This week has seen an escalation of tensions in Ukraine as Russia mobilises reservists. In the UK, the domestic economic news has been dominated by the announcement of, and fall out from, a ‘mini budget’. The cost-of-living crisis continues to escalate as inflation increases. Businesses are still struggling to deal with the impacts of energy and input costs, availability of materials, wage pressures and skills shortages.
- Russia started mobilising over 300,000 reservists ahead of heavily stage-managed votes in four occupied regions of Ukraine to join Russia.
- Following referenda in four regions in eastern Ukraine occupied by Russia in which Russia announced massive majorities in favour of joining Russia, Putin has threatened the use of his nuclear arsenal if Russia’s “territorial integrity” was “threatened”.
- EU foreign ministers have agreed to prepare a new package of sanctions against Russia. It is likely that other countries such as the US and UK will also increase sanctions.
‘Mini Budget’ and immediate aftermath
- On 23rd September the government released a ‘mini budget’ with the aim of helping to tackle and provide support for the growing cost of living crisis by offering around £45bn of tax reductions for people and businesses by 2027.
- Key tax announcements included a cut in the basic rate of income tax to 19% from 20% as of April 2023 and the 45% higher rate of income tax abolished for England, Wales and Northern Ireland taxpayers; scrapping of the health and social care levy and cancellation of the expected rise in corporation tax.
- Universal Credit rules are being tightened.
- Stamp duty on property purchases is being cut in England and Northern Ireland.
- Rules which limit bankers’ bonuses have been scrapped, with regulatory reforms expected later in the Autumn.
- The government is discussing setting up 38 new investment zones, with measures such as no business rates and stamp duty waived.
- Tax cuts and liberalised planning rules are to be offered to release land for housing and commercial use.
- Expert commentary on the ‘mini budget’ notes that while the tax reductions are substantial, their impact is forecast to only lower the tax burden to 2021-22 levels. This means the tax burden will still remain at its highest sustained level since the 1950s, according to the IFS.
- Resolution Foundation analysis indicates that the impact of tax cuts is that the richest fifth of households will be on average better-off by £3,090 next year. Whilst the poorest will gain only £230.
- While tax cuts may be intended to stimulate spending and investment there are various countervailing factors that are disincentivising investment, including lower business confidence, the failure to release an Office for Budget Responsibility (OBR) assessment, rising supply-side costs, falling consumer spending and increased interest rates.
- Since the ‘mini budget,’ there has been a run on the pound. The International Monetary Fund (IMF) has done something rarely seen for a G7 country and has openly criticised the UK government over its plan for tax cuts, warning that the cuts would likely fuel the cost-of-living crisis.
- The Bank of England has had to intervene as market volatility was at-risk of causing material risk to UK financial stability. It announced that it would start buying government bonds at an “urgent pace” to help restore “orderly market conditions”.
- With a continuing rise in interest rates expected, there has been a removal of mortgage products.
Energy Price Caps
- To protect households from energy price rises, the government has announced an Energy Price Guarantee (EPG). The EPG will raise household bills to £2,500 a year from 1st October from £1,971 currently; this is based on a household which uses 12,000 kWh of gas a year, and 2,900 kWh of electricity a year.
- In 2020 17.8% of households within the West Midlands were fuel poor.
- In terms of the impact of energy price rises on businesses, data from RedFlag, produced for WMREDI, shows that currently within the WMCA there are round 8,054 businesses with more than 10 employees which are classed as high energy users. Of these RedFlag data shows that 3,369 businesses would be at risk of closure, due to rising energy prices and their financial stability rating.
- To combat the rising energy prices and prevent businesses from going under, the government is capping the price that non-domestic consumers pay for both electricity and gas. The cap will fix wholesale prices for all non-domestic customers at £211 per MWh for electricity and £75 per MWh for gas.
Cost of living and doing business crisis
- Nationally, 82% of all adults reported being very or somewhat worried about rising costs of living in the past two weeks (81% in the previous period).
- 48% of adults who pay energy bills said they found it very or somewhat difficult to afford them in the latest period (45% in the previous period).
- 29% of adults reported that they found it very difficult or difficult to pay their usual household bills in the last month compared with a year ago, while 21% stated this was very easy or easy.
- 26% of adults reported being unable to save money as usual, 18% stated that they had to use savings to cover living costs and 17% said they had less money available to spend on food. 35% of adults reported that their household finances had not been affected in the past 7 days.
- Centre for Cities, identified the hardest-hit places by the cost of living crisis are cities and large towns in the North, but Midlands’ cities are badly affected too. The WMCA area (Birmingham, Solihull and the Black Country) is predicted to have the largest inflation rate amongst major English city-regions (10.8%); however, this rate is lower than in some northern towns.
- Wage growth has been more subdued in cities in the Midlands compared with Manchester and particularly with London.
- KPMG’s Economic Outlook indicates that the West Midlands region is having the slowest recovery in reaching pre-pandemic levels; the East Midlands is experiencing the 4th slowest recovery.
- Low-income households spend a larger proportion than average on energy and food. Hence, they will be affected relatively more by increases in their prices. The Resolution Foundation suggests that low-income households will have to reduce their spending by three times as much as high-income households to afford their energy bills.
