerate the levelling up agenda, the Government’s aim should be to tailor sector opportunities to local conditions. These should dictate what is needed for investment in skills, transport, digital and social infrastructure. Once plans are agreed, resources should be released to local control for delivery wherever practical.”