It is now two years since the beginning of the pandemic, and the Global Economy is being rocked by another severe shock. The Russian invasion of Ukraine is foremost a human tragedy and a reminder of the terrible costs of war and the immense and immeasurable consequences for those who are caught up in them. The conflict has also had major repercussions for the global economy, the recovery of which was already being buffeted by the Omicron variant, supply chain bottlenecks and rising inflation. Two weeks into the invasion, gas and oil prices had increased by a massive 250% since the end of 2021; prices have since fallen but remain well above historical averages.
Global trends
- Russia’s invasion of Ukraine and the economic sanctions that have been placed on Russia have put global energy supplies at risk. Russia currently accounts for around 10% of the world’s energy supply, including 17% of natural gas supplies and 12% of oil supply.
- Germany has already announced that it will begin gas rationing as it braces itself for a potential halt in energy deliveries from Russia due to disputes over payments. If supply begins to fall short and less draconian attempts to lower consumption do not work, then the government will cut off certain parts of German industry from the grid, giving preferential treatment to households.
- China has announced its biggest city-wide lockdown since the beginning of the pandemic. The city of Shanghai will be locked down over 9 days, whilst authorities carry out Covid-19 testing.
The national cost of living crisis
- Over 8 in 10 (83%) adults reported an increase in their cost of living in March 2022 (3 to 13 March 2022) compared with around 6 in 10 (62%) adults in November 2021 (3 to 14 November 2021).
- In early 2022 (6 January to 27 February 2022), 29% of adults reported that their household could not afford an unexpected, but necessary, the expense of £850. Adults on the lowest incomes, those renting their homes or those with no formal qualifications were most likely to report they could not afford this unexpected expense.
- The cost of living crisis will be worsening from 1st April, as there will be additional utility and public service prices hikes. Energy bills are expected to rise from 1st April, as the electricity and gas price cap, which the majority of UK homes are on, rises by 54%. For those earning around more than £190 per week, national insurance contributions (NICs) will rise by 1.25% from the 6th.
Other national trends
- The government is considering delaying post-Brexit border checks on goods entering Britain from the EU for the fourth time, in order to prevent what industry has warned will be a supply chain disaster.
- The Office for Budget Responsibility (OBR) retains its assumption that leaving the EU will result in the UK’s total imports and exports being 15% lower than had the UK remained a member state.
Regional trends
- The number of people on Universal Credit (UC) has soared from pre-pandemic levels – with some areas of Birmingham seeing claims more than double.
- The West Midlands has one of the highest rates of fuel poverty in England. The rising cost of electricity and gas will further push families into poverty. In September 2021 around 18% of homes could not affordably heat their homes compared to the England average of 13%. With the price cap set to increase by 54%, this will push even more families in the region into fuel poverty.
- Possible future manufacturing shutdowns in countries like Germany, Italy and the Netherlands due to energy shortages could have a massive impact on West Midlands supply chains.
- The West Midlands Business Confidence Index produced by the ICAEW has improved, making it the joint-most confident region in the UK, alongside London. Domestic sales growth was faster than in any other UK nation or region in the 12 months to Q1 2022, with even stronger growth expected for the year ahead. However, export growth has been small, likely due to complications around Brexit, according to ICAEW.
- Salary growth though is expected to reach its fastest rate in nearly 14 years, with staff turnover and availability of skills now being a widespread issue across the region.
Spring Statement
- The OBR predicts that if wholesale energy prices remain as high as expected, energy bills will increase by another 40% in October, pushing inflation to a 40 year high of 8.7% in the fourth quarter of 2022. OBR has assessed living standards will fall this year
- Higher inflation will erode real incomes and consumption; therefore, the OBR has revised its GDP growth predictions from 6% to 3.8% for this year.
- With inflation outpacing growth in nominal earnings and net taxes due to a rise in April, real living standards are set to fall by 2.2% in 2022-23, the largest fall on record, and the economy will not recover to pre-pandemic levels until 2024-25.
- To help ease pressure on the energy market, the government will remove VAT for homeowners installing energy-efficient materials such as solar panels, heat pumps, or insulation.
