Foreword Welcome to October s UK Powerhouse report. It s certainly been an interesting couple of months from a political and economic point of view. Since July and the decision at the end of June for the UK to leave the EU, we now have a new Prime Minister, a new-look Cabinet, a new Chancellor and even a new Minister responsible for the Northern Powerhouse. Despite the appointment of Andrew Percy to his new role, there has been much discussion about whether George Osborne s Northern Powerhouse project will continue to receive the support from the new PM. There were some mixed signals but it now looks like she will, and in a recent article, Theresa May revealed her commitment by saying that she will help the great cities and towns of the North pool their strengths and take on the world. Backing up George Osborne s calls for economic rebalancing, she also expressed her determination to make the Midlands an engine for growth. Following a close look at the Northern Powerhouse in our previous report, this latest quarterly UK Powerhouse study analyses the so called Midlands Engine. Experts at the Centre for Economic and Business Research (Cebr) have looked, in particular, at the automotive manufacturing sector in the region and examined what the future holds in a post- Brexit environment. 2
UK POWERHOUSE Help the great cities and towns of the North pool their strengths and take on the world. Theresa May There s also the usual summary of how the wider economy is performing as well as our quarterly league table of city economic performance, which provides a unique insight into whether the Government s economic rebalancing plans are working. I hope that you find the report interesting and I look forward to receiving your feedback. Niall Baker CEO of Business Legal Services E: niall.baker@irwinmitchell.com 3 A report for Irwin Mitchell Centre for Economics and Business Research
Irwin Mitchell s City Growth Tracker Official economic data sources for the UK s cities are often dated the last set of regional economic accounts corresponds to the economy in 2015. To more accurately estimate current economic activity, Cebr has utilised a range of more timely indicators to create a nowcast of GVA* and employment for a range of key cities across the UK. These latest outputs give us a picture of how the regional economies of the UK are performing. Contents UK Economy GDP Labour market UK Cities in Q2 2016 GVA growth Employment How the UK automotive sector has shaped growth across the Midlands The UK automotive industry The Midlands Engine Looking ahead *GVA: Gross added value (the value of goods and services produced) 4
UK POWERHOUSE Key Facts Quarterly GDP growth in the UK economy accelerated to 0.6% in Q2 2016, up from the 0.4% recorded in the first three months of 2016. On an annual basis, output across the UK economy stands 2.3% higher in real terms than in Q2 2015. Cambridge and Milton Keynes once again topped the tables in terms of GVA growth whilst Manchester and Inner London saw faster growth in Q2 as a result of increased activity across the business services sector. Whilst manufacturing experienced a strong uptick in growth in the second quarter of the year, the sector has generally struggled since the beginning of 2015. In contrast, the UK s automotive industry has reached record levels of production helping to boost the outlook for the Midlands economy. We welcome the continued support that the government is putting behind its economic rebalancing plans and believe that this report highlights the importance of initiatives such as the Northern Powerhouse and the Midlands Engine. Vicky Brackett CEO Corporate and Commercial Litigation 5 A report for Irwin Mitchell Centre for Economics and Business Research
UK economy rebounds in the second quarter of 2016 despite referendum uncertainty After a slow start to 2016, quarterly growth in the UK economy accelerated to 0.6% in the second quarter of the year, up from 0.4% in the first three months of the year. On an annual basis, growth recovered to 2.2%, just marginally lower than the 2.3% year-on-year growth recorded in the second quarter of 2015. On a sectoral basis, two of the four main industrial sectors experienced positive growth whilst the other half saw output contract compared with the first quarter of 2016. The UK service sector experienced its 14th consecutive quarter of positive growth, up 0.5% quarter-on-quarter. At the same time, the production sector saw a broad increase in output, rising 2.1% compared with the first quarter with each of the sub-indices experiencing positive growth in the latest quarter. In contrast, output in the construction sector once again declined, dropping 0.7% between Q1 2016 and Q2 2016. Following little to no growth since the beginning of 2015, the sharp rise in output across the UK s manufacturing sector reflects a marked reversal in fortunes. Within the sector, a range of industries recovered from a weak start to 2016. For instance, after contracting in the first three months of the year, the pharmaceuticals industry saw output rise by 6.4% in the second quarter. The recovery across the sector was supported by both the domestic economy and some improvements in export competitiveness following the declines in sterling against currencies such as the euro and the US dollar since the end of 2015. 6
