West Midlands Impact Monitor- 13th May 2022

High inflation rates are combining with slower economic growth. The rising cost of living remains a key concern. These trends are partly fuelled by war in Ukraine, with geopolitical tensions heightening as Sweden and Finland sign new security deals with European allies. Regionally, the West Midlands Business Activity Index has decreased. But the picture is mixed. The cost of doing business crisis is causing continued concern for business and is leading to severe financial impacts for some. Yet there are other reports of relatively high confidence within the region’s business base and investment markets, particularly buoyed by the lack of Covid-19 restrictions and future growth prospects.

Global and national issues

High inflation rates in the US, EU and UK have largely been as a result of soaring energy and fuel prices, alongside the war in Ukraine, supply chain bottlenecks and surges in demand.
Intelligence suggests that Putin plans to continue war in Ukraine for the foreseeable future and tensions have been heightening as Sweden and Finland sign new security deals with European allies.
The war in Ukraine is now leading to food shortages in other world regions. As Ukraine is the sixth-largest exporter of wheat, the inability to securely get wheat out the country has sent prices skyrocketing, leading to sharp rises in the price of basic food goods and drinks.
Central banks are now attempting to walk a fine line between controlling inflation and slowing economic growth. Many forecasters are predicting that we may enter a global recession this year.
The National Institute of Economic and Social Research (NIESR) forecasts that GDP will increase by 3.5% in 2022 – declining in the third and fourth quarters – then by 0.8% in 2023 and 0.9% in 2024. The medium-term outlook for GDP growth is slow even by the standards of recent history, returning to 1.5% only in 2026. The combination of shocks – Brexit, Covid-19 and the recent shocks to energy prices – is set to leave the incomes of people in the UK permanently lower.
Rising prices and higher taxes are squeezing household budgets. For 2022-23 NIESR estimates that 1.5 million households across the UK face food and energy bills greater than their disposable income.
Tensions between the Northern Ireland, UK and EU are rising around the Northern Ireland protocol. In March the UK government unilaterally extended the “grace period” for Northern Ireland border checks, while in Northern elections last week Sinn Fein emerged as the party with most seats.

Queen’s Speech

The Queen’s Speech delivered to Parliament on 9^th May reiterated the commitment to level up opportunity in all parts of the country and support more people into work; support the police to make streets safer and fund the NHS to reduce Covid-19 backlogs. The speech also highlighted continued support for democracy and Ukraine. These commitments were within a responsible approach to public finances, reducing debt will reforming and cutting taxes, leaving very little room for investment in places.
Amongst the measures announced, the government intends to introduce the Levelling Up and Regeneration Bill which will drive local growth, empower leaders and reform planning systems. Councils will get new planning powers including dealing with empty shops.

Business activity

The West Midlands Business Activity Index decreased from 59.1 in March 2022 to 54.5 in April 2022. Where output rose, firms reported new contract wins, expanded capacities and the catching up of projects that had been delayed due to Covid-19. The upturn was restricted by subdued demand conditions, amid acute inflationary pressures and concerns around the cost of living.
Out of the 12 UK regions, the West Midlands was the second lowest for Business Activity in April 2022.
The UK Business Activity Index decreased from 60.9 in March 2022 to 58.2 in April 2022.
The West Midlands Future Business Activity Index decreased from 75.2 in March 2022 to 71.8 in April 2022. Despite the overall level of positive sentiment falling to a 17- month low, some firms remained upbeat due to new product launches, marketing efforts and expansion plans to support output over the course of the coming year. Optimism was restricted due to concerns over inflationary pressures and energy price volatility that would curb demand and business activity.
Out of the 12 UK regions, the West Midlands was joint third highest (with Wales) for Future Business Activity in April 2022.

Middle Market Business Index

The Middle Market Business Index (MMBI) registered its first fall – from 139.6 in the last quarter of 2021, to 134.9 in the first quarter of 2022.
However, the MMBI still suggests that middle market businesses are optimistic, and the forward-looking aspects of the survey show that firms had been expecting labour shortages and supply chain pressures to start easing in the first half of 2022.
Middle market businesses have clearly become much more concerned about the general economic outlook. Just 43% of firms said the economy improved in Q1, and expectations for the economy’s trajectory over the next six months have fallen by nine points, from 72% in Q4 to 63% in Q1.
Over the past year, middle market firms have ramped up investment in productivity-enhancing equipment, software and intellectual property, which should help them to be more competitive and productive as the pandemic becomes endemic. In the current quarter, 51% of respondents noted an increase in outlays on capital expenditures and 63% indicated that they expect to increase theirs over the next six months. This is one of the more constructive elements of the first quarter survey results.

