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Economic Structure

Industrial Structure

2.6.1 The following section considers the industrial structure of the South West economy. It focuses on output and productivity in broad industrial groups across the economy. The employment structure is covered in detail in the Labour Market chapter.

2.6.2 This section uses data from the South West Regional Accounts, a regional input-output model which provides detailed data on the regional and sub-regional economies. The Regional Accounts are provided by the Economy Module of the Regional Observatory, based at the South West Regional Development Agency (South West RDA).

2.6.3 The structure of business is important to understanding the region’s economy. It can also go some way to explaining productivity differences between regions, since a region with relatively high concentrations of high value-added businesses will tend to have higher rates of overall growth. In addition, industrial structure highlights possible strengths, weaknesses and specialism in the regional economy that will influence its long term prospects.

2.6.4 Figure 2.6.1 below depicts the contribution of broad sectors to the total output (GVA) of the South West economy. Services make up the majority of economic output – 78% of all GVA is in this sector. Manufacturing and construction are also important sectors contributing 11.8% and 5.7% of total GVA respectively. This high level pattern is very similar to that of the rest of Great Britain.

Figure 2.6.1 Industry contributions to South West GVA, 2008

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Industry contributions to South West GVA, 2008 [Fig 2.6.1]. Source: South West Regional Accounts, South West Observatory Economy Module.

2.6.5 The service sector encompasses a wide range of activity, including business and financial services, retail and the public sector. Table 2.6.1 provides a more detailed breakdown of the relative contribution of these sub-sectors. In 2008, financial and business services accounted for over 30% of all output, the public sector approximately 20% and distribution and retail 12%. The service sector has been growing in importance for some time - in 1998 it made up 71% of regional GVA, rising to 78% in 2008.

Table 2.6.1 Contribution to South West output (GVA) and employment (FTE) by Industry, 2008
South West Industries	GVA (Total £m)	GVA (% of total)	Number of FTE	FTE (% of total)
All industries	98,327	100	2,283,913	100
Primary industries	1,303	1.3	79,619	3.5
Secondary industries	329	0.3	4,074	0.2
Manufacturing	11,651	11.8	258,556	11.3
Food and Drink	1,413	1.4	35,183	1.5
Tobacco products	40.0	0.0	276	0.0
Textiles	115	0.1	2,674	0.1
Clothing	67	0.1	1,579	0.1
Leather and footwear	33	0.0	881	0.0
Wood and wood products	172	0.2	6,762	0.3
Paper and printing	912	0.9	24,641	1.1
Coke ovens refined petroleum and nuclear fuel	176	0.2	1,202	0.1
Chemicals	764	0.8	10,040	0.4
Non metal products	921	0.9	24,327	1.1
Metals	111	0.1	1,864	0.1
Metal products	898	0.9	29,352	1.3
Engineering	1,150	1.2	28,778	1.3
Electronics	1,476	1.5	29,840	1.3
Transport equipment	2,742	2.8	43,288	1.9
Other manufacture	661	0.7	17,869	0.8
Energy and water	2,819	2.9	13,001	0.6
Construction	5,629	5.7	178,525	7.8
Services	76,596	77.9	1,750,139	76.6
Distribution and retail	12,071	12.3	362,064	15.9
Hotels and catering	3,300	3.4	127,104	5.6
Transport and communication	5,780	5.9	125,928	5.5
Finance	7,050	7.2	75,358	3.3
Business services	24,592	25.0	371,166	16.3
Public administration and defence	6,272	6.4	149,657	6.6
Education	6,103	6.2	156,502	6.9
Health and social services	7,819	8.0	273,115	12.0
Other services	3,608	3.7	109,244	4.8
Source: South West Regional Accounts, SW Economy Module

2.6.6 Manufacturing remains an important source of income, jobs and growth in the region – although overall output levels have been maintained in recent years, its share of output has been falling over time (see below), mirroring the national trend. Manufacture of transport equipment (including aerospace), food & drink and electronics together make up just under half of all activity in the sector.

