The pandemic has left a scar on many sectors of the UK economy. The UK has seen the largest contraction in GDP of all G7 economies and much of the Euro area in 2020. This is despite the UK providing the largest package of fiscal measures in modern day, which has propped up many businesses and protected jobs.
While local tiered restrictions worked to minimise the impact of closing business on a national scale, national lockdowns have had an uneven impact across the country, as some areas were more reliant on the key sectors most affected by restrictions than others. Inequalities of impact amongst regions and local areas are therefore likely to be pronounced.
The UK is one of the most geographically unequal amongst developed economies (see, for example, IFS analysis). The productivity of the City of London – at around 240% of the UK average – is three times higher than the productivity of Powys (where the productivity gap with the UK average is more than 20%). Income inequality is greater, as the gross disposable household income per head in the City of London is nearly 15 times higher than that in Nottingham, or nine times higher than the average UK local authority.
The benefits from growing regional productivity
CBI Economics analysis shows that boosting regional productivity for under-performing regions to close the pre-pandemic productivity gap with the UK average, would add approximately £215 billion to the UK economy and bring over £6,000 to the average UK household. This would require a 12% uplift to productivity and would close the UK productivity gap with the G7 average.
Empowering regions and local areas to boost growth in their high-productivity sectors and those sectors of comparative advantage through additional job creation and business investment would unlock greater gains to the UK economy. A 10% boost to GVA in sectors of above-average concentration in local areas with specialisation in these sectors would add £66bn to the UK economy (uplift to UK GVA of 3.6%).
Growth in these sectors would have spill-over effects on other sectors within their supply chains, boasting further economic benefits. The jobs they support would contribute to increases in household spending, supporting activity in many of the core sectors of the economy that benefit local areas.
Understanding the characteristics of underperforming towns and cities
To develop effective policy which recognises local diversity and challenges, you need to understand the characteristics of underperforming local areas and how they can be ‘levelled up’. The UK’s regional inequalities are less clear-cut than a simple ‘north-south’ divide. Economic theory suggests that proximity to urban centres and international trading connections (whether ports, or major airports) is associated with higher productivity. In an open economy, transport and digital connectivity are important for local areas to access the sources of demand for their goods and services, as well as reach new markets.
Economic opportunity is dependent on economic make-up. Former industrial towns that were historically highly dependent on a specific type of manufacturing activity, as well as rural and coastal towns are typically areas with a high dependency on basic sectors such as public sector activity, retail, tourism and hospitality, or lower-value production (such as agriculture, fishing, or the manufacture of wood products or furniture). These areas often have a low business density, a low export propensity, and lower levels of innovation – all of which have implications for productivity, as well as resilience to economic shocks. It is therefore unsurprising that these areas have a greater dependency on public sector support and typically struggle to attract the business investment that creates economic opportunities.
Many of these towns and cities have areas of specialisation, i.e. sectors of high concentration of economic activity relative to the UK average. These specialisations may build around anchor institutions. With the right environment for business – which includes enabling infrastructure, an education-offer, finance availability, research and testing facilities and business support, and supporting government policy – clusters can develop around these sectors which can draw in SMEs and start-ups, research organisations, and outside business investment to help it flourish on a national and international scale.
CBI Economics analysis identified a few examples of local sector specialisation:
- The highest concentration of UK food & drink manufacturing activity is found in Mid and East Antrim, which is 11 times more specialised than the UK average, with nearly 18% of its economy relying on this activity;
- East Lancashire has the highest specialisation in the manufacture of machinery & transport equipment, the sector being 14 times more concentrated in this area than nationally (20.7% of local economic activity reliant on the sector);
- West Cumbria has the highest specialisation in the manufacture of fabricated metal products of all UK local authorities (also 11 times the UK average), with 12% of its GVA relying on this activity.
- Sunderland has the highest specialisation in electricity & gas generation and distribution, nearly five times more concentrated than nationally.
Most of these areas’ productivities are below the UK average, from as low as 74% of the UK average (West Cumbria), or 88% (Mid and East Antrim, East Lancashire), to 96% in Sunderland. Their gross disposable incomes per head also fall short of the UK average, for example Sunderland incomes per head are 76% of the national average, and households in Mid and East Antrim see an average income per head at 88% of the average UK level.
Unlocking further productivity gains in sectors of local specialisation, as well as boosting economic activity through investment and job creation, could realise significant gains to the local and national economies. For regional clusters to benefit local areas, policy must support them in taking up these opportunities and accessing the supply chains of internationally-competitive and cutting-edge sectors.
For the latest insight on regional strengths and weaknesses, please see our latest Regional Scorecards here.
For bespoke regional and local economic analysis, please contact CBI Economics.