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Economy

THE CHANGING STATE OF THE SOUTH WEST 2012

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Economy
This page explores some of the key economic data about South West England, and looks at how changing global and national conditions may impact on this part of the country. It also looks at the local economic context, with particular focus on the six South West Local Enterprise Partnerships (LEPs).

WHAT DO WE KNOW?

Key Themes
The global and national environment for economic growth has been constrained by a combination of weak business and household confidence, financial and policy uncertainty, and the need to repair banking and sovereign balance sheets.

The immediate outlook for rebalancing South West growth is problematic. Demand is subdued in many South West markets and recent business surveys indicate business caution on the supply side. The region’s efforts to restructure its economy are hampered by its historical reliance on domestic demand from consumers and the public sector.

Differences persist between the various parts of South West England in terms of growth, employment and productivity. These differences need to be reflected in the priorities of emerging from the Local Enterprise Partnerships (LEPs).



Global & National Context
In late 2011, Euro-zone leaders agreed to establish a stability fund to support sovereigns and banks and move to a tighter fiscal union. This was an attempt to preserve the single currency and limit the damage of potential defaults. Unfortunately, these measures were not enough to reduce the risks of defaults. The euro-zone ‘crisis’ has been part of a wider global financial imbalance that has clouded economic prospects for the South West since 2008. Together with the UK government’s efforts to restructure the public finances, this continues to mean a negative outlook for growth.

The effects of the downturn have affected both the demand and supply sides of the economy: The Coalition’s austerity measures, aimed at addressing previous fiscal imbalances, tend to subdue demand, directly through cuts in jobs and real incomes and indirectly through the availability of, and appetite for, credit. With discretionary consumer and government spending falling in real terms, the region will continue to experience, at best, sluggish demand. Moreover, the drop in household real living standards has been exacerbated by the impact of loose monetary policy on inflation, through exchange rates and imported costs. The monetary stimulus from quantitative easing has not offset these factors.

The rebuilding of public and financial sector balance sheets affects supply directly by reducing investment on infrastructure, innovation and skills and indirectly by restricting credit access for business. The uncertainties surrounding product, service and financial markets (at home and overseas), conflicting policy signals, and subdued client and consumer confidence, have all damaged incentives to invest, develop and bring new technologies to market, as well as to find new customers. The result of these market pressures is a lessening and slowing of the flow of financial support to business and households even in markets that appear distant from the credit crunch. Hence, the South West has experienced slower output and trade growth and higher inflationary pressures at all spatial and sector levels since 2008.

Figure 2.1: UK Economy - Growth & Inflation (% change, year-on-year)

[ Zoom ]
Source: Author's Analysis of ONS data
In 2011, UK real GDP grew by less than 1% whilst inflation exceeded 5% at the peak (see Figure 2.1). Coming after the modest recovery of 2010, these represented adverse trends for manufacturing, construction and services: slower growth and faster inflation led to higher unemployment.

In most parts of the South West economy, private sector job creation failed to compensate for public sector job cuts from spring 2011 onwards. Because South West activity is more exposed than most to the weaker parts of demand, (domestic and government consumption), the region experienced adverse labour market conditions in the second half of 2011 and early 2012 compared with a year earlier.

WHAT'S THE POLICY CONTEXT? 

The international policy measures taken to address the risks of sovereign default and banking failure mean a comprehensive near term dampening of growth in many South West markets. Although UK fiscal withdrawal is a necessary condition for sustained recovery in the long run, its immediate impact is negative for market dynamics. Also, the offsetting real economy effects of loose monetary policy, working through quantitative easing and low interest rates, have been modest whilst the ‘prudential’ policies needed to provide a less fragile framework for the economy, particularly to eliminate “moral hazard” in banking, have yet to be implemented.

Against this macro policy background, the UK’s coalition government is changing the landscape for economic development at a sub-national level within England, closing the regional Government Offices and the Regional Development Agencies, withdrawing most of the public funding for direct economic intervention, and creating a more local emphasis on prioritisation and self-help by the private sector through the creation of the LEPs.

In the near term, the loss of the ‘pipeline’ of development projects without any equivalent substitution by private initiatives, together with the net reduction in total spending and little sign of immediate private substitution effects, means a further dampening of regional and local economic growth.

Over the longer run, replacing eight English public development organisations with almost 40 business-led LEPs is intended to generate more local development activity. The outcome will rely on the LEPs being able to lever in more private investment on the back of smaller government initiatives. With England, outside London, now the only part of the EU with no ‘regional’ economic function, this constitutes an interesting experiment in sub-national policy for sustainable growth.

South West and Local Context

Data released at the end of 2011 shows the South West economy performed relatively well compared with its UK peers up to 2010. Its gross value added (GVA) or total output amounted to £98.6 billion in that year; representing 7.6% of the UK total.