2.6.7 There is a wide difference in sector productivity. Table 2.6.2 combines output and employment measures to estimate productivity for South West sectors in terms of GVA per full-time equivalent worker (FTE).

Table 2.6.2 SW Productivity by industry (GVA per FTE), 2008
	GVA per FTE
	(£)	Compared to SW average (SW = 100)	Compared to GB average (GB = 100)
All industries	43,052	100	88
Primary industries	16,366	38	103
Secondary industries	80,647	187	20
Manufacturing	45,061	105	88
Food and Drink	40,175	93	83
Tobacco products	146,047	339	78
Textiles	42,861	100	113
Clothing	42,538	99	99
Leather and footwear	38,022	88	86
Wood and wood products	25,374	59	70
Paper and printing	37,006	86	69
Coke ovens refined petroleum and nuclear fuel	146,174	340	85
Chemicals	76,103	177	98
Non metal products	37,862	88	87
Metals	59,473	138	72
Metal products	30,585	71	75
Engineering	39,962	93	91
Electronics	49,470	115	98
Transport equipment	63,338	147	102
Other manufacture	36,985	86	95
Energy and water	216,865	504	96
Construction	31,530	73	74
Services	43,766	102	91
Distribution and retail	33,339	77	84
Hotels and catering	25,964	60	98
Transport and communication	45,900	107	87
Finance	93,551	217	90
Business services	66,256	154	103
Public administration and defence	41,909	97	109
Education	38,998	91	94
Health and social services	28,630	67	94
Other services	33,027	77	79
Source: South West Regional Accounts, SW Economy Module

2.6.8 Productivity in the primary industries and construction (£16,366 and £31,530 per FTE respectively) was lower than the South West average (£43,052) in 2008. Overall, service sector productivity was similar to the South West average, while GVA per FTE for finance and business services was £93,551 and £66,256, respectively - substantially above the average. Manufacturing was marginally more productive than the South West average. Manufacture of electronics and transport equipment, both important sectors in the region, exhibited high productivity rates (£49,470 and £63,338, respectively).

2.6.9 High productivity in utilities (energy and water) reflects low levels of employment relative to capital and infrastructure. The extraction industries also see high productivity levels - however, as these industries are relatively small, the figures need to be treated with caution. The high productivity rates for other small industries such as tobacco products and fuel (coke oven… etc) need to be interpreted with care for the same reason.

2.6.10 In general, sectors in the South West are less productive than the same sectors for Great Britain as a whole. The only large sector (in terms of output) that is (slightly) more productive than the GB average is public administration and defence. It should be noted that measuring the value of non-traded public services presents some methodological challenges, not least in determining a price for a good that does not necessarily have a market. More details on the methodology for estimating the economic contribution of these services can be found at UKCeMGA. Elsewhere, primary industries are also more productive than the GB average, but only contribute around 1% of regional GVA. Productivity in business services is similar to the GB average, although financial services are considerably less productive in the region. To some extent, this reflects the location of financial services headquarters in London. Some elements of manufacturing, such as engineering and transport equipment, are nearly as productive as the national average.

2.6.11 Productivity in the South West clearly lags the national average. In part this reflects the industrial structure of the economy (an under representation of highly productive industries) but also productivity rates within each sector which are generally lower than the national average.

2.6.12 Sector growth: The headline GVA figures from ONS give a broad indication of changes in sector output over time. The structural change from production (particularly manufacturing) to services continues to be the most significant change in the industrial make up of the region. Between 1998 and 2008 the share of regional GVA generated by manufacturing declined from 19% to 12% (see Figure 2.6.2). The largest sub-sector, real estate, renting and business activities contributed around 22% to regional GVA in 2008 and, aided by the housing boom, has been growing over time. Similarly, construction recorded strong growth increasing its share from 5.4% to 6.8%, as well as financial intermediation (5.2% to 7.2%).

Figure 2.6.2 Industry Contributions to South West GVA 1998 and 2008.

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Industry Contributions to South West GVA 1998 and 2008. [Fig 2.6.2]. Source: ONS.

