In the last fortnight we have seen considerable world turmoil, war in Eastern Europe, sanctions on Russia, further weakening of supply chains and escalating prices which are putting considerable stress on people and businesses. Whilst Covid-19 is still also in our midst, upheaval and migration could create greater risks of infection growth.
However, it is worth reflecting on the Birmingham Future Business District work, which highlights Birmingham’s offer remains powerful despite the turmoil – a well-connected location with a young and diverse population. Home to world-class businesses and universities, and a strong business, professional and financial services sector continues to be a driving force in the region’s economic renaissance. Firms are continuing to demonstrate agility and flexibility in how they operate, optimising their building space in the city for collaboration, keeping employees safe, and taking advantage of the benefits of hybrid working. The rapid adoption of technology is one of the positives to emerge from this very challenging period.
Conflict in Ukraine
- According to the IMF, impacts of Russia’s invasion of Ukraine will be felt across three key channels: (1) higher prices for commodities, such as food and energy, will push inflation up further, in turn eroding the value of incomes and weighing on demand; (2) neighbouring countries especially will face significant supply chain and trade disruptions, as well as facing a historic surge in refugee flows; (3) reduced business confidence and higher investor uncertainty will weigh on asset prices, this will tighten financial conditions and potentially spurring capital outflows.
- Commodity prices are set to be the impacted the most and are expected to remain high for the foreseeable future. Oil prices are expected to remain above US$100/b as long as the conflict continues. The Economist Intelligence Unit (EIU) has predicted that gas prices will rise by at least 50% this year, on top of a five-fold rise last year.
- Around 5-6% of UK gas imports come from Russia. However, with Russia withholding resources over the last two years, the UK has been exposed to volatile international gas markets. While our supply is unlikely to be affected, the price we pay for gas is, leading to rising energy bills this year.
- Ukraine and Russia are both major agricultural exporters. Any disruption to flows would quickly ripple through to buyers globally driving up costs for food and impacting on the food and drinks sector.
- Higher prices for non-energy commodities (such as industrial metals, foodstuffs and fertilisers) together with the potential for supply disruption, could exacerbate supply chain pressures in some sectors. Sectors at particular risk include automotive, technology and food & drink, given the prominent role of Russia and Ukraine in exports of key inputs/components.
- Key imports would include: pig iron, steel, nickel, aluminium, palladium, mineral products (clay and ceramics), neon, wheat, barley and fertilizers.
- UK exports to Russia are worth around £4.3bn per year, dominated by business services, cars, telecoms, pharmaceuticals and financial services. Imports are worth £11.6bn per year, dominated by energy and other commodities. UK exports to Ukraine are worth around £750m per year, with imports worth £1bn, dominated by foodstuffs and steel.
- The West Midlands (WM) region exports over £500m worth of goods exports to Russia and Ukraine a year. This represents 2% of all the region’s goods exports, the highest proportion of all regions – suggesting the region is more reliant on Russia and Ukraine markets than other places in the UK. This is driven by the region’s automotive strength.
- Beyond the humanitarian element, there is also higher risk of cyber-attacks emanating from Russia, to consider. There are wider concerns from business leaders about the Government’s ‘bandwidth’ to deal with ongoing issues.
Economy
- Out of the twelve UK regions, the WM was fifth lowest for the Business Activity Index in February 2022, with Yorkshire & Humber the highest at 63.1 down to the North East the lowest at 51.9.
- The WM Future Activity Index decreased from 80.3 in January 2022 to 76.7 in February 2022. Despite the overall level of positive sentiment falling to a three-month low, firms in the WM remained upbeat towards growth prospects with a favourable demand environment expected to be sustained along with forecast of new client wins and a recovery in the automotive sector and productivity gains.
- Out of the 12 UK regions, the WM was the fourth highest for the Future Business Activity Index in February 2022, with London the highest at 81.0 and the North East the lowest at 62.6.