In 2010, relative to total population, South West England generated £18,669 of GVA per head of population. Although this was the highest ever level in nominal terms, in real terms it was below the pre-recession peak and was 8.8% below the UK average. In 2011, with the South West economy less strong than some others, this relative performance may have slipped a little further.

In terms of GVA per head, the South West continues to rank fourth of England’s nine regions. These measures and rankings include London, which tends to make all peripheral areas look weak. Excluding London, South West England was actually 3.2%
above average in 2010.

The South West’s relative performance has been revised in line with ONS revisions to the national GDP series going back a decade or more. The chart above appears to show a slight downward trend over time. This simple assessment, however, is misleading. Given the narrowness of the range and the room for statistical error, South West England has moved around a fairly stable average since at least the late 1990s. Also, once you account for “boom” in 2006/7 and “bust” the recession in 2008/9, with its differential effects on London, the recent South West relative performance is remarkably good. In a period when London has improved its relative score by as much as 15%, the South West has made positive relative progress. Excluding London, South West England was the second best performing English region between 1997 and 2010 (behind the South East) on this GVA per head measure.

At a sub-regional level, the latest data relates only to 2009 - when the economy was still in the depths of recession. Nevertheless, the the pattern revealed is informative and broadly consistent with previous experience. For example, the next chart shows the relative GVA per head performance and ranking across the different administrative areas of South West England in 2009. As usual, we find Swindon and Bristol at the top and Cornwall/the Isles of Scilly and Torbay at the bottom. The range between these extremes has been narrowed by the latest revisions but remains large, reflecting the different economic structures in the ‘northern’ urban areas and the rest. Although Swindon, for example, was badly affected by the 2009 recession in manufacturing, it remained much more ‘productive’ than other parts of the South West. Similarly, Torbay remained relatively less productive: the rankings do not tend to change much whatever the stage of the economic cycle.

Figure 2.2: Relative South West GVA per head index (1997-2010, UK =100)

Source: ONS

Figure 2.3: Relative GVA per head index by Local Area (2009, £ and index versus SW = 100)

[ Zoom ]
Source: ONS
If we had data for the 2010 recovery and the 2011 moderation, the overall pattern will have persisted but with, perhaps, greater differentiation between the harder edges and the soft centre of the South West. This reflects the downward cycle in domestic spending and the variation in local area reliance on consumer and government demand.

The six LEP areas covering the former South West region vary significantly. Longstanding differences between economic performance, structure and size may mean some tensions between:


a) The different needs of town and country and
b) The priorities for traditional and new, small yet growing, and large but important, sectors or companies.

As Figure 2.4 shows, (ranking them by scale and showing the LEP definitions):

  • The CIoS LEP covers a much smaller economy compared with HoSW or WoE in terms of output and potential workforce.
  • CIoS and HoSW are far less productive than their eastern neighbours (below 100 in the final column).
  • The two main LEPs in the northern arc (WoE and Sw&Wilts) perform much better in terms of relative productivity - indeed, significantly better than the UK average.
  • Dorset and Gloucs are closer to the average, although, as with the others, they can vary widely within their boundaries.

This broad range of economic measures reflects different economic structures with, generally, more high value added activities and export potential in the north and east compared with the south and west.

At lower geographies, the differences on these crucial economic measures suggest a need for different approaches to economic development in the future. The more peripheral areas need to raise their overall game significantly across much of their economy whilst the others can focus more on maintaining existing strengths and developing new expertise. In both cases, however, this suggests action through similar aspects of investment and trade: through the drivers of innovation, skills and entrepreneurship to boost competitiveness.

Compared with this output-based assessment, measures of relative incomes are less dispersed. Flows of non-wage incomes through pensions or the benefits systems and a high wealth base in the South West’s non-active population tend to mean some relative equalisation of incomes compared with output. Nevertheless, in the wage economy, some South West areas exhibit an adverse ratio of income to living costs, as reflected in aspects of South West housing affordability (house price to income ratios) and fuel poverty (proportion of household spending paid on energy).

In 2010, average weekly wages in the South West ranged widely from £373 per week in Torbay to £529 in South Gloucestershire around a South West average of £460. By comparison, the UK average was £499: only three of the fifteen South West unitary and county authorities had averages above the UK figure. Moreover, these “all persons” figures hide some wide gender gaps as well as workforce-to-residence differences.

In the end, low wages reflect the low productivity story outlined earlier. You can only pay good wages, stay competitive, and build sustainable employment if you are productive. Another aspect of this is the South West’s relatively high employment rates. Usually, the South West labour market is flexible and efficient at finding work for its people but there remain elements of worker under-utilisation and hidden unemployment. These become exaggerated in times, as now, of prolonged downturn.



