West Midlands Economic Impact Monitor – 3 March 2023

This week the Prime Minister and the President of the European Commission announced a new agreement – the Windsor Framework – to change the way the Northern Ireland Protocol operates, including by removing checks on goods from Great Britain remaining in Northern Ireland. Inflation in the Euro area is decelerating. 

Concerns about the impacts of the rising cost of living in the UK remain.

Global, national and regional outlook

Eurozone inflation is decelerating. The Euro area annual inflation rate was 8.6% in January 2023, down from a peak of 10.6% in October 2022.
The Global Trade Outlook report produced by the Department for Business and Trade and the Department for International Trade shows that global trade is projected to grow broadly in line with global GDP over the next 30 years. By 2050 it is expected to double in real terms and almost quadruple in dollar terms to reach close to $100 trillion.
The UK is expected to remain among the top 10 trading nations out to 2050. UK exporters are well-placed to capitalise on an expanding global middle class, as richer populations tend to buy high-value goods and services that UK businesses specialise in. But rapid trade growth elsewhere means that by 2050, the UK is expected to account for 2.5% of global exports, down from 3.1% in 2021.
A new Windsor Framework has been announced that aims to significantly reduce the number of checks needed between Northern Ireland and Great Britain. The arrangements outlined in the Framework will see two lanes created for goods arriving in Northern Ireland from Great Britain: a green lane for goods remaining in Northern Ireland and a red lane for goods which are being sent on to the EU (Republic of Ireland). Products going through the green lane would see checks and paperwork scrapped, whilst red lane goods will be subject to checks. In addition to the new trading lanes, a Stormont brake is proposed that would allow the Northern Ireland Assembly to object to new EU rules.
It was expected that from April 2023 the cap on energy bills would be removed, ending the energy price guarantee and support available for UK households but the government has announced it will cap the average annual energy bill at £3,000 (or £3,250 dependent on payment methods). Under the current energy price cap set by the government, based on annual energy usage, the average West Midlands Combined Authority (WMCA) area household spends around £2,629 on energy bills. This is slightly higher than the England average, largely due to higher electricity usage amongst WMCA area households.
Insights from the ONS Winter Pressures Survey highlight the continuing impact of the rising cost-of-living and difficulties accessing NHS services. 9% of adults reported they had often or sometimes run out of food and could not afford to buy more in the past month. 34% agreed that increases in the cost of living had negatively affected their mental health. Of those waiting for NHS treatment, 70% reported it had negatively affected (either strongly or slightly) their life.
An ONS survey on the impact that the cost of living is having on students in higher education showed that 91% of students were either somewhat or very worried about the rising cost of living. In response to the rising cost of living, 30% of students had taken on new debt; of those that did, 71% reported they did so because their student loan was not enough to support their living costs. The average level of life satisfaction among higher education students (5.8) was significantly lower than the adult population in Great Britain (6.9).

Real-time indicators on economic activity and social change

Nationally, between 10^th and 17^th February 2023, total online job adverts decreased by 3.2%. On the 17^th February 2023, total online job adverts were 113.6% of their average in February 2020. In the West Midlands online job postings fell by 2.8% and on the 17^th February 2023, this was 113.1% of the average level in February 2020.
The System Average Price (SAP) of gas decreased by 11% in the week to 19^th February 2023 (from the previous week), it was 27% lower than the equivalent level in 2022. However, when compared to the pre-Covid-19 baseline, SAP of gas was 434% higher.
Results of the Business Insights and Conditions Survey show that 1% of responding West Midlands businesses reported that turnover in January 2023 had increased when compared to the previous calendar month. 33.4% of West Midlands businesses reported turnover had stayed the same. However, 26.5% reported that turnover had decreased.
7% of West Midlands businesses reported that energy prices were a factor for the business to consider rising prices in March 2023.
4% of responding West Midlands businesses reported the prices of goods or services brought in January 2023 when compared to the previous month had increased. 49.6% reported that prices had stayed the same.
2% of West Midlands businesses expect the number of employees will increase in March 2023, 57.4% expected the number of employees to stay the same and 5.3% of West Midlands businesses expect the number of employees to decrease.
5% of responding West Midlands businesses reported experiencing difficulties in recruiting employees in January 2023. However, 38.7% of West Midlands businesses did not experience any difficulties.
For the next 12 months, 41.6% of West Midlands businesses expect that overall performance will increase, 34.1% expect performance will stay the same and 9.6% expect performance will decrease.
Results from the Opinions and Lifestyle Survey reveal that respondents felt the four main issues facing the UK were; the cost of living (91%), NHS (85%), economy (74%) and climate change & the environment (58%).
48% of adults who pay energy bills said they found it very or somewhat difficult to afford them in the latest period (up from 47% in the previous period). This was higher at 64% among those in the most-deprived areas in England compared with 35% for the least-deprived areas.