Economic trends and West Midlands economic snapshot

West Midlands Quarterly Economic Snapshot for Q1 2022 shows that 66% faced recruitment difficulties in Q1 – a decrease of 6% compared to Q4 2022.
The West Midlands Regional trade in goods exports was worth £6.8bn in Q4 2021; a decrease of 6.7% compared with the same time period last year, while the UK levels increased by 4.6% to £130bn.
Business investment grew by 0.9% in Q4 if 2021, which is 0.8% lower than Q4 of the previous year. The level of investment is now 10.4% below where it was pre-pandemic (Q4 2019).
Gross domestic product (GDP) is estimated to have grown by 0.8% in January 2022 and is now 0.8% above its pre-coronavirus level. Services, particularly human health and social work activities, were the main contributor to this increase.
The West Midlands online job adverts on the 29^th April 2022 were at 141.3% of their average level in February 2020.
Google Mobility data provide an indicator of changes in the volume of visits to different location types compared with a pre-coronavirus baseline. As of the 29^th April 2022, visits to retail and recreation, transit stations and workplaces had not yet returned to pre-coronavirus levels.
Companies House data shows for the UK, there were 16,125 company incorporations in the week to 29^th April 2022. This is up from 15,476 recorded in the same week in 2021 and also higher when compared to the same weeks in 2020 (11,306) and 2019 (14,097).
Between February and March 2022, there was a rise in the percentage of businesses who reported that the prices of materials, goods or services bought had increased, from 39% to 50%. 31% of businesses expected to increase the prices of the goods or services they sold in April 2022. 41% of businesses reported energy prices was the main factor for rising prices for goods or services sold.

Regional and local business intelligence

There is a continuing mixed picture across the West Midlands’ business environment. On the one hand, the cost of living and cost of doing business crisis is causing continued concern for business and is leading to severe financial impacts for some. However, there are other reports of relatively high confidence within the region’s business base and investment markets, particularly buoyed by months of no Covid-19 restrictions and future growth prospects.
This confidence is reflected in the latest Business Barometer report from Lloyds Bank Commercial Banking; business confidence in the West Midlands rose 10 points in April to 42 per cent, the highest of any region or nation in the UK.
West Midlands businesses flagged a range of growth opportunities for the next six months, including investing in and expanding their teams (47 per cent), evolving their offering to include a new product or service (37 per cent), and entering new markets (35 per cent). Separate reports suggest strong 2022 performance in office markets and within business investment opportunities.
The drastically rising cost of key inputs – such as people, materials, energy – is damaging the competitiveness and sometimes feasibility of many West Midlands businesses. Inevitable cashflow pressures are unfortunately leading to firms being in financial stress and some facing closure. Data suggests that more than 13,200 businesses across the West Midlands found themselves in ‘significant’ financial distress during Q1 2022.
There have been further examples recently of regional businesses looking to re-shore their supply chain. This is partly linked with a focus on net zero strategies and reviews of supply chain management.
In the labour market candidate availability has fallen, with recruitment agencies stating that this has been due to a generally low unemployment rate and the added uncertainties related to the pandemic and situation in the Ukraine, with fewer EU workers and high demand for those that are available to work.
There are reports of companies are often unable to access much business support locally of present due to a lack of funded provision across the region, with many ERDF funded projects coming to an end and new projects not running yet.

UK Shared Prosperity Fund

The UK Shared Prosperity Fund (UKSPF) is a Government-allocated fund which is intended to reduce inequalities between communities, as part of the Government’s wider Levelling Up agenda. This Fund was first announced in 2017 and finally launched with the publication of its full prospectus on 13 April 2022.
In theory, the launch of the UK Shared Prosperity Fund (UKSPF) in April 2022 was a welcome boost to local economies. It will provide over £350m worth of funding over 3 years to 2023/25 across the Midlands Engine, supporting key local priorities and delivering activity for levelling up.
Analysis at the Midlands Engine geography scale suggests an estimated loss of £237.4m in funding over three years compared to pre-Brexit – a 40% cut. The West Midlands 3-LEP area as a whole is set to miss out on £94.3m worth of funding (a 39% cut). The Black Country is losing around £33.7m over the three years of funding, Greater Birmingham and Solihull £31.5m, Coventry & Warwickshire £29.1m, Greater Lincolnshire £19.0m, Derby, Derbyshire, Nottingham and Nottinghamshire £30.1m, Stoke and Staffordshire £28.1m, The Marches £16.2m and Worcestershire £7.9m.
So, the replacement for EU funding through UKSPF will be worth less, with more strings attached and less time to spend it.