Figure 2.4: Economic Performance by LEP: 2009/10


 

 

GVA (£mn)

 

% of SW

 

WAP (‘000)

 

% of SW

GVA/WAP (£’000)

Rel to SW=100

HoSW

26406

27.8

1015

31.1

26.0

89.1

WoE

24161

25.4

721

22.1

33.5

114.8

Sw&Wilts

13468

14.2

410

12.6

32.8

112.5

Dorset

12636

13.3

420

12.9

30.1

103.1

Gloucs

11452

12.0

369

11.3

31.0

106.3

CIoS

7001

7.4

324

9.9

21.6

74.0

SW total

95123

 

3259

 

29.2

 

Source: author’s analysis of ONS data

Key:

Heart of South West (HoSW) = Devon, Somerset, Plymouth & Torbay
West of England (WoE) = Bristol City, Bath & NE Somerset, N Somerset & S Gloucestershire
Dorset = Dorset County, Bournemouth & Poole
Sw&Wilts = Swindon & Wiltshire
Gloucs = Gloucestershire
CIoS = Cornwall and Isles of Scilly
GVA = gross value added - a measure of output
WAP = working age population - a measure of potential workforce
GVA/WAP = measure of relative productivity


In the three months to November 2011, South West employment and unemployment rates were 73.8% and 6.5%, ranking third highest and second lowest respectively of the UK’s twelve regional/devolved areas and comparing to the national averages of 70.3% and 8.4% respectively (see the Labour Market). Through ‘booms’ and ‘busts’, the region’s overall rank does not tend to change much. It has been noticeable, however, that South West employment and unemployment started to move more negatively than most in 2011 as the domestic expenditure constraint began to bite. For example, the South West claimant count (residence) measure of unemployment rose to a rate of 3.4% in December 2011. This was still low compared with a national average of 5.0%, but the South West accounted for a larger than usual share of the net change. In the year to November, the UK claimant count level rose by 10%. Within South West England, most areas increased faster than this, with only one notable exception.

For the six LEPs, the respective figures were +18% for WoE, +16% for CIoS, +12% for Gloucs, +11% for HoSW, +10% for Sw&Wilts and yet only +1.5% for Dorset.

PROSPECTS

At the end of November 2011, the OBR issued revised, much lower, forecasts for UK economic growth in 2012-14. Official and commercial forecasts of likely UK economic performance have all been falling recently, as forecasters adjust to the disruption caused by austerity and debt reduction policies across Europe.

The main OBR forecasts are shown in Figure 2.5. They make grim reading for 2012 and 2013. Growth of these low rates does not support strong investment or employment intentions amongst UK businesses at home, whilst the foreign outlook does not make it easy to explore market substitution overseas.

The OBR raised its long term UK growth rate slightly but only because a different price deflator is now used. There was no real change to the modest outlook for growth in the longer term. Indeed, the OBR revised down sharply its estimates of the ‘output gap’ given the recent poor productivity performance and other adverse trends. If correct, this means potential growth is slowing in the short term and less than we thought for the longer run.

With this, and the forecast that real earnings will not be significantly positive until 2014, the OBR’s suggested rise in the unemployment rate in 2012 may prove too modest. Indeed, the OBR already admits the total number of jobs to be lost in the public sector is now set to be much higher than it thought (710,000 over next four fiscal years); more than offsetting its previous
downward revisions.

Similarly, the Government finances are shown to deteriorate in the
both short and medium terms relative to previous estimates, particularly with respect to total borrowing and the pace of deficit reduction.

Recent surveys of South West businesses offer little immediate hope for economic growth. Most have shown a Sout West relative deterioration since last summer, especially in respect of hiring and investment intentions for the first half of 2012. Although activity levels have not dropped, confidence about the future has.

The immediate outlook for the South West economy is not robust. Debt restructuring in many sectors, together with unexciting global growth prospects, suggest restraints on demand and supply will persist for some time.

Against this background, South West businesses, across most sectors and most places, will need to be nimble, flexible and proactive in seeking opportunities to rebalance demand and supply. It will help if they can engage in co-operative networks to promote best-practice competition in a wider range of spatial and product markets.


Figure 2.5: OBR Forecasts for the UK economy (2011-15)

 

2011

2012

2013

2014

2015

Real growth  

   (% ch yr-on-yr)

 

+0.9

 

+0.7

 

+2.1

 

+2.7

 

+3.0

Inflation  

   (% ch yr-on-yr)

 

+4.5

 

+2.7

 

+2.1

 

+2.0

 

+2.0

Unemployment

   (% rate)

 

8.1

 

8.7

 

8.6

 

8.0

 

7.2

 

2011/12

2012/13

2013/14

2014/15

2015/16

Government deficit

   (% of GDP)

 

-6.5

 

-6.0

 

-4.7

 

-3.3

 

-1.8

Public Sector net debt

   (% of GDP)

 

67.5

 

73.3

 

76.6

 

78

 

77.7

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