COVID-19 cases have been rising. In England, the percentage of people testing positive for COVID-19 remained high in the week ending 2 April 2022; ONS estimate that 4,141,600 people in England had COVID-19 equating to 7.60% of the population, which is about 1 in 13 people, but deaths still remain low. This level of illness however is further pressure on services and manufacturing as people take sick leave. The last month has demonstrated that West Midlands businesses are still faced with increasing costs from energy prices, talent and labour shortages, supply chain disruption, VAT for hospitality returning to 20% and rampant inflation with key sectors still needing time to recover from two years of COVID-19 pandemic.
Economy
- KPMG’s main scenario assumes that global oil prices will be US$30 higher than their path prior to the escalation of the Ukraine crisis, whilst gas prices across Europe will be 50% higher, alongside a 5% rise in global food prices. A more severe scenario looks at the potential impact of world oil prices being US$40 higher, alongside a 100% rise in gas prices for Europe and a 50% increase for the rest of the world. This scenario also assumes a 10% rise in global food prices. Both scenarios incorporate a 23% rise in average metal prices and a 4% increase in the cost of agricultural inputs. They also include higher investment risk premia and additional government spending in Europe. However, in the best-case scenario, the estimate is of a potential return to February levels, providing the crisis ceases. Depending on the scenario, KPMG has estimated that global GDP could range between 3.3%-4% this year and between 2.5%-3.2% in 2023. However, even in their downside scenarios, they have not envisaged a situation where Russia cuts off energy supplies because importers of Russian energy are unwilling to pay in Russian Rubles.
- On Russian sanctions, there is concern over the disruption to metals and materials for industries such as aerospace. There is further disruption to Aerospace as businesses are starting to cut ties with Russian suppliers and associations. This is affecting businesses that import materials from Russia to make a product and sell to UK businesses. Additionally, businesses with closer ties to Russia are experiencing concern from their employees, resulting in people leaving or being poached. There is also concern from food manufacturers who expect more inflation and supply shortages from the disruption of wheat production.
- The UK economy slowed down in February as weaker activity in the health sector, supply chain disruptions and storms undermined strong tourism growth, raising concerns as the cost-of-living crisis grows. According to the ONS, GDP grew 0.1% between January and February, down from 0.8% the previous month. Tour operations and accommodation may have seen a 33% and 35% growth, retrospectively. Most firms are suffering the impact of rapidly rising energy prices placing them under greater and greater cost burdens. The services sector only grew by 0.2% comparative to 0.8% in the previous month. Additionally, manufacturing fell by 0.4%, with the automotive sector continuing to struggle to source parts.
- The WM Business Activity Index (PMI) increased from 58.4 in February 2022 to 59.1 in March 2022; this was the fastest rate of growth in nine months. This increase was associated with backlog-clearing efforts, greater sales and a rush to beat price hikes. Out of the twelve UK regions, the West Midlands (WM) was 6th lowest.
- The WM Future Activity Index decreased from 76.7 in February 2022 to 75.2 in March 2022. Despite the overall level of positive sentiment falling to an eight-month low, firms in the region remained upbeat for the next twelve months.
- 8% of WM businesses reported they had high confidence that the business will survive the next three months, with a further 15.8% with moderate confidence
- 4% of WM businesses reported that they were, or intended, to use increased homeworking as a permanent business model going forward. The highest response as to why at 83.2% was due to “improved staff wellbeing”.
- WM businesses are experiencing continued upward pressures on wages.
- The clearest effects of the COVID-19 pandemic on the economy were on turnover and employment in small and medium-sized enterprises (SMEs) and the collapse in the numbers of self-employed. In q4 2020 there was a sharp fall in the number of individuals in the very early stages of setting up a new business compared to the pre-pandemic high in 2019. There is undoubtedly an appetite for people to start their own businesses but they had decided to delay the actual decision to get the business operational.
- Two-thirds of GEM respondents (the highest ever proportion) indicated that they planned to set up a business within 3 years and the pandemic had influenced their decision to re-assess their future engagement with the labour market. The challenge is to increase the number of them that grow.
- In January 2022, the North West led other regions with 10% of new firms created. The East Midlands and West Midlands follow with 8.2% of firms created. The share of firms created in the WM briefly increased to 9.4 in March 2021; it fell to 8.2% again in January 2022.
