West Midlands Economic Impact Monitor – 24th June 2022

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The latest Purchasing Managers Index has left confidence falling to a 19-month low, but some firms remained upbeat due to new product launches, marketing efforts and expansion plans to support output over the course of the coming year. Business optimism was generally restricted due to acute inflationary pressures, issues with transportation, a challenging economic climate, and the Russian invasion of Ukraine all reportedly dampened optimism in May 2022. This is a change for the region, which had until now remained positive in the face of the pandemic and EU Exit.

Covid-19
  • Case numbers across Europe have risen since the previous monitor, with numbers doubling in some countries. In the UK the new confirmed case numbers have risen from 93 per million people to 208 per million people. The reason for these increases is likely because of economies reopening and big events returning. However, deaths remain low.
Economy
  • There has been a widespread decline in GDP over the first quarter of this year, alongside rapidly rising inflation. The largest rises in inflation have been within the UK and US and forecasters are now anticipating that inflation could climb to double figures this year in both the UK and US. The reasons for this are rapidly rising energy prices; supply chain bottlenecks; and wheat and fertilizer prices.
  • ONS announced that Consumer Price Inflation (CPI) had risen even further to 9.1% in the 12 months to May, up slightly from April’s rate of 9%. This is the highest rate of inflation in 40 years since March 1982, and the Bank of England is now forecasting that inflation could reach 11%.
  • 17 out of the 20 most deprived areas in the UK are within the Midlands and the North. With inflation hitting 9% many households may be pushed further into poverty and deprivation within the Midlands.
  • The Bank of England (BoE) has raised interest rates from 1% to 1.25%, their highest level for 13 years. Some analysts are predicting that the BoE may go so far as to raise interest rates to 3%.
  • ONS stated that inflation in May was fuelled by rising prices for food and non-alcoholic beverages. The inflation in this sector is largely due to Russia’s invasion of Ukraine severely restricting wheat and maize supplies; the two countries make up almost a quarter of worldwide production.
  • The Centre for Economics and Business Research (Cebr) has found that the rail strikes will likely cost the economy at least £91m, warning that these figures could be much higher, especially for hospitality and retail. Rail strikes will limit or prevent freight from moving around the UK, at expected rates which will impact the West Midlands (WM). Significantly limiting businesses’ ability to get output to customers and reducing economic activity.
  • WM Business Activity Index decreased from 54.5 in April 2022 to 49.7 in May 2022: the first contraction in 16 months. A score below 50 means that the regional economy is shrinking. Business activity was restricted due to inflationary pressures, subdued demand, challenging economic conditions and input shortages. Out of the 12 UK regions, the WM was the third lowest for Business Activity in May 2022.
  • WM Future Business Activity Index decreased from 71.8 in April 2022 to 66.1 in May 2022.
  • WM New Business Index increased from 50.2 in April 2022 to 50.5 in May 2022, a marginal rise in new business intakes due to better demand conditions and greater international travel.
  • WM Export Climate Index decreased from 4 in April 2022 to 52.8 in May 2022, indicating the slowest rate of growth in four months.
  • WM online job adverts decreased by 4.4% and on the 10th June 2022, it was at 130.9% of the average level in February 2020. All 12 regions were still above their February 2020 levels.
Energy and low carbon
  • Energy prices hit their peak in March when gas prices hit a high of £314.52 per therm due to a number of factors including the invasion of Ukraine; gas shortages; increased demand; Halting of Nord Stream 2.
  • UK households have been hit with higher energy bills after the energy price cap on standard variable rate tariffs (SVTs) increased by 54% as of April. However, the price cap does not extend to business energy, meaning that suppliers can increase their out-of-contract rates by as much as they see necessary to cover their increased costs and remain profitable. This has seen out-of-contract rates (also known as deemed rates) rise by an average of 100% since August 2021.
  • Very small business consumers – consuming under 20 MWh per year- were likely to pay the highest electricity price in Q4 of 2021 at 18.84 pence per kWh. Whereas extra-large consumers- consuming over 150,000 MWh annually- paid on average 17.07 pence per kWh.
  • Between 2020 and 2021, the average price of electricity per kWh increased by 11.8% and gas increased by 24.4%. The year-on-year increase has been higher for larger consumers however, smaller consumers are still paying a much higher rate.
  • A third of businesses saw their energy bills increase. 1 in 5 owners saw an increase of over 15%, and 1 in 10 reported a hike of 20%. Almost a third of SMEs say they will have to reduce their energy usage to save on running costs. 1 in 5 (17%) said that doing so would negatively impact their business. 1 in 4 (26%) small business owners have increased their prices due to rising inflation and business costs.
  • WMCA is home to around 90,000 micro and small businesses, making up 97% of the region’s total business count. Energy prices potentially rising by 250% in the first quarter of this year will drastically impact their ability to continue to operate at current capacities.