2.6.13 As regional industrial GVA data is only available up to 2008, we are unable at present to conclude which industries were most adversely affected by the recession. The new data for 2008, however, does give an indication of which industries suffered earlier in the downturn and, from what we know about the last couple of years, this is a good signal of where the recession had its biggest impact. South West manufacturing output declined by 3.6% between 2007 and 2008; prior to this, it had been increasing steadily since 2002 (though its share had been declining). The only other sector to record negative growth over the same time period (as nationally) was utilities (electricity, gas and water supply) – but this was only a very marginal decline. Other notable slow downs, compared to longer term trends, were recorded in construction, hotels & restaurants, and real estate, renting & business activities.

2.6.14 Some of these sectors were affected by slower growth in discretionary household spending and some by the bursting of the housing “bubble”. In contrast, the financial intermediation sector saw strong output growth between 2007 and 2008, growing by a substantial 12.7%. The financial sector was, to an extent, shielded by government intervention to support the banking system from default. Hence, whilst balance sheets were under pressure, financial income streams continued to do well. It will be interesting to see whether this positive performance is apparent in next year’s release for 2009, when the full period of the recession will be encapsulated by the data.

2.6.15 Sector growth projections: Economic projections from the South West Economy Module estimate growth in sectors for the near and medium term. There is always uncertainty surrounding the future and the figures reported in this section should only be seen as a guide if past trends continue and the consensus forecast for the UK economy is broadly accurate. The projections estimate that between 2008 and 2009, output declined across all sectors in the economy except the public sector (covering defence, education and health & social care). The largest percentage declines are predicted to have occurred in construction and manufacturing, both experiencing contractions in output of around 10%. These rates were the same nationally. Growth is expected to have returned to most sectors in 2010 (except agriculture) with construction, manufacturing and extraction industries bouncing back strongly, and recording growth rates well above the regional industry average.

2.6.16 Over the next five years, the public administration and defence sector is projected to see a fall in output (-0.1% per annum between 2010 and 2015), reflecting the Coalition government’s budget deficit reduction policies. Over the longer term, growth will return, albeit at a comparatively low rate (0.3% per annum between 2015 and 2030). The transport & communications and business services sectors (the fastest growing sectors pre-recession) are expected to see the fastest industry growth rates over the next 10 to 20 years: the former growing by 3.2% per annum between 2010 and 2015 and 3.6% per annum between 2015 and 2030 (compared to SW average of 2.5% and 2.4%), the latter growing by 3.4% per annum over both time periods.

2.6.17 We reiterate that projections reflect recent trends. They are not forecasts of what will happen. In addition, these Autumn 2010 Projections were produced before the release of 2008 industrial GVA figures and 2009 regional totals, and so do not account for the relatively strong growth of the South West in 2009. Nevertheless, they are an important benchmark for analysis of alternative possibilities in the future.

Voluntary and Community Sector

2.6.18 General Charities and Housing Associations: According to the NCVO Almanac 2010, there were 18,555 registered charities in the South West in 2007/8. This equated to around 3.6 charities per thousand head of the adult population, the highest rate of the English regions (the English average was 2.7). These charities had a combined income of £2.6 billion. In addition, the number of working age individuals employed in charities was 67,000, about 3% of all employees in the region and the third highest percentage behind London and the South East. Data from the National Housing Federation suggests that the 200 SW housing associations (not included in the definition of general charities) had a combined annual turnover of around £670 million and employed nearly 8,800 people directly in 2007. For more detailed information on the contribution of volunteers in SWE please see the Social and Welfare chapter - INSERT LINK .

2.6.1 There is very little up to date data on social enterprises in the region. DTI commissioned research in 2005 i9 Social Enterprise: dentified about 1,800 social enterprises in the region registered as companies limited by guarantee or industrial and provident societies, generating at least 25% of their income from trading. On this basis, the South West contained 12% of all social enterprises in the United Kingdom (compared to 9% of all businesses) and ranked third after London and the South East. However, as acknowledged in the DTI survey, the data represented only a subset of the whole social enterprise population. Research for Regional Infrastructure for Social Enterprise (RISE), based on a review of sub regional and other studies, estimated that there are about 5,500 social enterprises in the South West. This is consistent with the Government's estimate that, nationally, some 5% of all businesses with employees are social enterprises.