- For the UK and particularly for regions outside London, more High technology (HTEC)/ knowledge-intensive services (KIS) firms need to be created as part of the wider drive to stimulate innovation. However, the opposite is happening. In WM the share of HTEC/KIS firms is 26.6% in January 2022; this is notably lower compared with 31.7% in the North West and 31.2% in the East where there are a similar number of new firms created. The WM had one of the highest birth rates at 12.2% and the second-highest death rate of 11.9%. Its net rate of firm formation for that year was 0.3%, the lowest of the English regions and this churn has been a consistent challenge for the region.
- Raw materials and energy are impacted at the moment and may start to make some businesses unsustainable. This is due to an often-limited ability to pass on costs to consumers. This could dent confidence in businesses and make them even more cautious, deferring decisions, and delaying possible investments. In response, businesses are seeking to ensure that their cost base is as stripped back as it can possibly be with the searches for the cheapest options ongoing.
- Businesses have told the region’s Growth Hubs that the proportion of expenditure on energy bills is resulting in negative adjustments to business growth projections over the next few years. The knock-on impact of energy prices on the supply chain has meant that businesses in the construction sector are finding it difficult to provide accurate quotes for work, due to materials fluctuating in cost. For businesses with high use of compressed Co2, such as food and drink manufacturers, their costs can be expected to increase by up to 75% or more.
- The lack of components in some manufacturing businesses means that products cannot be completed, leading to cancelled orders. This is one of a number of contributing factors for some businesses struggling with cash flow issues. A lack of other available materials is also frustrating businesses as they are unable to fulfil orders. In particular, metals, timber and electronics components are in short supply.
- In 2021, the WM region’s export value was worth £25.5bn, an increase of £931m (+3.8%) since 2020; the UK increased by 6.6% to £309.9bn. Over the same period, the WM imported £34bn worth of goods. This has increased by £4bn (+13.5%). The value of all UK imports increased by 9% to £461.2bn. The West Midlands had a trade in goods deficit of £8.5bn in 2021.
- In 2021, the largest value export for a SITC section in the WM was machinery & transport at £17bn. This SITC section accounted for 66.6% of the total exports value. Compared to 2020, the total value of these exports has increased by £667m (+4.1%).
- In 2021, the highest value of WM exports was to the EU at £11.8bn, accounting for 46.1% of the total. Exports to the EU from the West Midlands increased by £236m (+2.0%) since 2020, considerably lower than the UK overall rate (+6.9%) and below the rate of all other exporter regions excluding North America.
- 57% of WM adults reported that the household could afford to pay an unexpected but necessary expense of £850 (58% GB). Although 34% of WM adults reported they could not (29% GB). 18% of WM adults reported that they have had to borrow more money or use more credit than usual in the last month compared to a year ago (17% GB). 51% of WM adults reported that it was somewhat or very difficult to afford the energy bills (43% GB). 29% of WM adults reported it to be somewhat or very difficult to afford the rent or mortgage payments (30% GB).
- At the end of February, the government announced the most significant reform to the student loan system in England since 2012. Graduates with lower-middling earnings will be hit will by the majority of changes with a lifetime loss of around £30,000. The highest-earning graduates will repay around £20,000 less as a result of the lower interest rate. The system will also become substantially less generous for middle-earning graduates from the 2012–22 starting cohorts.
- The Department for Transport (DfT) has confirmed a £1.05 billion grant to transform transport infrastructure across the West Midlands. The City Region Sustainable Transport Settlement(CRSTS) money, topped up with local funding, will deliver a £1.3 billion investment over the next five years. West Midlands Combined Authority (WMCA) has already drawn up a priority list of schemes to drive the decarbonisation of transport, target investment into areas of poor connectivity and support inclusive economic growth.
Employment and skills
- For the three months ending February 2022, the WM employment rate was 75.4%. Since the three months ending November 2021, the employment rate increased by 0.6 percentage points (pp) which was the third highest across all regions.
- For the three months ending in February 2022, the WM unemployment rate was 5.1%, which has increased by 0.4pp since the previous quarter but a decrease of 0.7pp from the previous year.
- For the three months ending February 2022, the WM economic inactivity rate was 20.6% – a decrease of 0.9pp from the previous quarter and a decrease of 1.7pp when compared to the previous year – both time comparisons were the largest decreases across all regions.
- There were 159,105 claimants in the WMCA (3 LEP) area in March 2022. Since February 2022, there has been an increase of 0.2% (+315) claimants in the WMCA (3 LEP) area, while the UK decreased by 1.3%.
- There were 26,765 youth claimants in the WMCA (3 LEP) area in March 2022. Since February 2022, there was an increase of 0.9% (+240) youth claimants in the WMCA (3 LEP) area, while the UK decreased by 0.7%.