UK POWERHOUSE Figure 1 UK GDP quarterly average compound growth by industry sector before and after the 2008 to 2009 economic downturn Source: Office for National Statistics, Cebr analysis On an expenditure basis, GDP growth was once again centrally supported by increases in household spending, which rose by 0.9% compared with the previous quarter. Interestingly, despite uncertainty in the run up to the referendum on the UK s membership of the EU at the end of June, business investment rose in the second quarter providing a further boost to growth. However, net trade once again weighed on quarterly GDP growth. Alongside an uptick in economic growth in the second quarter of the year, the UK also saw further improvements in the labour market for the three months to June 2016. Having stood at 5.1% in the first three months of the year, the rate of unemployment across the UK dropped to an 11 year low of 4.9% in the second quarter of 2016. 7 A report for Irwin Mitchell Centre for Economics and Business Research
UK Cities in Q2 2016 GVA League table ranking (arrows indicate change in position since last quarter) GVA Q2 2016, millions (Annualised, Constant 2012 prices) Growth (YoY) 1 Cambridge 1 8,541 2.7% 2 Milton Keynes 1 10,315 2.7% 3 Manchester 4 16,041 2.5% 4 Inner London 20 244,320 2.5% 5 Coventry 3 7,162 2.5% 6 Oxford 3 7,965 2.4% 7 Ipswich 6 4,115 2.4% 8 London 7 362,317 2.4% 9 Birmingham 3 23,090 2.4% 10 Southampton 5,737 2.3% 11 Bristol 2 13,125 2.3% 12 Greater Manchester 56,923 2.3% 13 Sunderland 8 5,274 2.3% 14 Outer London 10 117,997 2.2% 15 Peterborough 2 5,302 2.2% 16 Derby 16 6,810 2.2% 17 Nottingham 11 7,945 2.2% 18 Liverpool 19 10,324 2.2% 19 Newcastle 5 8,875 2.2% 8
UK POWERHOUSE UK Cities in Q2 2016 GVA continued 20 Bournemouth 2 4,472 2.2% 21 Leeds 19,895 2.2% 22 Norwich 7 6,195 2.2% 23 Brighton 10 6,723 2.1% 24 Glasgow 2 19,047 2.1% 25 Edinburgh 10 17,311 2.1% 26 Wolverhampton 1 4,589 2.1% 27 Cardiff 8 9,046 2.1% 28 Hull 3 4,958 2.1% 29 Stoke-on-Trent 4,828 2.0% 30 Leicester 3 7,034 1.9% 31 Swansea 2 4,341 1.8% 32 Belfast 5 9,600 1.8% 33 Sheffield 3 11,035 1.8% 34 Portsmouth 11 5,309 1.8% 35 Bradford 1 8,982 1.8% 36 Middlesbrough 2 3,222 1.7% 37 Aberdeen 11 12,037 1.7% 38 Plymouth 4 5,086 1.7% 9 A report for Irwin Mitchell Centre for Economics and Business Research
UK Cities in Q2 2016 Employment League table ranking (arrows indicate change in position since last quarter) Level, Q2 2016 Annual % Change 10 1 Liverpool 2 289,093 3.5% 2 Milton Keynes 2 161,179 3.4% 3 Glasgow 1 455,627 3.4% 4 Stoke-on-Trent 3 115,973 3.3% 5 Peterborough 3 111,105 2.2% 6 Leicester 3 206,134 2.1% 7 Birmingham 2 543,716 2.0% 8 Outer London 3 1,724,332 2.0% 9 Leeds 5 449,268 2.0% 10 Hull 3 146,070 1.9% 11 London 7 4,783,818 1.8% 12 Southampton 6 150,774 1.8% 13 Norwich 8 123,488 1.7% 14 Inner London 7 3,059,486 1.7% 15 Manchester 3 418,369 1.6% 16 Coventry 6 176,181 1.5% 17 Greater Manchester 4 1,226,792 1.5% 18 Belfast 2 125,535 1.4% 19 Oxford 2 126,965 1.3%
UK POWERHOUSE UK Cities in Q2 2016 Employment continued 20 Bristol 3 338,669 1.0% 21 Cambridge 7 123,995 1.0% 22 Swansea 3 114,263 1.0% 23 Newcastle 1 212,809 1.0% 24 Bournemouth 9 87,591 0.9% 25 Nottingham 1 227,442 0.8% 26 Edinburgh 10 322,118 0.8% 27 Sunderland 2 119,227 0.7% 28 Plymouth 2 138,594 0.5% 29 Derby 2 145,519 0.5% 30 Brighton 132,534 0.5% 31 Aberdeen 2 192,362 0.5% 32 Cardiff 5 210,991 0.4% 33 Wolverhampton 19 112,714 0.4% 34 Middlesbrough 1 72,765 0.4% 35 Ipswich 9 77,256 0.3% 36 Sheffield 1 275,387 0.1% 37 Bradford 3 211,495-0.2% 38 Portsmouth 2 108,651-0.3% 11 A report for Irwin Mitchell Centre for Economics and Business Research
The range of cities covered by the City Tracker all saw annual growth accelerate over the course of the second quarter of the year. Across the cities, growth ranged from a low of 1.7% in Plymouth to the 2.7% seen in Cambridge, which moved just ahead of Milton Keynes to top the table. The cities of Cambridge and Milton Keynes continue to benefit from their relatively high share of service and knowledge-based industries and have once again topped the table. Outside of these cities, Manchester moved into third place with annual GVA growth of 2.5%. The city was supported by stronger growth in sectors such as business services and continued inward investment into the city. The financial services and insurance industries are important drivers of a number of cities across the UK. Whilst London s role as a global financial centre predominates, cities such as Edinburgh, Leeds, Bristol and Bournemouth are all important financial centres in their own right. After standing at relatively modest levels in the first quarter of 2016, annual