West Midlands Economic Impact Monitor – 3 February 2023

This fortnight the second round of the Levelling Up Fund has been announced causing a significant reaction. We have yet to see the full results of the inquiry into the Levelling Up policy implementation and what it may say about the process. The IMF is still not positive about the UK economy; the forecast has been downgraded.

Economy

Global growth for 2023 has been revised upwards by 0.2% since October’s forecast. Global growth is now set to fall from 3.4% in 2022 to 2.9% in 2023, rising to 3.1% in 2024. However, the 2.9% growth this year will be lower than the historical average (2000-19) of 3.8%.
Central banks are raising interest rates to combat inflation. Russia’s invasion of Ukraine will continue to weigh on economic activity. The surge in Covid-19 in China was a dampener on growth in 2022 but the re-opening of the economy is expected to lead to a faster recovery.
Global inflation is expected to fall from 8.8% in 2022 to 6.6% in 2023 and 4.3% in 2024. This is still above pre-pandemic (2017-19) levels of around 3.5%.
The IMF forecast was not optimistic about its UK forecast compared to its global forecast for this year. The IMF revised its growth forecast for the UK by 0.9 percentage points from its October forecast to a growth of -0.6% in 2023. IMF stated that this reflects the tighter fiscal and monetary policies, financial conditions and still-high energy retail prices weighing on household budgets. A likely factor in the downgrading of the UK growth forecast was the ‘mini budget’ in September 2022.
Wednesday 1^st February saw the most disruptive strike action yet, nicknamed ‘Walkout Wednesday’. It came as multiple unions choose to coordinate their strike action on the same day. 500,000 train drivers, civil servants, university staff and teachers have been striking.

Levelling Up Fund

The West Midlands had 8 successful projects winning £156m worth of funding or 7.5% of the total funding pot. This is a significant fall from the first round of funding, when the West Midlands had 11 successful projects, winning 10.5% of the total funding available.
In Round 1, the North West, the Midlands and Yorkshire & the Humber received most of the funding. The West Midlands received £33 per capita spending. The split between Labour and Conservative constituencies was 41.8% and 40.8% respectively. 56.2% were in priority 1 areas (of highest need according to the LU evidence base) only 8.6% were in the least priority area.
In Round 2, the North West received a higher proportion of funding than other regions. The areas which saw the largest decrease in funding allocation were Yorkshire & the Humber (-5.3%), the West Midlands (-4.1%) and the East Midlands (-3.5%). Most projects in this round (52.3%) were in Conservative areas, compared to 26.1% in Labour areas. 24 of the 58 successful projects in Conservative constituencies were in the top 100 most deprived local authorities in the UK. 55.9% (62) had a priority rating of 1.
In the 2^nd round, the second most deprived group (51 to 100) won most of the funding at 31%, with a per capita spend of £101.67. This differs from the first round when the most deprived LAs won the most funding, in this round they won 24.6% with an average spend per capita of £94.21.
The Levelling Up round 2 guidance states that ‘any successful bids a place has had in the first round will be subtracted from their bid allowance in the second round’.
Across both rounds, the North West (15.5%), East Midlands (10.1%) and South East (9.6%) received the most. Regions which have won the least funding so far were Northern Ireland (3.2%), London (5.7%) and the North East (5.5%).
216 projects have won funding across both rounds, 98 are in Conservative constituencies, winning £1.8bn or 49.8% of total funding. 70 projects that received funding are in Labour constituencies, winning £1.2bn or 33% of total funding. The rest of the funding was won by other parties. 13 projects were multi-locational and spanned several LAs/party affiliations.
The most deprived group received the most funding in England, 32.6%. However, they saw the lowest spend per capita at £57.75. Whilst LAs in the least deprived group received the least funding at 0.8%, they had the highest spend per head of £554.62.

Manufacturing and competitiveness – MakeUK

The impact of high energy prices shows no signs of abating on manufacturers as they enter 2023. Rising energy costs are anticipated to be the biggest cost facing manufacturers in 2023. An overwhelming 70% of manufacturing leaders said that energy costs are expected to increase significantly in 2023.
The biggest risk to manufacturers’ competitiveness in 2023 is the increasing cost of producing goods and services. Manufacturers still face significant upward pressure on input costs, as lingering shortages of raw materials across the world remain, with demand vastly outstripping supply. 58% of manufacturers identified this as the biggest risk they face to being competitive in 2023.
Reducing costs, increasing competitiveness and rebooting confidence is critical if we are to kickstart economic growth. This begins with a long-term economic vision. A lack of, and need for, a coordinated, regional approach to long-standing challenges is still missing from the Government.

