This fortnight we saw another budget announcement, which has highlighted the global and national economic situation post pandemic and makes it difficult to read, we have a full summary of activities and an assessment of some of the implications for the region. PMI is reflecting the low current business confidence, as energy prices rise, and availability of skills gets tighter. OECD is projecting that the global economy will grow below the outcomes expected before the war – at a modest 3.1% this year, before slowing to 2.2% in 2023 and recovering moderately to a still sub-par 2.7% pace in 2024
- Rapidly rising inflation: Inflation has risen to 11.1% in the 12 months up to October, highest rate of inflation since the 1970s. largely due to energy, food and beverage price increases.
- Energy Prices: Energy prices are set to continue to rise with City REDI forecasts show that energy prices could rise as high as £6,600 in April 2023 without a price cap for households. For a small business energy prices will be between £11,650 and £20,077 from April 2023, based on average gas and electricity usage.
- Tight Labour Market: Job vacancies and unemployment are at a ratio of 1:1. Due to people retiring and an upturn in people with long term health conditions. Economically inactive due to a long-term sickness rose from 2 million people to 2.5 million.
- High interest rates: Interest rates are at their highest since before the financial crash, at 3%.
- Recession– As of the third quarter of 2022 the economy has entered a recession, that the OBR forecasts to last for a year, with an expected 2% fall in GDP
- Living standards– Inflation is set to erode real wages and reduce living standards by 7% by the 2023 financial year, wiping out the last 8 years of growth.
- Unemployment– This is set to rise from 3.5% to 4.9% by 2024
- The Deficit– Is set to rise from £133.3bn (5.7% of GDP) last year, to £177.0bn (7.1£ f GDP) this year. However, borrowing will then fall to £140bn (5.5% of GDP), as a result of tax rises and scaled back support, continuing to fall to £69.2bn (2.4% of GDP) in 2017/28.
- Public Spending– Despite expected departmental cuts from 2024, total public spending rise from 39.3% of GDP to 43.4%in 2017/28. This is 2.9% higher than forecasted in March, reflecting higher debt interest rates and welfare spending raising cash spending.
- Government Debt– higher borrowing is set to push underlying debt from 84.3% of GDP to 97.6% in 2025. With the share of revenues consumed by servicing the debt rises from under 5% in 2019/20 to 8.55 in 2017/28, meaning public finances will be more vulnerable to future shocks.
- Spending cuts will be delayed by 2 years, but are expected to total £30bn. From the 2024 financial year day-to-day departmental spending for unprotected departments will rise by 1% per year for three years, this will be a significant cut for some departments.
- A taskforce has been announced, which will focus on an initiative to insulate homes and upgrade boilers, with an extra £6bn in funding from 2025 to 2028
- £280m to be invested in the DWP to crack down on benefit fraud and errors
- The Chancellor will continue with the second round of the levelling up fund, at least matching the £1.7bn value of the first round
- The top 45% rate of tax will now be paid on earnings over £125,140, instead of £150,000
- Income tax personal allowance and higher rate thresholds frozen until April 2028
- National Insurance and inheritance tax thresholds will remain frozen until April 2028
- Local councils in England will be able to raise council tax up to a 5% a year without a local vote
- Dividend allowance will be cut from £2,000 to £1,000 next year and to £500 from April 2024
- National living wage will raise to £10.42 from £9.50 for those over 23 from April 2023.
- State Pension, means-test and disability benefits will increase in line with inflation by 10.1%. 82,116 people claiming disability benefits, 176,130 people receiving housing benefits, alongside other means tested benefit claimants in the WMCA will see them rise with the 10.1% level.
- The household energy price cap will be extended for one year from April 2023; however, the cap will increase to £3,000 per year instead of £2,500. From the current cap therefore, average WMCA household energy bill will see a £519 increase from April. WMCA household energy bill being 174% higher than the average England energy bill was in April 2021. This is going to severely impact WMCA households, across the WMCA in 2020 average household poverty was already 3%. Companies have already seen bills increase under the current cap by 90% since Autumn 2021, if there is no support offered from April, then since Autumn last year business will have seen their energy bills increase between 282% and 320% based on consumption levels. This will be devasting for many businesses, especially those already struggling with high energy costs. Red Flag Alert data shows 8,054 businesses are at risk of closure, due to rising energy prices and their low financial stability rating
- The investment zones are set to be refocused to catalyse on a limited number of high potential clusters, working with local stakeholders, set to be announced in the coming months. Therefore, existing expressions of interest have been scrapped. Instead investment zones will be centred around universities in “left-behind” areas, to build growth clusters, with further announcements being made in the Spring budget
- The government has restated its commitment to agree trailblazer devolution deals with GM and the WM, seeing more devolved powers in areas including skills, transport and housing
- According to the IFS by 2027-28 the total number of people paying income tax will have risen from 34 million to 35.6 million (rising from 63% to 66% of the adult population retrospectively). With the number of higher- or additional-rate taxpayers is set to rise from 6.1 million to 7.8 million (11% and 15% of the adult population respectively). This is the highest proportion of adults paying tax since the beginning of individual income tax.
