West Midlands Economic Impact Monitor – 13 September 2023

This month there is another natural disaster; rescue efforts are ongoing after a powerful earthquake struck central Morocco on Friday night just after 11pm. The death toll has soared to more than 2,000, with a similar number of injured. Inflation continues to be an issue globally post-pandemic. Heatwaves, fires and floods are hitting key supply chains. In the first week of September, the official heatwave criteria were met for much of England and Wales.

This month, Birmingham City Council has also announced a section 114 notice declaring itself bankrupt. The Council has announced that vital services are safe.

Economy

In July, real (inflation-adjusted) consumer spending in the US grew strongly. This was not due to an increase in income, as disposable personal income declined from the previous month. Rather households cut the share of income that they save, enabling a big increase in expenditure.
Eurozone inflation stopped decelerating in August while core inflation declined. This resulted in investors being less certain that the ECB will raise interest rates again.
Deloitte’s growth forecast for the UK continues to be well below pre pandemic levels, slowing abruptly in 2023 due to energy prices and consumer incomes. The forecasts highlight further energy and supply chain disruption as the main downside risks.
The Consumer Prices Index, including owner occupiers’ housing costs (CPIH), rose by 6.4% in the 12 months to July 2023, down from 7.3% in June.
The Consumer Prices Index (CPI) rose by 6.8% in the 12 months to July 2023, down from 7.9% in June.
Falling gas and electricity prices provided the largest downward contributions to the monthly change in CPIH and CPI annual rates; food prices rose in July 2023 but by less than in July 2022, also leading to an easing in the annual inflation rates. Hotels and passenger transport by air provided the largest offsetting upward contributions to the change in the rate.
Producer input prices fell by 3.3% in the year to July 2023, down from a fall of 2.9% in the year to June 2023. Inputs of crude oil and petroleum products provided the largest downward contributions to the annual rates of input and output inflation, respectively.
The WM Business Activity Index (PMI) decreased from 52.6 in June 2023 to 51.3 in July 2023, although remained above the 50-growth mark for the sixth month in a row. Growth due to new products and services along with demand resilience. Restrictions on business activity link to an economic slowdown, client destocking and unfavourable conditions.
The WM Future Business Activity Index increased from 74.4 in June 2023 to 76.8 in July 2023. Optimism in WM firms was linked to planned investment in staff and systems, expected gains in market shares and hopes that inflation would retreat.
Erratic climate conditions in India have led to large scale loss of crops. This has led to rapidly increasing food inflation. The average cost of a regular vegetarian meal has jumped by around a third in a month. The Indian government is taking protectionist measures to safeguard their domestic supply of food. This could severely disrupt international food supply chains.

Electric Vehicle Manufacturing (EVs)

