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UK's regional growth gap set to widen further

UK's regional growth gap set to widen further
Matt Browning
Written By:
Matt Browning

The economic regional growth gap in the UK is set to widen, with London and the South East outgrowing the rest of the country, an accounting firm forecasts.

Nationwide, the UK is set to feel economic momentum between now and 2027, but all three regions in the South of England are predicted to have a higher employment growth rate than the rest of the nation.

The average growth rate in employment is forecast for 1.1% between now and 2027 in the UK, but the levels in London, South West, and South East are predicted to experience rates of 1.5%, 1.3%, and 1.2%.

Meanwhile, the East of England is the other leading region to see growth, and is set for an employment growth rate of 1.2%, reports Ernst and Young’s (EY UK’s) Regional Economic Forecast.

Further, London and the South East are expected to represent 40% of the UK’s overall growth value added (GVA) in 2027 – an increase from 39% in 2023 and 36% in 2005. GVA measures the contribution to the economy of an individual industry or sector in the UK to determine its gross domestic product (GDP).

An example that highlights the regional growth gap is that Reading is set to replace Manchester as the UK’s fastest-growing location.

Reading’s strong information and communication sector will help it to grow by an average annual rate of 3.3% between 2024 and 2027, whereas Manchester will grow by 2.2%, according to the report.

Reading becomes the fastest-growing location

Further, three of the five slowest-growing areas are expected to be in the North of England – the regions are Blackpool (1.1% annual average GVA growth), Warrington (1.3%) and Cumberland (1.3%). Aberdeen and Dundee complete the bottom five with annual average GVA growth rates of 0.8% and 1.4% respectively.

Despite ‘moderate economic growth’ projected to return to the UK, figures suggest the levels of labour market following the pandemic are furthering the UK’s economic disparity. The highest levels of labour inactivity were reported in Northern Ireland (25.7%), the North West (22.9%), and Wales (22%).

The cost-of-living crisis’ impact on lower-paid families was another key factor in the three-year financial forecast. The lowest incomes were found in Wales (£17,796), Northern Ireland (£18,181), and Yorkshire and the Humber (£18,508) during 2023, which constrained households’ spending in the area and therefore contributed to lower growth there.

With higher incomes more commonly found in London and the South East, this disparity between regional growth is set to continue.

‘Outright declines’ hit Wales and the North of England

Peter Arnold, EY UK chief economist, said: “The UK entered a technical recession in the latter half of 2023, and growth for the year remained tepid as high inflation and rising interest rates squeezed consumer spending power and business performance.

“In terms of regional performance, average household income was a key differentiator, as cost-of-living pressures were felt most by the lower-paid.

“There were outright declines in economic activity in Wales, Northern Ireland, and Yorkshire and the Humber where average incomes tended to be lower. Looking ahead, while growth is expected to remain subdued for much of 2024, there are signs that economic momentum should start to build towards the end of this year.”

Arnold added: “Inflation should fall to the Bank of England’s (BoE’s) 2% target by the spring and, alongside declining energy prices, this should provide scope for future interest rate cuts, which will ease pressure on households and businesses. The UK’s economic prospects for 2025 and 2026 appear even brighter, but this return to moderate growth is unlikely to be balanced across the country.”