- ONS surveys suggest that households in the West Midlands spend more on housing, fuel and power (15% of total expenditure) than all other regions outside London other than the South West
- Business confidence in the West Midlands has dropped back into negative territory as companies grapple with the rising cost of doing business. Sentiment tracked by ICAEW’s Business Confidence Monitor (BCM) for the West Midlands for Q3 2022 found confidence at -8.1. Companies in the region face rising costs, supply-side issues and a global surge in energy prices, despite a strong sales performance
- The industrial structure of the Midlands Engine economy means it is more at risk from increased energy costs than any other region. The Midlands Engine has a concentration of GVA in particular sectors with high energy demand, such as manufacturing, transport and storage, and wholesale and retail trade of vehicles. These three sectors alone account for 32% of Midlands Engine GVA.
- Large parts of both the North and the Midlands remain the most vulnerable to the cost-of-living crisis – nearly 9 in 10 (87%) of the places in the top decile of the Centre for Progressive Policy’s (CPP’s) Cost of Living Vulnerability Index are based there. At the regional level, the four most vulnerable regions are the North East, North West, Yorkshire & the Humber and the West Midlands.
- Middlesbrough remains the most vulnerable local authority according to the index, but three out of the ‘top 5’ are now areas in the West Midlands: Sandwell (2nd), Walsall (3rd) and Wolverhampton (5th). Sandwell is ranked the most vulnerable in the poverty aspect of the index.
- CPP suggest that the findings underline a strong case for providing vulnerable places with greater financial assistance to deal with the crisis, allied with stable long-term funding to deliver sustainable inclusive growth. Recommendations include: revamp the Household Support Fund; reform the UK Shared Prosperity Fund so that it more than matches previous EU structural funds; a Business Transition Fund to support the transition of energy-intensive sectors to a decarbonised economy; and a Retrofitting Investment Fund to retrofit millions of homes and put the responsibility for delivery in local areas. A further recommendation is to allocate all funding to local areas based on need and not via competitive bidding while ensuring places can consolidate across funds available where possible.
- A snapshot from March 2022 shows that there were 149,565 enterprises in the WMCA (3 LEP) area, an increase of 0.6% (+935 enterprises) compared with the March 2021 snapshot, while the UK increased by 0.1%.
- The WMCA (3 LEP) area has a slightly higher proportion of enterprises with a turnover between £1m-£4.99m than the UK, at 7.0% of enterprises compared with 6.8%. The WMCA (3 LEP) matches the UK average for enterprises with turnovers between £5m – £49.99m at 2.0% of enterprises and £50m+ at 0.3% of total enterprises.
- In the WMCA (3 LEP) area, the highest proportion of enterprises by broad industrial grouping was in professional, scientific & technical, which accounted for 13.4% (20,055) of the business base; the UK proportion was 15.6%.
Labour market constraints in manufacturing
- There are 95,000 current manufacturing vacancies costing the British economy £7.7 billion a year. This represents a £21million daily loss to UK GDP.
- 50% of manufacturers say they cannot source the talent their business needs locally
- 62% reported that they will not find it easy to ensure their businesses have the skills they need to power ahead to 2030.
- Automation, digitalisation and environmental sustainability came out top of companies’ priority lists.
- 58% of manufacturers plan to recruit engineering technicians and 61% are prioritising production and process engineers between now and 2030.
- Automation is changing the focus of businesses, with over a quarter (27%) of companies saying that they need data analysts and 11% planning to recruit data scientists.
- Almost three-quarters (74%) of businesses expect demand for cognitive and metacognitive skills – like critical thinking, creative thinking and learning to learn – to increase with the transition to a green and digital future across manufacturing.
Economic and labour market real-time indicators
- Nationally, between the 9th and 16th September 2022, total online job adverts increased by 1.6%. West Midlands online job adverts increased by 0.9%. Vacancies were at 118.6% of the average level in February 2020.
- The System Average Price (SAP) of gas increased by 13% in the week to 18th September 2022 (from the previous week); it is now 106% higher than the equivalent level seen on 19th September 2021.
- 1% of West Midlands businesses reported that turnover in August 2022 had increased when compared with the previous calendar month. 41.3% reported turnover had stayed the same. 26.4% had reported that turnover had decreased.
- 1% of West Midlands businesses expect turnover to increase in October 2022. 48.9% reported expectations of turnover to stay the same. 14.5% expect a turnover decrease in October 2022.
- 1% of West Midlands businesses reported the prices of goods or services brought in August 2022 when compared to the previous month had increased. 41.0% reported that prices had stayed the same and 1.1% reported that prices of goods or services brought had decreased.
- 0% of West Midlands businesses reported in August 2022, when compared to the previous month, that the number of employees increased, 57.4% reported the number of employees had stayed the same and 13.2% reported the number of employees had decreased.
- 1% of West Midlands businesses expect to make redundancies over the next three months, 5.6% expect to make redundancies within the next two weeks, 16.7% expect to make redundancies between two weeks and one month ahead and 64.8% between one and three months ahead.
- 1% of West Midlands businesses reported experiencing difficulties in recruiting employees in August 2022. A slightly lower proportion (34.9%) of businesses did not experience any difficulties in recruitment.
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.
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.