Universities and levelling up

City-REDI has established a new Universities and Levelling Up Policy Forum from across central government, universities and higher education policy makers/funders, to look at the role universities can play in levelling up and look at the purpose, role and funding of universities post the White paper.
Following the Civic University Commission report in 2019, universities have demonstrated a growing commitment to civic engagement: over 100 universities have now joined the Civic University Network. Many of them are giving civic engagement and social mission greater prominence in their strategic plans. Even though universities do not feature extensively in the White Paper, levelling up poses new challenges, especially for those institutions located in or near ‘left behind places’ or in regions where the government wants to see purposeful collaboration between government, business and other partners to address the White Paper’s spatial rebalancing objectives and the 12 missions it identifies.
Despite the level of detail in the White Paper, what is meant by levelling up remains imprecise. Much more clarity is needed on the scope and expected outcomes at both national and local levels in order to facilitate measurement and evaluation and to inform understanding of the mechanisms involved in the delivery and of the roles of partners, including universities.
Effective performance and accountability frameworks for understanding what works, what doesn’t, and why different arrangements are needed, alongside processes that facilitate shared learning. Universities can play a key role here, by sharing their research and expertise, supporting knowledge mobilisation (amongst local partners and between localities) and by working together to design new tools and approaches.
Although there is much focus on R&D in the white paper, the impact of universities spans the whole agenda of the white paper this forum will continue to explore these issues.

Creative industries

The creative industries have been a fast-growing part of the national economy, with strong export potential. In 2016, the creative industries were estimated to add almost £92bn in national GVA and grew by almost double the UK average in the period 2010-2016. The two most significant sectors (in financial terms) are IT, Games and Software (£34.7bn) followed by Film and Television (£15.3bn).
Birmingham has been identified by NESTA as a ‘Creative Challenger’: noted for specialization in creative industries’ sub-sectors, and characterised by high growth firms. Birmingham is known for Peaky Blinders, also housing BBC offices with plans for expansion. It hosts a burgeoning creative & digital sector. There is an internationally important video game cluster around Leamington Spa.
The creative industries in the UK are currently facing a triple challenge, recovering from the COVID-19 pandemic, adjusting to the UK’s exit from the EU, as well as feeling the effects of a decade of austerity, with sustained funding cuts across the sector.
TV and Film, Video Games and IT are high-growth sectors with huge potential but are suffering from serious skill shortages and gaps in experienced positions.

Energy

Global final energy consumption grew by 6% between 2015 to 2019, and total GHG emissions from energy systems rose by 2.7% during the same period. On the other hand, energy generated by global solar PV grew by 170% ( to 680TWh), and wind power increased by 70% (to 1420TWh) from 2015 to 2019.
The West Midlands has set targets and to reach them, more than £15bn is being invested in local energy projects, £74bn on products and services to improve the quality of local energy systems, and £80bn is being spent on fuel and power that drives industry and homes in the West Midlands by 2030.
The low carbon energy and environment sector in the West Midlands contributed £26.6bn to the region’s economy in 2019/20 through 10,500 businesses which employed over 195,000

Air transport

Over the last 20 years, Manchester, Edinburgh, and Birmingham were seen as the key airports to be served by foreign carriers. The pecking order for UK aviation has always been Heathrow first, then Gatwick, Manchester, Birmingham and, or Edinburgh. For the Midlands, at peak air passenger throughput, the local airport generated a regional economic impact in 2017/18 (as reported by the consultants, York Aviation) was some £1.7bn GVA and 33,000 jobs.
Airlines and airports want business class passengers, they make airlines more money notwithstanding the volumes of economy passengers who would flood the duty-free/retail stores
Should aviation recover from the pandemic, the spectre of controlled travel may still be on the horizon because of the dystopian possibilities of carbon emissions and climate change. The climate conference, COP 26, at Glasgow might just set a new direction of travel for the industry but unless a new way is found to capture the prize of global interaction, aviation wealth creation may stay tantalisingly out of reach.

Covid-19 infections

Covid-19 case numbers across Europe have continued to fall in all countries, except Portugal which has seen a rise.
In England, it is estimated that 1,586,900 people had COVID-19 (95% credible interval: 1,516,200 to 1,659,000) in the week ending 30 April 2022, equating to 2.91% of the population or around 1 in 35 people.

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.