- To help those that are most vulnerable to rising living costs the government will provide local authorities with an additional £500m for the Household Support Fund from April
- The income threshold at which people will start paying National Insurance (NI) will rise to £12,570 in July, which the Chancellor has claimed will be a tax cut for employees worth over £330 a year. However, there will be a 25p increase in NI, in the form of the health care levy. Combining those two measures means that anyone earning less than around £34,000 will pay less NI than they did last year and anybody earning more than that will pay more.
Impact of Brexit and Covid-19
- Analysis from City-REDI shows that the combined impact of Brexit and Covid-19, termed the “2020 shock”, on the West Midlands automotive sector has seen 61,211 jobs lost in the Midlands.
- In output terms, the shock sees output fall by £11 billion in the Midlands. In the five years since the process to leave the EU formally began, the combined effect of Brexit and Covid has led to a fall in employment in important sectors in the region.
- The West Midlands as a whole is more exposed the Brexit and Covid than the UK average. This is partly due to 55% of the West Midlands’ £934m exports in manufacturing services and 62% of its £177m exports in Wholesale and Motor Trades’ services head for the EU. This inability to adjust to economic shocks is a characteristic of many of the UK’s economically weaker regions, with lower levels of diversity, skills and connectivity.
- The break from the seven-year EU funding cycles re-emphasises the importance of long-term funding strategies. Research from CIPFA and City-REDI in addressing regional inequalities shows the importance of long-term funding. Effective industrial strategy should be a long-term strategy that works over decades rather than years. There is increased importance that future policy should evolve slowly building on a strong supportive foundation and should be evaluated over decades rather than determined by short-term election cycles.
- The ‘forced experiment’ of remote working and increased online shopping was more seamless than many expected. Remote working is not new, but formerly progress had been slow despite ongoing expectations that with the ‘death of distance’ the agglomeration advantages of central business districts would be eroded. The Covid-19 lockdown changed that: in April 2020 over 43% of workers nationally were working from home, up from just under 6% in early 2020.
- In contrast to ‘anywhere jobs,’ there are high-touch public-facing roles and construction, infrastructure and many maintenance tasks that cannot be can be done remotely. ‘Anywhere jobs’ are disproportionately concentrated in the professional and business services sector.
Entrepreneurial dynamics
- Recent research by the Enterprise Research Centre (ERC) shows that when we look at cohorts of start-ups in the UK there is an extraordinary force of mortality. After 15 years 90 per cent are dead, and for those surviving, the chance of death is still about 10 per cent a year. Another important finding is that most firms, even those that survive 15 years, do not grow very much. Further, of the firms that do grow firms born smaller (i.e., 1-4 employees) grow faster than those born larger.
- The development of a Global Entrepreneurship Monitor (GEM) Panel Study of Entrepreneurial Dynamics (PSED) for the West Midlands will create a panel to provide new information about the nature of the firm creation process for a range of demographic groups, including ethnic minority communities.
Infrastructure
- As of March 2021, there were 657 job posts shared on the HS2 jobs board, with 218 of those within the West Midlands. We expect these numbers to rise as the project continues to gather pace. The total workforce number across both our enabling works and main works contracts in the West Midlands is now nearly 4,000. 117 of these are people that were previously out of work, and over 200 are apprentices.
- A new report investigates experiences of investing in infrastructure in six areas across the world. Varied and alternative financing mechanisms for investments in infrastructure have worked in the case studies examined; Competitive bidding processes need to be well thought through to provide sufficient capacity for all to participate and robust appraisal; Embedding robust evaluation, monitoring, and appraisal mechanisms that are implemented, adjusted, and updated throughout the project life cycle is vitally important; Partnership working is important for uniting stakeholders around key initiatives and addressing gaps in capacity; Fiscal autonomy can support the development of initiatives. Many of the infrastructure initiatives profiled have been introduced by city-regions with high levels of fiscal autonomy.
A Clean Air Zone (CAZ) is an effective way to reduce pollution, therefore, the implementation of the Birmingham Clean Air Zone in June 2021 is a firm step to tackle road-transport related air pollution in the city centre. However, many local authorities have found air pollution controls challenging to introduce due to the lack of public and political acceptance from businesses and residents.
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.