North West economic growth to remain modest in 2019-20 due to Brexit-related uncertainty

●      Economic growth in the North West to remain modest at around 1.1% in 2019 and 0.9% in 2020, assuming an orderly exit from the EU, but risks are weighted to the downside

●      Regional productivity in the North West is approximately 8.9% below the national average, but has the fourth highest level of productivity across all regions

●      All regions of the UK projected to see modest but positive growth in 2020

●      Consumer spending has continued to drive the economy so far, but the housing market has cooled and business investment remains on a declining trend

●      The Bank of England is expected to keep interest rates on hold until there is clarity over both Brexit and the global economy

PwC’s latest UK Economic Outlook projects that economic growth in the North West is likely to be closely in line with that of the UK, growing by around 1.1% in 2019 and 0.9% in 2020.

The report projects that UK economic growth is likely to remain subdued, growing by around 1.2% in 2019 and 1% in 2020 - significantly below its long-term average rate of around 2%.

According to the report, economic growth has slowed over the past two years primarily due to a dampening of business investment, resulting from both a lack of clarity over Brexit as well as heightened global trade tensions.

Although consumer spending has continued to drive the UK economy, supported by recent rises in real incomes, a cooling housing market coupled with slower jobs growth means there is likely to be only moderate consumer spending growth of around 1.2% in 2019 and 1.4% in 2020.

However, that said the UK GDP could still be boosted by 4% - or £83 billion - if local areas with below-average productivity levels could make up half of the gap, according to the report. 

The report examines UK regional productivity, revealing wide variations in domestic productivity per job, as well as from an international perspective. PwC concludes that UK output per worker is around 10-15% behind Germany, France and Sweden and more than 30% behind the US.

Regional productivity

Regional productivity gaps are large, with output per job in London around 40% above the UK average, but around 8.9% below the national average (£54,300) in the North West (£49,503). In addition, the gap between the best and worst performing local enterprise partnerships (LEPs) in England is widening, with productivity in the highest-ranking LEP being around 2.1 times more than the lowest-productivity LEP in 2017, as compared to 1.8 in 2002. 

John Hawksworth, chief economist at PwC commented:

“Places that are better connected physically and have access to skilled workers tend to have higher productivity levels. 

“We find, for example, that a 1% increase in skills is associated with a 2% increase in productivity in a local area. Similarly, physical connectivity also matters, which reinforces the case for increased investment in transport infrastructure for areas that tend to lag behind, whether in the North of England or the far South West such as Cornwall.

“The prize from closing the regional productivity gap could be large. If LEPs that are performing below the UK average can close 50% of this gap in productivity performance, it could add around £83 billion to the economy, equivalent to almost 4% of GDP. Yorkshire and the Humber could see the largest percentage increase (13.5%), followed by Wales (10.7%)".

PwC estimates that all 12 UK regions will see modest but positive growth in 2019 and 2020. Although in previous years London has generally had the strongest growth rate of any UK region, PwC predicts it will grow only slightly faster than the UK average in 2019-20, due partly to the greater exposure of some London activities, such as the City, to adverse effects of Brexit uncertainty.

Jing Teow, senior economist at PwC added:

“Our latest projections indicate that the South East, South West and Scotland should perform reasonably well both this year and next, but the differences from the UK average growth rate are small.

"By contrast, the North East, Wales and Northern Ireland are projected to lag behind slightly with growth of only around 1% in 2019 and 0.8% in 2020.”

The report suggests a number of strategies that could be employed to help boost productivity across the regions. Notably, businesses can promote workplace training and upskilling, a recommendation that is reinforced by PwC’s recent global skills survey, which showed that the desire of UK employees to learn new skills is not being met by employers. In addition, investment in local infrastructure could boost connectivity (and therefore productivity). LEPs could collaborate to strengthen intra-regional connectivity. This could utilise the Oxford-Cambridge arc as an example, which is supported by four LEPs in an effort to boost east-west transport connectivity through the East West Rail and Expressway.

The report shows that the issue for many parts of the UK is less about how to catch up with other countries and more about how to catch up with regions and cities closer to home. More importantly, it highlights that productivity is a crucial challenge facing the next government, with significant economic gains achievable for both regions and the country as a whole.

 

John Hawksworth

John Hawksworth, chief economist at PwC

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