  • The average business within WM is spending £3,686 on their annual energy bills. Excluding Greater London, this means that the WM has the 4th highest average annual energy bill amongst the UK regions.
  • The industrial make-up of the WM was highly impacted by the pandemic, vastly reducing growth, compared to other UK regions. Some of the large sector employers in the region, such as the automotive industry, are also still grappling with inflation caused by other factors such as shortage of raw materials, supply chain bottlenecks and Brexit increasing transactional costs. Rising energy prices will likely force many businesses in these sectors to increase prices and this will reverberate across all supply chains.
  • Research performed by the West Midlands Growth Company has shown that despite the impact of Covid, that low-carbon manufacturing is now the fastest-growing sector; the sector grew by more than 7% in 2020 despite a 9% decline in the wider West Midlands economy as a result of the Covid pandemic.
  • Heating accounts for 40% of the energy consumption and about one-third of the carbon emissions. In contrast to electricity, very little progress has been made in the decarbonization of how homes are heated and how heat is generated in industrial applications, due to the difficulties of behaviour change, infrastructure and more costly alternatives, and investment in new forms of heating.
  • The Midlands proposes a National Centre for Decarbonisation of Heat (NCDH), working between local government, academic institutions, innovation Catapults, and industry to coordinate the delivery. The NCDH would work on a whole series of activities including driving down the cost of delivering heat.
  • Jaguar Land Rover said that it will develop 6 new electric vehicles in the next 5 years and that all vehicles will be available as all-electric variants by 2030, setting the pace for the region and there is an opportunity for the Midlands to continue to take a leading role in the introduction of electric vehicles in the UK.
  • The System Average Price (SAP) of gas decreased by 28% in the latest week to 12th June 2022 (from the previous week), 44% higher than the equivalent period from the previous year and 300% higher when compared to the pre-Coronavirus baseline.
  • 2% of responding WM businesses reported “exporting stayed the same” in May 2022 when compared to May 2021. 18% of businesses reported “exported less” and 16.4% reported “exported more”.
  • 6% of WM businesses reported experiencing global supply chain disruption in May 2022.
  • 35% of WM businesses reported the main concern for business was “inflation of goods and services prices”.
  • 1% of WM businesses are using, or intending to use, increased homeworking as a permanent business model going forward.
  • 6% of West Midlands businesses reported currently experiencing a shortage in workers, leading to 63.7% stating workers were working longer hours.
  • The most common actions reported by adults who reported their cost of living had increased continued to be spending less on non-essentials (60% – up 4% from the previous period), using less fuel such as gas or electricity at home (52% – up 2% from previous period), spending less on food shopping and essentials (41% – up 5% from previous period) and cutting back on non-essential journeys in vehicles (40% – up 1% from the previous period).
Innovation
  • Manchester and Birmingham city-regions both underperform on innovation relative to their international peer group based on population size. Oxford and Cambridge are national and global outliers in terms of Science and Technology intensity. Beyond these outliers, there is relatively little variation in innovation performance across regions, compared to other countries.
  • Specific measures of S&T output and discounting the outliers show the WM to be performing well nationally, relative to its size, while GM lags the rest of the pack, especially on patent applications.
  • The UK has an apparent weakness relative to other highly innovative countries when it comes to mid-sized cities. Between the stellar S&T performance of Oxford and Cambridge and the global significance of London, there is little in between in terms of places, that could be classed as world-leading.
  • Across almost all regions – the UK is performing relatively well in terms of innovation inputs. But it is behind in terms of applying these commercially, which can drive long-term growth in employment, productivity and prosperity. This is also the area where the South East, as well as the East of England, are performing much better than the other regions.
  • Regions like the West Midlands for innovation inputs and outputs are very diverse and include Tuscany and Andalusia, Budapest, and Northern Jutland.
  • The Levelling Up White Paper announced increasing spending by 40% by the end of the decade, adding a further £0.7bn by 2030. The target for a 40% increase in public R&D spending by 2030 only applies to the non-GSE regions
  • This funding aim includes BEIS spending through UKRI, other BEIS R&D funding competitions, industry R&D programmes and R&D infrastructure. It is difficult to track regional spending of all public R&D funding and the Government acknowledges this.
  • A 35% increase in R&D spending performed by the public sector in the West Midlands (using 2019 as a base) would be worth about £191m a year by 2024/25.

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.

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