Levelling Up

Local authorities have had a 20% reduction in real funding since 2010 and regarding Levelling Up funding were bidding for a centralised pot of money for the ‘opportunity’ to build something in their area. 74% of the 834 bids submitted were not accepted – the competitive funding nature of funding to reduce inequalities is still creating a gap between winners and losers. A patchwork approach to funding is not conducive to supporting local areas with the control or resources to realise the ambitions they have.
To make the most transformational impact, the funding needs to land in the pockets of the people and places that experience these inequalities in the first place. The principles of Doughnut Economics and Community Wealth Building emphasise that the economy and funding should be inclusive ‘by design’.
Practical implementation of projects matters. This means that a strategic case for the project must include a link to the future economic vision. Embedding a social value weighting into the procurement of projects is essential to ensure additional value is created for the people who live and work in the local area.

Devolution in England: Labour’s Plan to Put “The Right Powers in the Right Places”

In December 2022, the Labour Party published a new report: A New Britain: Renewing our Democracy and Rebuilding our Economy promising “the biggest ever transfer of political power out of Westminster and into the towns, cities, and nations of the UK” and providing 40 recommendations across a range of themes covering various facets of the UK’s constitutional arrangement.
To bring “the right powers in the right places” the report makes 10 recommendations:
1. Towns and cities in England to be given new powers to drive growth;
2. A radically reformed suite of place-based, innovation-led R&D programmes, with Mayors and local leaders in all parts of the UK playing a key role in design and delivery;
3. The UK Infrastructure Bank should be given an explicit mission to address regional economic inequality in infrastructure provision;
4. The British Business Bank should be given a new remit to promote regional economic equality in access to investment capital;
5. An economic growth/prosperity plan for every town and city to contribute to shared prosperity, owned by Councils, Mayors, towns and cities working in partnership;
6. 50,000 civil service jobs should be transferred out of London, saving at least £200m per year, and more Agency and Public Bodies Headquarters moved out of London;
7. Local government should be given greater long-term financial certainty;
8. Local government should be given more capacity to generate its own revenue;
9. Local leaders should be able to take new powers from the centre;
10. There should be “double devolution” that pushes power closer to people.
Some of the recommendations are a continuation of the current government’s plans to level up, including devolution of power – including in relation to skills, FE and transport – to existing combined authorities and partnerships of local authorities. Others are directed to a more fundamental change in the subnational governance system. New elements include: (a) A move away from competitive bidding processes towards 3-year block grants; (b) a commitment to neighbourhood-level devolution; and (c) local institutions being given rights to take powers from central government.