growth in financial and insurance services across the UK rose sharply in the second quarter of the year, despite the negative impact that the UK s referendum on EU membership appeared to have on intentions for business investment and acquisitions in the run-up to 23 June 2016. As a result, output growth in Inner London rose from 2.0% year-on-year in Q1 2016 to 2.5% in the latest quarter taking the region into the top five cities for GVA growth in Q2 2016. Similarly, annual growth in Edinburgh accelerated from 1.7%, well below the UK average for Q1 2016, to 2.1% in the latest quarter. Similarly, the improvements in the economic performance of sectors such as manufacturing during the second quarter had a positive impact on other cities across the UK. For instance, year-on-year growth in the production glassware, ceramics, porcelain and related products notably accelerated compared with the first quarter of the year, boosting annual GVA growth in Stoke-on-Trent. Additionally, the improved performance of the UK s pharmaceutical industry helped to support growth in a number of cities across the country including Cambridge and Outer London. 12
UK POWERHOUSE Figure 2 Five fastest and slowest expanding cities by year-on-year GVA growth in Q2 2016 Source: Office for National Statistics, Cebr analysis Alongside key industry sectors, growth across the UK s cities continued to be supported by the robust expansion of household consumption, with key regional retail hubs such as Manchester, Birmingham and Newcastle particularly benefitting. Given the tightness of the labour market in some regions unemployment nationally stands at just 4.9% the latest rankings for employment growth do not necessarily correspond to the relative rankings for output growth over the past 12 months. For instance, in some cities, businesses may be able to create new jobs but find it difficult to fill these vacancies due to a lack of available skills in the labour market. Bentley provides one example of this. The company recently advertised for 300 new engineering jobs for its production site in Crewe but has been unable to fulfil them because of the skills shortage. 13 A report for Irwin Mitchell Centre for Economics and Business Research
Despite the low rate of unemployment across the UK as a whole and uncertainty in the lead up to the UK s referendum on EU membership, employment growth across the cities has generally held up in the latest data. Outside of Bradford and Portsmouth, annual employment growth stood in positive territory in each of the cities in the second quarter of 2016. Stoke-on-Trent once again enjoyed a relatively high rate of job growth in the latest quarter but was overtaken at the top of the table by Liverpool. This has been supported by a fresh recruitment drive by telecoms firm BT. The company has begun to create 1,400 new apprenticeship and graduate jobs, with Liverpool a key location for the recruitment drive. Similarly, in line with its strong GVA growth, Milton Keynes enjoyed relatively robust employment growth of 3.4% in the latest quarter, with hiring looking set to continue, supported by the expansion of the city. For instance, John Lewis has recently announced that it will create 500 jobs as the company opens two new distribution centres in the city. Figure 3 Top and bottom five cities by annual employment growth, Q2 2016 14 Source: Office for National Statistics, Cebr analysis
UK POWERHOUSE How the UK automotive sector has shaped growth across the Midlands As highlighted earlier, the UK manufacturing sector saw a marked improvement in growth in the second quarter of the year following over a year of little to no growth. However, not all industries within this sector have seen such weak growth over the course of recent years, with the performance of the UK s automotive industry providing a sharp contrast to the struggles of the manufacturing sector as a whole. Figure 4 Manufacturing - motor vehicles, trailers and semi-trailers, quarterly GVA, millions Source: Office for National Statistics, Cebr analysis As shown in Figure 4, the motor vehicle manufacturing industry has seen output expand on a quarterly basis in all but two quarters since the beginning of 2014, continuing the general rise in output in real terms since the recession in 2008 and 2009. 15 A report for Irwin Mitchell Centre for Economics and Business Research
Figure 5 UK car output, rolling year totals, millions Given the contrasting performance of the automotive industry compared with manufacturing as a whole in recent years, vehicle manufacturing has grown as a share of the UK s manufacturing sector as a whole. In 2015, motor vehicle manufacturing represented 8.2% of UK manufacturing, up from 6.2% in 2006. The Midlands Engine Source: SMMT In terms of vehicle manufacturing across the UK, the Midlands, and in particular the West Midlands, dominates. The region is home to a host of companies including Jaguar Land Rover (JLR), Toyota, BMW, the London Taxi Company (LTC), JCB and Dennis Eagle alongside a host of OEMs such as GKN Driveline. According to data from the Business Register and Employment Survey, around 49,900 people were employed in the industry in the West Midlands and a further 8,100 people across the East Midlands. This reflects over 40% of the total UK workforce employed in the manufacture of motor vehicles highlighting the key role played by the Midlands in this industry. Conversely, vehicle manufacturing is an 16