2.6.21 As part of the Annual Small Business Survey 2007/8, SMEs were asked how well they fitted with a given definition of a social enterprise (i.e. a business with primarily social/environmental objectives). Around 27% of SMEs in the region considered this definition to be either a ‘very good’ or ‘quite a good' fit. This was slightly higher than the England average (26%).

Cabon Efficiency of Industries

2.6.21 Pursuing growth within environmental limits acknowledges that economic growth cannot sustainably rely on ever increasing natural resource use. One of these environmental limits is the global atmospheric concentration of carbon dioxide (CO2). The Environment chapter provides more information on how the South West stands in relation to total emissions. This section focuses on carbon efficiency i.e. the amount of CO2 generated by each unit of economic output. This does not provide an absolute measure of emissions generated by economic activity, but it does indicate how well the economy is using its resources.

2.6.22 In 2008, the South West region emitted a total of 40,517 kt of CO2, equating to 416 tonnes per million pounds of its GVA. This was less efficient than the English average (382 t/£m GVA) but the fourth highest efficiency of the English regions. London recorded the highest carbon efficiency of just 172 t/£m GVA, reflecting its largely service dominated sector mix. Carbon efficiencies have increased across all of the English regions since 2005, demonstrating a relative decoupling of economic growth from environmental impact. The South West recorded an efficiency improvement of 16% (with the rate falling from 500 t/£m GVA in 2005) - this the fourth largest percentage gain of the English regions.

2.6.23 Figure 2.6.3 compares GVA per head (discussed earlier in this chapter) and CO2 (kt) per head. While the region recorded the fourth highest GVA per head in 2008, it had the fourth lowest CO2 per head, suggesting that as well as being relatively productive, it is also relatively resource efficient. It is important to note, however, that CO2 emissions are measured on a territorial basis which means they capture emissions associated with goods produced within the region but not those imported. The region’s relatively low emissions partly reflect the low density of heavy industries. It may be that the region is effectively allocating its emissions to the countries from which it imports goods and services. Consumption based emissions figures - rather than these production based estimates - are much higher.

Figure 2.6.3 GVA per head compared to CO2 Emissions per head 2008

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GVA per head compared to CO2 Emissions per head 2008 [Fig 2.6.3] Source: DECC/ONS

2.6.24 The following analysis considers the level of emissions generated by SW industries both now and into the future using the latest version of the Regional Economy Environment Input-Output (REEIO) model Cambridge Econometrics for the Sustainable Consumption and Production Network (SCPnet) . The baseline data for the model show that economic activity within the South West generated 27.4 million tonnes of CO2 in 2007 – an increase on the 25.6 million tonnes generated in 2005. This can be attributed to an increase in emissions associated with power generation and households, which cancelled out reductions made by the manufacturing and transport & communications sectors. UK emissions fell by 1% over the same period. Road transport is by far the largest contributor to regional emissions (40%), followed by households (22%) and manufacturing sectors (14%). The service sector makes a relatively small contribution to emissions but this is in part because emissions from electricity generated outside of the region and then imported (a substantial share of the electricity consumed within the region) are allocated outside of the region by the model.

2.6.25 The REEIO model contains a built in forecast of the values of economic and environmental variables up to 2030 based on Cambridge Econometrics’ regional economic forecasts (from a Local Economy Forecasting Model). Based on these assumptions, overall emissions (measured in tonnes of carbon) in the SW region are projected to fall from 7,300 kt to 6,400 kt – a 12% reduction. In absolute terms, manufacturing will contribute the most to this reduction with emissions falling by around 500 kt. This is due to model assumptions of improved energy efficiency, as well as the shift towards higher electricity consumption and lower consumption of gas and other fuel oils. Emissions from road transport, however, are expected to increase by around 5% with the sector’s share of total industry emissions rising from 40% to 48%. This is largely due to an anticipated increase in car and road freight vehicle kilometres travelled which will outweigh assumed gains in fuel efficiency.