International Migration and the UK Labour Market

Employment of workers from outside the UK is one possible strategic and tactical response to address labour and skills shortages.
International migrants are typically younger than the UK population overall; they generally lower the average age of the workforce. Analysis by the ONS of all people arriving in England and Wales in the year before the 2021 Census shows that their median age was 26 years, compared with 40 years for the overall population.
The size and composition of flows are influenced by immigration policies. Immigration policies in both the UK and other countries matter because they influence the relative attractiveness of alternative destinations.
Net migration was at a high level of 504,000 in the year ending June 2022; the opening of new routes for Ukrainians and Hong Kong British Nationals (Overseas) status holders were key factors here.
EU net migration decreased sharply from 2016 onwards and then remained low. Between March 2016 and March 2020 EU net migration fell by 58%, with a 126% fall for EU-8 migrants (from Eastern & Central Europe).
From 1^st January 2021, the UK has had a new immigration system. Free movement arrangements for European Economic Area (EEA) nationals have been revoked. There is now a single skills-based system for all migrants to the UK that makes no distinction on the basis of nationality. Migrants coming to work in the UK need to be sponsored by an employer and work in at least a middle-skilled job paying a wage equal to or above a minimum salary threshold. There is no provision for migration to low-skilled jobs except on a temporary basis.
Estimates from the All-Party Parliamentary Group on Migration Inquiry in 2021 on The Impact of the New Immigration Rules on Employers in the UK show that international migrants face much higher costs in the UK than in various competing destinations.
Qualitative research conducted by the MAC focusing on employer experiences of skills shortages and migration indicates that both the Covid-19 pandemic and changes to the immigration system in 2021 have had a major impact on businesses and international migration, with the Covid-19 pandemic tended to be viewed as a short-term threat that would be overcome but the ending of free movement was seen as an ongoing threat.

Changing labour market participation of people aged 50 years and over

There has been considerable recent debate about levels of economic inactivity in the UK. Much of this debate has focused on economic inactivity amongst those aged 50 years over and the relative contributions of early retirement and of ill-health, alongside other factors.
Prior to the Covid-19 pandemic labour market participation amongst older workers was increasing, particularly amongst older women, while labour market participation rates amongst younger people decreased. Since the Covid-19 pandemic, the increase in economic inactivity amongst older people has reinforced the ageing effect of an older population.
The reversal of the previous trend of an increase in participation rates occurred at a time when the cohort aged 50-64 was particularly large. In the next decade, it would be expected that nearly everyone in this large birth cohort would be retired.
In a study on the rise in economic inactivity in people in their 50s and 60s published in the summer of 2022, the IFS concluded that a lifestyle choice to retire as a result of changes in preferences and priorities following the Covid-19 pandemic is the major factor explaining the increase in economic inactivity in this age group.
There has been a rise in long-term sickness in the UK since the start of the Covid-19 pandemic albeit long-term sickness was on an upward trend before the Covid-19 pandemic hit. ONS analysis shows that between June 2019 and June 2022, the number of people aged 50-64 who were economically inactive due to long-term sickness rose by 16%, from nearly 1.137 million to 1.320 million.
The ONS Over 50s Lifestyle Study conducted in August 2022 on adults aged 50 to 65 years shows that of those who left or lost their job since the start of the Covid-19 pandemic and had not returned to work only a small minority were looking for work: 14% of those aged 50-59 years and 6% of those aged 60-65 years. A key reason for not returning to work was retirement, cited by 37% of 50-59 year olds and 60% of 60-65 year olds.
Labour demand factors – including flexible working hours and good pay – are likely to play an important role in enticing the over the 50s back into the labour force.
Research by Phoenix Insights on What is driving the Great Retirement?, based on polling of residents aged over 50 years in the UK, Germany and the USA showed that there are significantly more negative attitudes to work in the UK than in Germany and the USA and views towards work have been changed more profoundly by the Covid-19 pandemic. 58% of workers in the UK said they liked their job, compared to 74% in the USA and 73% in Germany.
Policy needs to recognise the diversity of older people who are economically inactive, the reasons for their inactivity and their desire (or otherwise) to return to the workforce. There is a clear distinction between those who have withdrawn from the workforce voluntarily before the State Pension Age and have the financial capability to sustain their desired lifestyle and those who have left low-paid work because of ill health and who are not financially comfortable.
The Learning and Work Institute highlights the need for individually tailored support via trusted institutions. There is a role for place-based policy here through shaping the local employment support offer and aligning it with other local provision. The Resolution Foundation points to possible reform of the role of access to tax-relieved financial pension wealth from the age of 55 years which currently helps to support early retirement.

Download and view a copy of the West Midlands Economic Monitor

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.