The over 50s and implications for the workforce

When we see headlines about the number of the over-50s leaving the labour market, it should be recognised that this is a large cohort. ONS numbers show that of those leaving the workforce 1/3 are aged 55 to 59 years, and 1 in 10 are aged 50 to 54. The issue large size of this cohort relative to previous cohorts means it has a bigger impact. More women have worked in this cohort than in previous cohorts. Outflows from work have been compounded by post-pandemic illness and job fatigue in this cohort who were more likely to suffer from long Covid and other delayed health issues.
ONS has stated that of the people surveyed in August 2022, those in the 50-54 cohort are more likely than other cohorts to leave due to stress and not feeling supported in their job, and more likely to have lost their job. Of all people leaving the labour market, 3 in 10 have left to retire and 50% are aged between 60 and 65.
Also highlighted the majority (66%) owned their homes outright and have not returned to the labour market. Leavers were more likely to be debt free (61%) compared with those who left their job and returned to work (42% debt free).
This younger cohort, in their late 50s and early 60s, is also less reliant on state pensions and have healthier personal pensions. This means the ability to retire early has become more accessible.
Since the 1960s boom, birth rates have dropped dramatically. Greater industrialisation, urbanisation, and rising affluence are drivers. This is a spillover effect of more women working, being educated, and earning. It has been seen globally that investing in women leads to smaller, healthier families and general economic growth. This means that successive low birth cohorts have led to reduced numbers entering the workforce, this has been compounded recently by the raising of the school leaving age to 18 (since 2015). As the boomer generation exits employment this leaves a larger relative hole in the workforce that needs to be filled through other means.
In terms of immigration, the UK has broadly in line with other high-income countries. There have been increases in temporary workers and students recently, but these are usually short-term moves and migrants often leave after a couple of years. Up to 2016 the largest component in immigration was EU citizens; by June 2022 they did not contribute to net migration at all.
Reduced in-migration has a double hit, not only in terms of immediate workers but longer term in relation to fertility rates; in 2014 non-UK mothers accounted for 27%, rising from 19.5% in 2004, of all births in England and Wales, so longer term the births will reduce if immigration reduces.
The labour pool will continue to reduce significantly as the next birth peak after 1960 was not until 1990; this means there are 30 years of reduced population. This peak was also half the previous peaks, and the next peak was in 2010, so it will be another 10 years until those young people enter the labour market. Businesses will continue to find it difficult to fill posts. As the 1970s trough (people in their late 40s or early 50s) is now moving into senior and middle management this also reduces the pool of experienced people who will lead responses to this labour constraint.
Labour constraints are likely to continue for many decades. Opportunities and responses to labour market issues may need to focus on the UK birth rate in the long run; in the short-term migrant labour or technology solutions may become more acute.
Globally population growth is uneven, and although western countries are seeing population decline other countries are still in transition as health, economic and education opportunities are improved. The challenge for international policy is how much the growth constraints in some countries are tackled through the redistribution of the working-age population.