- 8% of WM businesses reported the main concern for business was “inflation of goods and services prices” over the next month.
- The latest Business Barometer from Lloyds Bank Commercial Banking said that confidence in the WM rose by eight points during the February to 47 per cent. A net balance of 44 per cent of businesses in the region expect to increase staff levels over the next year, up 24 points on last month.
- WM smaller businesses are showing strong signs of recovery and a renewed appetite for growth, according to figures revealed by the British Business Bank’s eighth annual Small Business Finance Market Report 2021/22. Equity investment in WM smaller businesses reached £277 million by the end of 2021’s third quarter across 46 deals. This was an 18 per cent rise on the number of equity deals completed in the same period in 2020, however the region experienced a 25 per cent drop in investment value.
- In 2019, 35 per cent of all UK’s automotive employment was in the WM. The automotive sector is export intensive, and the WM is the UK’s leading region making 40 per cent of all cars exported from the UK. WMREDI revealed that 21 large manufacturing firms in the automotive sector are at high risk due to relatively poor liquidity ratios.
- The shock in the North sees some 28,321 jobs lost (FTE) throughout the UK, representing 0.09% of all FTE. The shock sees 61,211 jobs lost in the Midlands, representing 0.20% of all FTE. In output terms, the shock in the North sees output fall -£4.9 billion in the Midlands -£11 billion.
- Work by David Bailey highlights: Freeport in a poorer region will simply attract activities, such as assembly, that firms already tend to locate in such regions to take advantage of cheaper labour, lower rents, etc. Rather, a much more holistic industrial policy will be needed to help regions develop, which was a key argument in the recent Manufacturing after Brexit
- Freeports in the rest of the UK: Scottish ‘greenports’ can probably be a useful tool to attract investment to certain areas, and perhaps they can be used as part of a broader industrial strategy aimed at upgrading UK manufacturing. But, on their own they are unlikely to bring the sort of benefits that the Scottish or UK government are hoping for.
- Recent business enquiries to West Midlands Growth Hubs include a focus on: net zero, mentoring, grants and finance, technology and innovation
- A survey by Make UK and business advisory firm BDO showed that prices for the UK and exports increased for the fourth successive quarter.
- Jaguar Land Rover’s sales continued to fall during the third quarter of its financial year because of the ongoing shortage of computer chips.
- Analysis of the gender pay gap reveals that Innovate UK funding benefits businesses with large gender pay gaps and few women amongst the 25% of highest earners in an organisation. Among Innovate UK funded businesses, median male earnings are on average 14% higher than median female earnings. These differences are likely the result of women occupying lower earning positions within organisations.
- The industry with the highest share of women at the top – 77% of top earners are women – is the manufacturing of wearing apparel, i.e. the fashion industry. This industry received only 0.002% of the overall funding made available by Innovate UK. Other industries in with a high share of women at the top are those that typically have a high share of women in the workforce, such as health care, education, creative industries, and retail.
Employment
- Greater Birmingham Chambers of Commerce West Midlands Quarterly Economic Snapshot reveals significant recruitment difficulties. Of all firms surveyed, 72% faced recruitment difficulties in 2021 Q4 2021 – an increase of 10% compared to Q3 2021. 77% of manufacturers in the region faced recruitment difficulties – an increase of 9% compared to Q3 2021 and the highest on record. 70% of service firms in the region faced recruitment difficulties – a 10% increase compared to Q3 2021.
- The difficult labour market is evident in the continuation of the high number of vacancies, low unemployment and economic inactivity continues – potentially driven by high numbers going into training, high numbers leaving the labour market/retiring and low immigration. Whilst numbers of claimants continue to drop as people return to labour market and wages/income picks up post furlough. High numbers of vacancies are being carried by businesses, lack of candidates, forced flexible working, lack of apprenticeships, lack of trainers and assessors.
- Job vacancies rose to a new record of 1,318,000 in the period from December 2021 to February 2022: an increase of 105,000 from the previous quarter with half of the industry sectors showing record highs.