There are small numbers of manufacturers in this sector in the region, which correspond with the current car manufacturing base. However new products with new capital investment demand can create seismic change in the supply chain, especially if incumbent companies are slow to adapt or change. The low numbers in specific electrical areas demonstrate that companies are likely to still see their core product as combustion engine vehicles; however, there is no data available to allow us to understand which companies are moving towards the new markets and how fast they are innovating/moving.
EVs are projected to match the sales of internal combustion engine (ICE) vehicles by 2030, and to surpass them by 2040. Siemens observed that the recent and rapid growth of EVS is driven by several factors: improved battery technology; regulatory pressure at national, regional, city levels; investment into EV programmes and start-up companies from a variety of sources; a growing network of EV charging stations.
To meet this increased demand and remain competitive in a changing market, automotive manufacturers will need to ramp up their ability to manufacture EVs at volume. This presents an opportunity for the WM to grow its EV manufacturing capability, building on its existing comparative advantage, business confidence and further market opportunity. The WM Growth Plan projects the following growth opportunity in EV manufacturing: a further £850m – £950m of output and 11,200 to 12,400 jobs (by matching the growth trajectory of the leading UK region for similar clusters).
To date regional producers, have (2010-22) invested £2.2 million in EV production, 54,000 jobs and £5.1m GVA (SMMT, 2023). JLR has recently announced that it is recruiting 300 technicians and test engineers.
The production of battery cells is the primary challenge, accounting for 70% of the cost of the battery. Any investment that the region makes in battery manufacturing is strategically important to the growth of the cluster. The UK Battery Industrialisation Centre, based in the region, provides a critical link between research at laboratory or prototype stages and the successful mass production of new battery technologies.
Professor David Bailey considers Tata’s recent decision to build a ‘giga-factory’ to make batteries for electric vehicles (EVs) in Somerset rather than Spain as “the most significant investment in UK automotive since Nissan. Bailey argues that domestic battery production will reduce supply chain costs and ease logistical difficulties, helping to safeguard jobs, by anchoring JLR vehicle assembly in the WM.
Key R&D assets include the National Automotive Innovation Centre (NAIC), Advanced Propulsion Centre (APC), Manufacturing Technology Centre (MTC), WMG, HORIBA MIRA, and the universities of Birmingham, Warwick, Coventry, Wolverhampton and Aston amongst others (Invest West Midlands, 2023).
Challenges of EVs include drive range; vehicle cost; standardisation, quality control and ongoing skills development, as well as warranty, service, and reliability requirements and “charging anxiety”.
Government has published new regulations (July 2023) for public charge points, including a reliability standard of 99% for rapid chargers. The new rules, outlined in the Public Charge Point Regulations 2023.
Government will phase-out the sale of new petrol and diesel cars and vans,. This has been brought forward to 2030. There is a commitment for all new cars and vans be fully zero emission at the tailpipe from 2035.
HVM Catapult suggests 63% of current jobs, and as high as 84% for electric machines, will be subject to significant change. Quality engineers and technicians with the knowledge of electronics are amongst the biggest change with needs to re-skill and re-train. Beyond manufacturing, there will be a potential need to reskill 182,000 mechanics and around 175,000 independent dealerships by 2030.
In 2020 the automotive sector faced multiple concurrent shocks that affected both demand and supply sides of the sector. City-REDI (2022) research found that in 2020 a 25% fall in new car registrations had severe consequences for the Midlands due to the high degree of interconnectivity in the supply chain.
The sector is facing a transformational change while significant portions of the supply chain can remain similar: autobody construction, fabricated and basic metals, upholstery, and plastics. The drivetrain of vehicles will change substantially. The complexity of an internal combustion engine necessitates many specialised parts (sometimes over 2,000 parts) to be combined from an often locally networked supply chain. These parts are often maintenance intensive and require frequent servicing. The electric vehicle drivetrain is greatly simplified, with sometimes as few as 20 parts. This will present a significant restructuring impact on the current regional asset base and if this fails to happen it could present a major shock to the economy, jobs and businesses in the region.
This week the Vauxhall plant in Ellesmere Port has become the first electric vehicle only factory, with over £100m investment from parent company Stellantis, demonstrating competition is high across the UK.

Local Authority budgets

The BBC has recently highlighted the looming black hole in Local Authority Budgets. The average council now faces a £33m ($42m) predicted deficit by 2025-26 – a rise of 60% from £20m two years ago. Unison said the situation meant some councils would not be able to offer the “legal minimum of care” next year. Recent work by City-REDI highlighted Birmingham City Council as an example of this threat, prior to the announcement by the Council of a 114 notice.
Reduced budgets can lead to service cutbacks; staff reductions; infrastructure and maintenance; increased fees and charges (including council taxes/business rates); capital projects. delays and cancellations; economic impact through cuts to business support, tourism, job creation and regeneration; and increased demand for social services.

International effects of Cost of living

Most OECD countries have experienced an upsurge in total inflation growth rate, which includes food and energy. UK annual inflation growth rate increased significantly by 8.6 pp, from 0.8% in the fourth quarter of 2020 to 9.4% in the fourth quarter of 2022, which is in line with the OECD average of 10.1% in Q4 2022.
Among major economies, Italy witnessed the highest increase in inflation rates (12% by the end of 2022), followed by the Eurozone area (10.3%). Japan, which experiences structural issues that manifest in slow GDP and inflation growth, saw a relatively lower increase, followed by Canada and the United States.
Due to the deceleration of worldwide economic growth, the reduction in food and energy price inflation, and the monetary constriction enforced by many central banks, inflation is anticipated to decrease across almost all G20 economies in 2023 and 2024.
When factoring in housing expenses, the overall cost of living in the UK increases, ranking it 20^th It is noteworthy that the UK’s rank in the overall cost of living index was relatively better before the pandemic and inflation expansion of the past two years, with a rank of 31^st in mid-2019.
The UK has a lower grocery index (47.7 in 2023) compared to many other countries, including the US, Japan, Canada, France, Italy, and Germany. Restaurant prices in the UK (with an index of 67.9) are relatively high compared to other G7 nations, surpassed only by the United States.
The UK has a relatively strong local purchasing power with a ranking of 14^thin the world and an index of 98.9, which is higher than France and Italy but lower than the United States, Germany, Canada, and Japan. Despite the fact that the UK’s cost of living is higher than many countries, it is still competitive when compared to the other G7 nations.
In spite of the labour market tightness and increasing nominal wages, most countries have witnessed a notable decline in real wages (which accounts for inflation), indicating a general decrease in the purchasing power of their workforce.
The structure of household expenditure across different income groups does vary from country to country. However, analysis at the EU level has shown that, in most member states, the impact of inflation on energy and food prices has also disproportionately affected families with lower incomes.

