The State of Britain


Falkirk tops the UK growth league

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According to ONS figures out this month, in 2018 the highest annual growth rate seen in the 179  local areas of the UK was 10.5%, in Falkirk, the lowest level was in Mid and East Antrim at -10.1%, a 20% swing. So what has gone well in Falkirk?

On the face of it, Mid and East Antrim town, Ballymena, is not dissimilar to Falkirk. However, in 2018 people in Falkirk increased GDP from £29,869 to £33,868, whereas in Ballymena there was a c£5K drop to £29,885.  Both areas are close to the capital cities of devolved administrations, where Belfast had GDP per head of £44,332 in 2018 and Edinburgh had £51,224.

Ballymena has a central location in Northern Ireland and is connected to the M2 motorway. It has a station on the Belfast/Londonderry railway line and Belfast International Airport is only 18 miles away and Belfast City Airport is also accessible. The area is also close to the ports of Larne and Belfast, 20 and 27 miles away respectively.

Falkirk also occupies a central location in Scotland, with direct access to the north-south (M9) and east-west (M876) motorway networks. Falkirk High is on the main Glasgow-Edinburgh line, with four trains an hour to either city. Falkirk Grahamston is on the Edinburgh to Dunblane Line which has frequent connections to Edinburgh. The town also has a direct rail service to London. 

Additionally Falkirk has bus services to Stirling, Edinburgh and Glasgow and sits on the junction of the Forth & Clyde and Union Canals. Glasgow and Edinburgh airports can be reached within an hour.

So both Ballymena and Falkirk have good rail and motorway links to major cities, both are close to international airports and Grangemouth and Larne are both active ports. Why the difference?

Whereas the economy of Falkirk has tilted towards retail and services in recent years, away from the heavy industries and manufacturing sectors of the pre 1980s, Ballymena has not restructured so successfully.

In April 2018, Ballymena saw production at the town’s Michelin’s tyre factory end after 50 years. The 840 headcount fell over a two year period at the site after the company announced in November 2015 that it was closing the factory. Then, at the end of 2017, the JTI Gallaher cigarette factory closed with the loss of another c800 jobs.

In September last year, the Ballymena-based bus manufacturer Wrightbus was placed into administration and put up for sale, with c1,200 staff losing their jobs. Since then the facility has completed its first delivery of new buses following the company’s acquisition in October by new owners Bamford Bus Company.

If Ballymena has been too dependent on manufacturing, then what has Falkirk got right?

A major catalyst for change was a millennium project, the £17.5m Falkirk Wheel, which re-connected the cross country Forth & Clyde Canal with the Union Canal from Edinburgh. The wheel, which is a rotating boat lift, was opened in 2002, and attracts c500,000 visitors a year (more than 7m since it opened.)  

Also in Falkirk, the Kelpies, 30-metre-high horse-head sculptures depicting kelpies (water spirits) are seen by c560,000 people a year. The £5m horse sculpture was commissioned as part of the £43m Helix regeneration project, a partnership between Falkirk Council and British Waterways which received a £25m grant from the Big Lottery fund. Tourism now generates £110m+ for the local economy and employs nearly 2,000 workers in the area.

As well as flagship regeneration projects, Falkirk has also been successful in attracting investment from businesses of all sizes to the area. Glasgow University spin out, scanning technology company Lynkeos, established its headquarters in Falkirk and Ian MacLeod Distillers is hoping to reopen the Rosebank Distillery in 2020. Despite its recent takeover by a Canadian firm, Alexander Dennis, one of the world’s largest bus manufacturers, is headquartered in Falkirk with a factory nearby.

The Falkirk area is also set to benefit from the £1bn worth of investment earmarked for the UK by chemical giant Ineos. In February 2019, the firm said part of this investment includes building a £350m new steam and power energy plant at Grangemouth. Grangemouth benefited from earlier investment from Ineos in 2016, when the firm chose the port to transit US shale gas (used to create plastic pellets for general manufacturing.)

Good fortune or well planned, well executed economic development?  Falkirk Council and Scottish Enterprise are likely to argue the latter but it’s probably a bit of both. Who takes the plaudits is a moot point, but according to the ONS’s growth figures, there is credit due

The UK avoids recession, London is the ‘regional’ star performer and Northern Ireland steals the South West’s low unemployment crown

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On regional stats, and following its first publication of quarterly GDP estimates for the regions in September, the ONS has now published its next estimates for the nine English regions, and Wales, for the year to March 2019. GDP figures have been available for the UK since the 1940s, for Scotland since 2002 and Northern Ireland since 2013.

The figures showed that London’s economy grew by 4.2%, up from 2.3% the previous quarter. This placed the capital top (previously fourth) out of the twelve UK ‘regions.’

Yorkshire and the Humber was bottom of the rankings at -0.3%, and propelled by a drive to meet the original March 31st Brexit date, UK growth over the same period was 2.2%.

The ONS figures also showed that growth in London’s economy accelerated in the quarter to March 2019. The capital’s economy grew by the most in the UK, 1.2% in January to March. Contractions of 0.2% were seen in Yorkshire and The Humber and the East Midlands, although Wales was bottom with -0.5%.