UK POWERHOUSE important driver of the Midlands economy. Compared with the 1.3% share that the industry as a whole contributes to UK GVA, the manufacturing of transport equipment represents some 2.7% of the East Midlands GVA and 3.8% of output across the West Midlands. Despite the loss of British Leyland and then MG Rover, the cities of Birmingham and Coventry remain key hubs for car manufacturing, with Jaguar Land Rover acting as the key player across the cities. Whilst the recent economic success of the two cities is not entirely a product of recent growth in the vehicle manufacturing industry, the sector has played a vital role in the growth of the cities and the region. The West Midlands is the only region of the UK that is running a trade surplus with China, with JLR leading the way about half of the Chinese export growth comes down to JLR and its supply chain. The company saw sales rise by 18% last year, helping to boost output across the region. Further, in 2015, JLR invested 400 million in a new engine plant, equipment and the expansion of its design centre. Alongside output, the industry has played a central role in creating thousands of highly skilled jobs across the region in recent years. Some additional 6,000 manufacturing jobs were created in manufacturing across the West Midlands according to Business Population Estimates from the Department for Business, Innovation & Skills, representing almost one in every five new jobs created in the region during the period. Unipart, which manufactures car parts such as fuel rails and fuel lines, recently announced it s creating 40 new jobs at its Coventry plant after landing a seven-year contract to supply engine components for Ford cars being made in China, which will increase Coventry fuel rail production by 50% from 2018. 17 A report for Irwin Mitchell Centre for Economics and Business Research
Looking ahead The continued growth of the automotive sector has encouraged a range of substantial investment plans across the region, with many heavily supported by foreign investment. Geely, the Chinese owners of Coventry s London Taxi Company (LTC), began work on a 250 million factory in the city in August 2015 and have since announced an additional 50 million of investment to enhance their research capabilities and launch a new fleet of zero-emission-capable black cabs. The investment should help to substantially boost production capacity when the first vehicles role off the production line in 2017 and is expected to lead to the creation of 1,000 jobs. Whilst foreign investment remains the key driver of new projects in the automotive sector, the Government has played a role in supporting these plans. This is particularly apparent in Jaguar Land Rover s (JLR) planned Whitley South centre in Coventry. JLR plans to invest 500 million in its research and development site in Whitley, doubling the size of its operation and adding some 2,000 jobs on top of the 5,600 people currently employed at the site. Construction, which looks set to start later this year or in early 2017, is to be supported by 35 million of government investment which will include improvements in industrial transport links on the A45 including a new bridge to connect Whitley South to the existing Jaguar Land Rover engineering centre and Global HQ. However, whilst the significant investment across the Midlands points to a positive outlook for the sector, the UK s decision to leave the European Union presents a number of risks to the sector and the outlook for growth in cities such as Birmingham and Coventry. Whilst the industry has had much success in forging trading ties with emerging economies such as China, Europe remains a key market and access to the continent has provided a key support for investment into the UK from overseas car manufacturers. Even premium manufacturers such as JLR derive around 40% of sales from the EU 18
UK POWERHOUSE and production for more distant Asian markets is increasingly moving closer to the customer base, such as JLR s plant in Changsu, China. Further, domestic component manufacturers form part of the automotive supply chain not only in the UK but also throughout the EU, whilst the EU provides 60% of parts supplied for cars built in the UK. Figure 6 UK car production by destination, 2015 Source: SMMT 19 A report for Irwin Mitchell Centre for Economics and Business Research