Employment

1% of the 21.3 million households had all household members aged 16 years and over in employment during April to June 2023, up 0.3 pp compared with the same period last year.
2% of households have at least one working and one workless adult, up 0.1 pp compared with the same period last year. 13.7% of households no member of the household was in employment, down 0.4 pp compared with the same period last year.
The number of young people who were aged 16 to 24 years and not in education, employment, or training (NEET) increased in April to June 2023, to a current estimate of 794,000, up from 770,000. The increase in the number of young people who were NEET was entirely driven by young men.

Labour Market Statistics

UK early estimates for July 2023 indicate that there were 30.2m employees, an increase of 1.9% (+578,000 employees) compared the previous year. There was an increase of 15,000 employees aged under 25 years, while the number of employees aged 35 to 49 years increased by 196,000.
In April to June 2023 reports of UK-wide redundancies in the three months prior increased by 0.9 per thousand employees, compared with the previous quarter, to 3.8 per thousand employees. The UK redundancy rate is similar to pre-coronavirus pandemic levels.
Estimates for April to June 2023 show decreases in the UK employment and economic inactivity rates compared with the previous quarter (Jan to Mar 2023), while the unemployment rate increased. Flows estimates show that, between January to March 2023 and April to June 2023, there was a large net movement from economic inactivity into unemployment.
The UK employment rate was estimated at 75.7% in April to June 2023, 0.1 percentage points (pp) lower than January to March 2023.
The unemployment rate for April to June 2023 increased by 0.3pp on the quarter to 4.2%.
The economic inactivity rate decreased by 0.1pp on the quarter, to 20.9% in April to June 2023.
WMCA – year ending March 2023, the economic activity rate was 73.5%, compared to 78.3% UK-wide, decreased by 1.5pp and for the UK, decreased by 0.1pp when compared to the year ending March 2023.
Employment rate in the WMCA area was 68.6%, compared to 75.4% UK-wide, decreased by 1.4pp when compared to the year ending March 2022. In contrast, the UK employment rate increased by 0.3pp.
In the year ending March 2023, the economic inactivity rate in the WMCA area was 26.5%, an increase of 1.5pp from the year ending March 2022. Over the same period the UK increased by 0.1pp to 21.7%.
In the year ending March 2023, the modelled unemployment rate in the WMCA area was 6.6%, compared to 3.7% for England-wide. The modelled unemployment rate for the WMCA area increased by 0.1pp when compared to the year ending March 2022. England’s modelled unemployment rate decreased by 0.5pp.
8% (656,400) of the working age population had RQF4+ qualifications. This was below the UK-wide average of 45.5%.
6% (184,000) of the working age population had no qualifications, this was above the UK-wide average of 7.0%.
There were 126,125 claimants in the WMCA area in July 2023. Since June 2023, there has been an increase of 1.5% (+1,900) claimants in the WMCA area, while the UK increased by 1.8%. When compared to March 2020 (pre-Coronavirus pandemic), claimants have increased by 27.0% (+26,825) in the WMCA area, with the UK increasing by 23.3% over the same period.
The number of claimants as a proportion of residents aged 16-64 years old was 6.8% compared to 3.7% for the UK in July 2023.
In July 2023 there were 23,315 youth claimants in the WMCA area. Since June 2023, there was an increase of 2.0% (+460) youth claimants in the WMCA area, while the UK increased by 2.2%. When compared to March 2020 (pre-Coronavirus pandemic), youth claimants have increased by 21.7% (+4,160) in the WMCA area, with the UK increasing by 12.9%.
The number of youth claimants as a percentage of residents aged 18-24 years old was 8.2% compared to 4.9% for the UK in July 2023.

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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.