- The number of unique job postings rebounded across the WMCA 3 LEP geography in March 2022, increasing by 22% to 164,978.
- In the WMCA (3 LEP) area, the number of people with NVQ 4+ qualifications increased by 3.5% over the year to approximately 983,200 (from 949,800 in 2020) compared to a UK increase of 0.9%. That means 38% of the working-age population were educated to NVQ 4+ qualifications in the WMCA (3 LEP) area against the UK average of 43.5% in 2021. Despite this improvement, a further 142,450 of the working-age WMCA (3 LEP) residents are required to obtain an NVQ 4+ qualifications to equal the UK average.
- The number of people in the WMCA (3 LEP) area with no qualifications, decreased from approximately 227,500 in 2020 to 219,300 in 2021. This equates to 8,200 fewer people without any qualifications or a decrease of 3.6% compared to an increase of 1.8% across the UK.
- That means 8.5% of the working-age population in the WMCA (3 LEP) area had no qualifications against the UK average of 6.7% in 2021. To eradicate the gap with the UK average, 45,924 of the working-age WMCA (3 LEP) residents are needed to obtain at least one qualification.
Green Jobs
- The LSE and Placed-Based Climate Change Action Network (PCAN) has found that one in five workers, and 6.3 million jobs in total, will be affected by the transition to net-zero, with around 3 million workers requiring upskilling and another 3 million that will be in high demand:
- Energy: The energy sector is unlikely to see declines in demand in the future, however, it will see major changes in the demand for the type of energy.
- Construction: 30% of the current workforce will need to be reskilled to meet the demand of changing regulations, policies and new technologies in infrastructure, as we progress to a net-zero.
- Transport and Storage: transitional reskill of 26% of the current workforce will need to be supported. Currently, there are policies in place to ban the sale of combustion engine cars after 2030, therefore those within the transport industry will need to be reskilled in how to manufacture and operate new technologies.
- Manufacturing: It is expected that around 17% of jobs within the current workforce will need a transition reskill.
- The Centre for Progressive Policy (CCP) found that on average earnings for some of the highest emitting jobs is £680 per week compared to the rest of the economy for which the average weekly wage is £580.
- Sectors that are likely to face the largest transition, such as manufacturing, construction and energy, usually have higher employment rates within stereotypically ‘left behind’ areas. However, the RSA also highlights that a substantial number of the areas which are expected to be most impacted by these future sectorial changes are not considered within the levelling up agenda priority areas.
- CPP created two categories of areas ‘High Emitters and extremely economically vulnerable’ and ‘High Emitters and economic vulnerable’. 100 local authorities will have the highest reliance on high emitting industries for employment and of these 74 were deemed to be economically vulnerable.
- Onward found that the East Midlands and West Midlands had the highest percentage of jobs within high emitting industries, around 40% for both regions. These areas are characterised by large industry, manufacturing and aviation employers.
- The Social Market Foundation created a Net Zero Opportunity Index which ranked areas based on key opportunities including proximity to renewable energy sites, proximity to a decarbonising industrial cluster, and proximity to a top university for STEM research with associated innovation opportunities. The West Midlands ranked high on their index indicating that the region may see relatively higher levels of economic and employment opportunity in the transition to net-zero compared to other regions.
- The Environmental Audit Committee recommends that in order to ensure a ‘just transition’ of people from high-polluting employment to low-polluting employment, the government needs a place-based targeted skills plan to up-skill those in ‘at-risk’ industries.
Net-Zero
- The growth of global GHG emissions has slowed down in the past decade from 1% per year between 2000 and 2009 to 1.3% per year between 2010 and 2019.
- China (39%) and India (14%) contributed the most to the 6.5 GtCO2eq of emissions from 2010 to 2019.
- The impact of COVID-19 has temporarily set back the delivery of many SDGs. COVID-19 trigged an economic depression and reductions in CO2 emissions; however, most countries have rebounded by 2020.
- The pathways consistent with the implementation of current policies in countries would see GHG emissions reaching 57 GtCO2eq per year by 2030 to 47-67 GtCO2eq per year by 2050, leading to median global warming of 4°C to 3.5°C by 2100.
- Long-term emission reduction is best achieved by introducing new mitigation policies while at the same time re-evaluating existing policies that support GHG emission reduction.
- Sub-national actors such as municipalities and regional governments play an essential role as they have jurisdiction over climate-relevant sectors such as land use, waste and urban policy.
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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.