As a result, the negotiations on the future trading relationship will be an important determinant in the outlook for the automotive industry across the UK, particularly for volume producers such as Toyota in the East Midlands. Fortunately, given the importance of the UK market to vehicle producers in mainland Europe (the UK is Germany s single biggest export market for vehicles by volume), there will be some considerable desire to get a deal of sorts done in this area. Whilst there remains some uncertainty about the future trading relationship between the UK and Europe, the result of the referendum has had an immediate impact on the value of the pound against its major trading currencies such as the US dollar and the euro. The shift is likely to have a range of impacts on the UK s automotive industry. With the majority of the UK s car production destined for markets overseas, the weaker sterling will help to increase the competitiveness of UK vehicle exports. In contrast, for some manufacturers, the supply chain is largely based overseas leading to increased input costs. However, JLR s supply chain is already predominantly based within the UK and, in time, other suppliers are likely to look to onshore more of their supply chain boosting demand for other areas of the UK s automotive sector. Overall, assuming a deal on automotive exports is reached in Brexit negotiations with the EU, the outlook for the automotive industry across the Midlands looks positive. Whilst economic growth in the UK looks likely to slow in 2017, with spending on big ticket items such as cars particularly impacted, continued demand from overseas markets and increasing production capacity will help to drive growth in the region s key manufacturing hubs. In total, we expect the sector to create more than 14,000 jobs from 2015 to 2026 in the region. Still, the sector and region could see some fallout from the UK s decision. There is already a serious issue of skills shortages with one in five vacancies in the West Midlands unfulfilled because of a lack of available skills in the labour market. Whilst cooperation with local colleges and universities will help to support the supply of skilled school leavers and graduates, the loss of an EU-wide talent pool, should negotiations take this route, could be of detriment to the continued expansion of the sector in the region. 20
UK POWERHOUSE Midlands Engine Launched in 2015, the Midlands Engine is an ambitious plan to make the Midlands an engine of growth. Chaired by Burberry PLC Chairman, John Peace, it sees 11 Local Enterprise Partnerships (LEPs) coming together with a plan to boost productivity, attract inward investment, increase connectivity and build a regional tourism offer. It is focused on five key themes skills, innovation, transport, promoting the Engine, and finance for business, and is part of the government s wider plans to support jobs and growth. According to the government, if the Midlands region matches the predicted growth rate for the UK over the next 15 years, it could create 300,000 jobs and boost the national economy by 34 billion. The Midlands Engine is a key part of the government s industrial strategy. The region has huge potential and it s vital that business leaders and politicians come together to make it a reality. Chris Rawstron Head of Business Legal Services, Birmingham 21 A report for Irwin Mitchell Centre for Economics and Business Research
Future city growth Predicted city growth between Q2 2016 and Q2 2026 Cambridge 25.1% Bristol 14.3% Milton Keynes 22.6% Greater Manchester 13.8% Oxford 22.5% Edinburgh 13.7% Ipswich 20.2% Liverpool 13.4% Brighton 19.3% Leicester 13.3% Southampton 19.1% Leeds 13.1% Portsmouth 18.3% Newcastle 12.9% Norwich 18.1% Aberdeen 12.8% Peterborough 16.7% Stoke-on-Trent 12.4% Bournemouth 16.4% Sunderland 11.9% Inner London 16.4% Sheffield 11.6% London 16.3% Cardiff 11.4% Nottingham 16.2% Hull 11.1% Outer London 16.1% Wolverhampton 10.9% Manchester 15.5% Bradford 10.3% Birmingham 15.0% Plymouth 9.9% Derby 14.8% Swansea 9.5% Coventry 14.7% Belfast 8.8% Glasgow 14.7% Middlesbrough 8.2% Source: Cebr
UK POWERHOUSE Our latest study predicts that the economic gap between London and the North of England will grow significantly by 2026. Rebalancing the UK economy is more important than ever. The stakes are high and the potential benefits for the region are huge. Roy Beckett Regional Managing Partner, Manchester
Disclaimer Whilst every effort has been made to ensure the accuracy of the material in this document, neither Centre for Economics and Business Research Ltd nor the report s authors will be liable for any loss or damages incurred through the use of the report. Authorship and acknowledgements This report has been produced by Cebr, an independent economics and business research consultancy established in 1992. The views expressed herein are those of the authors only and are based upon independent research by them. London, October 2016 A report for Irwin Mitchell 0370 1500 100 www.irwinmitchell.com @irwinmitchell For a list of our offices visit our website Irwin Mitchell LLP is authorised and regulated by the Solicitors Regulation Authority. BLS-0105-B