Productivity in the West Midlands

At the national level, capital shallowing (workers having less capital per hour worked) and slower growth in multi-factor productivity (which can be driven by technological progress, economies of scale, improved management or business processes or efficient use of inputs) has been a drag on labour productivity growth (output per hour worked) since the 2008 economic downturn.
The former, accounting for around a third of the productivity gap, is likely the result of business uncertainty driving a reluctance to invest in capital, which is often the less flexible input to production (compared to labour). In contrast, labour composition (or the quality of labour) has maintained its pre-downturn trend and helped to mitigate the extent of the productivity gap with the pre-downturn trend.
In the West Midlands region, labour productivity was 11% below the UK in 2019, and 33% lower than the most productive region (London).
If the West Midlands had the same industrial structure as GB (but retained its average productivity for each industry) it would have an 11-percentage point gap in productivity with the GB average (firm productivity index). In contrast, if it retained its industrial structure but each industry had the same productivity as GB the productivity gap would only be 1 percentage point – pointing to inform productivity issues but a strong industrial structure.
In the West Midlands, the industry mix effect is positive (+3-percentage points) but not large enough to offset the firm productivity effect (-11 percentage points).
Given the size of the Less Knowledge Intensive Sector (LKIS) (making up over half of the local plants in the West Midlands and accounting for nearly 60% of employment) it is key to explaining the aggregate productivity gap.
Local plant productivity in the West Midlands Less Knowledge Intensive Services is the most widely spread; those in the top 75% are 3.2 times more productive than those in the bottom 25%. Meanwhile, the spread of plant productivity in Knowledge Intensive Services and Manufacturing sectors is very low.
The high median productivity of micro firms can be partly explained by their higher share in the more productive KIS industries. In the West Midlands, whilst 76% of all local plants were micro firms this proportion rises to 89% and 87% within KIS and ‘Other’ sectors respectively.
The West Midlands has a high share of plants in the LKIS within the top 20% of the productivity distribution. With nearly one in every 2 plants in the top 20% (48%) the share is over 4 times larger than in London (11%) and 9 percentage points above the second highest region (North East).
London and the South East, which have productivity above the UK average, have the top 20% of the productivity distribution dominated by plants in the KIS.
In the non-financial business economy, differences within industries explain more of the UK regional productivity gaps. Some of this may be due to regional price differentials that are not picked up in the data, particularly in the non-tradeable goods/services. Some may also be the result of the data not being quality adjusted (so not accounting for occupational/skill composition) within the same industry across regions or due to other differences hidden in the sector classifications. For example, a multinational law firm in London may have a different specialisation (hence different labour productivity levels) to a small local law firm elsewhere. Still, both will have the same two-digit industry grouping.
Firm productivity differences can also be driven by a myriad of internal (age, size, management, foreign investment) and external (infrastructure, agglomeration, market size etc) factors. Further research may be needed to see how these affect the firm productivity within the West Midlands specifically.

Real-Time indicators

Nationally, between the 13^th and 20^th January 2023, total online job adverts increased by 3.4%.
WM online job postings rose by 2.1% and on Jan/23, it was at 105.6% of the average level in Feb/20.
5% of WM businesses reported that turnover in Dec 2022 had increased when compared to the previous calendar month. 33.5% of WM businesses reported turnover had stayed the same. However, 37.8% reported that turnover had decreased.
6% of WM businesses reported economic uncertainty was impacting turnover.
2% of WM businesses expect turnover to increase in Feb 2023. 45.8% reported expectations of turnover to stay the same. However, 17.0% of WM businesses expect a turnover decrease in Feb 2023.
9% of WM businesses have had to absorb costs due to price rises.
2% of WM businesses reported in Dec 2022 when compared to the previous month, that the number of employees increased, 62.1% reported the number of employees had stayed the same and 13.2% of WM businesses reported the number of employees had decreased.
4% of WM businesses expect the number of employees will increase in Feb 2023, 57.9% expected them to stay the same and 9.0% of WM businesses expect the number to decrease.
0% of WM businesses reported experiencing difficulties in recruiting employees in Dec 2022. However, 38.7% of responding WM businesses did not experience any difficulties
0% of WM businesses reported that the difficulties in recruiting employees were due to a low number of applications for the roles on offer.
3% of WM businesses reported that debt repayments were between 50% and 100% of turnover in December 2022. 3.0% reported that repayments were between 20% and 50% of turnover. 25.6% reported that repayments were up to 20% of turnover.
7% of WM businesses reported that overall performance in Dec/22 increased when compared to Dec/21. 38.3% of performance had stayed the same and 22.5% reported that performance had decreased.
In the latest period, respondents felt the four main issues facing the UK were; the cost of living (93%), NHS (89%), economy (76%) and climate change & the environment (59%).
16% of adults reported having no savings in the latest period (remained the same as the previous period). 7% of adults reported having a direct debit, a standing order, or a bill that they were unable to pay in the past month (down from 8% in the previous period).
46% of adults who pay energy bills said they found it very or somewhat difficult to afford them in the latest period (remaining the same as the previous period).

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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.