- 6% of WM businesses reported currently experiencing a shortage of workers. Of those, 61.0% reported the worker shortage was causing “employees working increased hours”.
- For the three months ending in January 2022, the West Midlands Region employment rate (aged 16 – 64 years) was 75.7% – a record high. Since the three months ending October 2021, the employment rate saw an increase of 1.1pp; while there is an increase of 2.7pp when compared to the same period in the previous year – with the latter the largest increase across all regions. The West Midlands employment rate was above the UK rate of 75.6%, an increase by 0.1pp when compared to the previous quarter and an increase of 0.9pp when compared to the previous year.
- For the three months ending in January 2022, the West Midlands Region unemployment rate (aged 16 years and over) was 4.9%, which has increased by 0.2pp since the previous quarter but a decrease of 1.3pp from the previous year. The UK unemployment rate was 3.9%, a decrease of 0.2pp from the previous quarter and a 1.2pp decrease when compared to the previous year.
- For the three months ending in January 2022, the West Midlands Region economic inactivity rate (aged 16 – 64 years) was a record low of 20.3% – a decrease of 1.3pp from previous quarter and a decrease of 1.6pp when compared to the previous year – both time comparisons were the largest decreases across all regions. The UK economic inactivity rate was 21.3%, an increase of 0.1pp from the previous quarter and no change from the previous year.
- There were 161,485 claimants in the WMCA (3 LEP) area in February 2022. Since January 2022, there has been an increase of 2.4% (+3,745) claimants in the WMCA (3 LEP) area, while the UK increased by 1.8%. When compared to February 2021, the number of claimants has decreased by 24.9% (-53,585) in the WMCA (3 LEP) area, with the UK decreasing by 32.4%. When compared to March 2020 (pre-pandemic figures), the number of claimants has increased by 37.3% (+43,895) in the WMCA (3 LEP) area, with the UK increasing by 42.6%.
- There were 27,000 youth claimants (aged 18-24 years old) in the WMCA (3 LEP) area in February 2022. Since January 2022, there was an increase of 3.3% (+865) youth claimants in the WMCA (3 LEP) area, above the UK increase of 2.6%. When compared to February 2021, the number of youth claimants has decreased by 35.7% (-14,980) in the WMCA (3 LEP) area, with the UK decreasing by 43.6%. When compared to March 2020 (pre pandemic figures), the number of youth claimants has increased by 19.6% (+4,420) in the WMCA (3 LEP) area, with the UK increasing by 19.5%.
Evaluation
- A review of Heritage and Cultural programme evaluations has been carried out which could usefully inform policy and strategy development for the sector including recruitment and training policies, as well as further funding applications. Long-term impacts of the programmes evaluated are still to be fully determined – particularly in relation to the economic effects of the pandemic and Brexit – investment in interventions to support the cultural sector are shown to have strong impacts in four areas: Health, Culture, Economy, and Society. The region contains nationally significant concentrations of culture, and the region’s cultural sector is an important economic entity yet is under-recorded in published data. Prior to the pandemic, the sector was growing strongly but has been hit extremely hard by the restrictions. Projects evaluated have provided a valuable career development opportunity for emerging arts practitioners. There is currently an under-representation of diverse groups within the workforces of the cultural and creative industries in the Midlands.
Download and view a copy of the West Midlands Economic Monitor
City-REDI / WMREDI has developed a resource page examing the impact of Coronavirus (COVID-19) on the West Midlands and the UK. It includes previous editions of the West Midlands Weekly Economic Monitor, blogs and research on the economic and social impact of COVID-19. You can view it here.
This blog was written by Anne Green, Professor of Regional Economic Development at City-REDI / WMREDI, University of Birmingham.
Disclaimer:
The views expressed in this analysis post are those of the authors and not necessarily those of City-REDI, WMREDI or the University of Birmingham.