- For small businesses the frozen VAT registration threshold at £85,000 could also be seen as a stealth tax. As the rate won’t rise in-line with inflation
- The WM Business Activity Index rose from a 20-month low of 47.8 in September 2022 to 49.6 in October 2022 – although, remained below the 50-growth mark as WM firms struggled to secure new business. WM firms reported clients reducing spending linked to recession fears and financial difficulties.
- WM was the second highest region for business activity in October 2022.
- The UK Business Activity Index decreased from 49.1 in September 2022 to 48.2 in October 2022.
- The WM Future Business Activity Index decreased from 64.4 in September 2022 to 60.7 in October 2022. WM firms remained confident in the rise of output in the next 12 month but the degree of optimism towards business growth was at its lowest level since the first Covid-19 lockdown in early 2020. The decline in optimism was linked to concerns over the economic outlook and customer spending.
- WM was third highest for Future Business Activity in October 2022.
Regional Labour Market Summary
- WM Region employment rate was 74.1%, decreased by 0.8 percentage points (pp) and a 0.2 decrease when compared to the same period in the previous year. The UK employment rate was 75.5%.
- WM Region unemployment rate was 4.7% – the highest rate across all UK regions. The WM unemployment rate has increased by 0.1pp since the previous quarter but a decrease of 0.1pp from the previous year. UK unemployment rate was 3.6%, a decrease of 0.2pp from the previous quarter and a 0.7pp decrease when compared to the previous year.
- WM Region economic inactivity rate was 22.1%, an increase of 0.8pp from previous quarter and an increase of 0.4pp when compared to the previous year. The UK economic inactivity rate was 21.6%.
- ONS has conducted research into inflation vs wage growth, finding that the only industry in which wage growth outpaced inflation was the Professional and Scientific industry.
- Wage growth increases over this year have been because of record high vacancies. Worker shortages have driven wage increases, as employers compete to attract and retain labour. The ONS found 4/5 industries where wage growth stayed above inflation in early 2022 (professional and scientific, information and communication, retail and finance), also had vacancy rates in June 2022 that were 1.5 or more percentage points higher than a year before.
- Hospitality has also seen significant wage growth, largely because of people leaving the industry during in pandemic and not returning.
WMCA (3 LEP) Claimant Summary
- There were 143,050 claimants in the WMCA (3 LEP) area in October 2022. Since September 2022, there has been an increase of 0.4% (+595) claimants while the UK decreased by 0.1%. Compared to March 2020 (pre-pandemic figures), the number of claimants has increased by 21.7% (+25,460) in the WMCA (3 LEP) area, with the UK increasing by 18.9%.
- WMCA (3 LEP) the number of claimants as a proportion of residents aged 16 – 64 years old was 5.4% compared to 3.6% for the UK in October 2022.
- There were 25,470 youth claimants in the WMCA (3 LEP) area in October 2022. an increase of 2.2% (+560) youth claimants in the WMCA (3 LEP) area, the growth rate matched the UK. When compared to March 2020 (pre pandemic figures), the number of youth claimants has increased by 12.8% (+2,890) in the WMCA (3 LEP) area, with the UK increasing by 7.6%.
- Overall, for the WMCA (3 LEP) the number of youth claimants as a percentage of residents aged 18-24 years old was 6.4% compared to 4.6% for the UK in October 2022.
- Quarter on Quarter analysis shows for the WM region, GDP growth increased by 0.2% in Quarter 1 2022, below the UK-wide growth of 0.7%.
- When the base year is 2019 (=100), in Q1 2022, the quarterly GDP indices for the WM was 96.9, an increase from 96.7 in the previous quarter.
- The latest quarter on quarter GDP percentage change shows for the WM that 10 industries and the overall total production industry contracted. The highest contraction in GDP was in manufacturing by 5.2%. In contrast, GDP growth was highest for arts, entertainment & recreation by 8.9%.
- The number of active enterprises continues to increase and in 2021 there were 170,680 in the WMCA (3 LEP) area. This has increased by 1.0% (a net increase of 1,760 enterprises) compared to 1.5% growth for the UK since 2020.
- There were 405 enterprises per 10,000 population in the WMCA (3 LEP) area in 2021, compared to 459 per 10,000 population for England.
- There were 60 enterprise births per 10,000 population in the WMCA (3 LEP) area in 2021, above the level reported across England (57 per 10,000).
- This week on the ONS released data on the year-on-year percentage change in private housing rental prices. The latest data shows that the average England rental property price has increased 3.7%, from October last year. Prices have just increased above average in the West Midlands at 3.9%. However, the largest rise in rental prices was in the East Midlands at 4.8%, with the lowest being in London at 3%.
- ONS has already found that around 6 in 10 renters were finding it difficult to afford energy bills and around 4 in 10 were finding it difficult to afford their rent. Comparative to mortgage holders where 4 in 10 were struggling with energy bills and 2 in 10 with mortgage payments. Renters were also more likely to be behind on energy bill repayment comparative to their mortgage holder counterparts.
- The government recent released its regional well-being data. As of Q2 this year well-being had remained relatively stable comparative to the previous Q1. When comparing well-being in the WM to the England average the two are very similar, with scores almost matching across each factor. Looking at the percentage of people that are very happy on each factor, it would suggest around 3 in 10 have strong well-being.
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.