Estimates published by ESCoE last month for the year ended September 2019, a more recent period than the ONS figures, ranked London top (previous ranking also first) with growth of 2.3%. Using this metric, UK growth was 1.45% which compared with growth in the South West of England (bottom) at 0.41%

More data from the ONS showed that unemployment fell between July and September; the decrease of 0.1% took the overall rate to 3.8%. Northern Ireland had the lowest rate of 2.5%. The highest rate was 5.9% which was recorded in the North East.

The South West had the highest employment rate at 81.0% which compared with 71.2% in the North East; the UK rate was 76.0%.

In September, average earnings in Wales were down by £55 to £527 per week, the lowest in the UK. London had the highest average earnings of £830.

The biggest jump in earnings was £32 per week in the East of England. In the UK overall, average earnings grew by 3.6% or by 1.8% after inflation.

Welsh average property prices fell by 2.8%, the biggest drop in the UK over the month. The largest increase was in Northern Ireland where prices increased by 2.3%. UK prices fell by 0.2% to £234,370 during September.

The lowest annual growth was in London, where prices fell by 0.4% over the year to September 2019. The highest annual growth in England was in the North West, where prices grew by 2.8% and in the UK, Northern Ireland house prices grew the most, at 4.0%. The UK annual growth rate was 1.3%.

National stats

A recession was avoided when the ONS said UK GDP increased by 0.3% in the three months to September although there was a contraction of 0.1% in the month itself.

The services sector was the main driver of growth, up by 0.4%. Construction also performed well but production, especially manufacturing, was flat in the three months to September 2019. The trade deficit narrowed, mainly due to growing exports of both goods and services. Annual growth dropped to 1.0%.

GDP rose by 0.2% in the euro area and by 0.3% in the EU28 during the third quarter of 2019, according to Eurostat. Annually GDP rose by 1.2% in the euro area and by 1.3% in the EU28.

Key European economies remain sluggish; Germany has grown by 0.5% and France by 1.3%, with Italy at last showing some growth of 0.3%.

The UK labour market was largely unchanged, with the level of employment falling by 58,000 to 32.75m and the level of unemployment decreasing by 23,000 to 1.31m or 3.8%.

An increase in average hours meant that total hours worked was unchanged in Q3 to some extent offsetting the drop in employment. Average earnings grew by 3.6% in the year to September, compared with the previous figure of 3.8%.

The euro area unemployment rate was 7.5% in September 2019, with the EU28 rate at 6.3%. The lowest unemployment rate in September 2019 was 2.1% in the Czech Republic and the highest was 16.9% in Greece.

The UK inflation rate was 1.5% in October 2019, down from 1.7% in September. Key downward contributions came from electricity, gas and other fuels as a result of changes to the energy price cap. Further downward contributions from furniture, household equipment and maintenance; and recreation and culture, were partially offset by rises in clothing and footwear prices.

Euro area annual inflation was 0.7% in October 2019, down from 0.8% in September. European Union annual inflation was 1.1% in October 2019, down from 1.2% in September. A year earlier, the rate was 2.3%.

Public sector borrowing in October was £11.2bn, £2.3bn more than in October 2018.

This is the highest October borrowing for five years. Debt at the end of October 2019 was £1,798.5bn, 80.4% of GDP, a decrease of 1.1% on October 2018.

UK productivity problems persist, a decade of deficit reduction ends, and we are all a little happier

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The UK’s productivity puzzle continued, with productivity in the UK falling at its fastest annual pace in five years in the April-to-June quarter, according to the ONS.

The figure – measured by output per hour – fell by 0.5% after two previous quarters of zero growth. Both services and manufacturing saw a fall from April to June. Few would deny the fall is unwelcome, but we do have more people employed than ever before.

In response, the Government announced an £88m cash injection aimed at the next generation of supercomputers, and research into productivity imbalances, poor management practices and skills investment.

The £88m comes out of the Strategic Priorities Fund, which supports high quality multidisciplinary R&D as part of the government’s aim to invest at least 2.4% of GDP in research and development by 2027.

The last regional productivity figures show Inner West London had the highest labour productivity at 50% above the UK average, while the highest labour productivity level outside of London was in Berkshire, Buckinghamshire and Oxfordshire, a drop to 14% above the UK average. The lowest level was in Cornwall and Isles of Scilly at 32% below the UK average.

In a recent speech, former London Mayor, Boris Johnson, said he wants London’s vigour to spread into the regions, boosting productivity, growth and tax revenue.

London attracts the highest qualified workers, denuding underperforming regions of those most able to be productive. London is also much better at attracting inward investment from highly productive multi-national companies. Productivity is also highest among larger companies but in many regions of the UK, small companies dominate.

But let’s not forget, last month the current Mayor of London, Sadiq Khan, launched a report highlighting London’s contribution to the UK economy. Khan’s report outlined the economic case for how success for the capital means success for the UK as a whole.

In its latest estimate of regional public spending and regional tax revenues in 2018, the ONS concluded that only three regions ran a surplus and contributed c£60bn to the Treasury, of this London’s £34.3bn was by far the largest.

Killing the goose that lays the golden egg would be foolish. Instead let’s get regional policy right.

The Stats

The ONS said UK GDP fell by 0.1% in August but in the three months to August it grew by 0.3%. A weak performance across manufacturing was offset with TV and film production helping to boost the services sector. Annual growth is 1.3%.

GDP rose by 0.2% in the euro area and by 0.3% in the EU28 during the third quarter of 2019, according to a flash estimate by Eurostat. Annually GDP rose by 1.1% in the euro area and by 1.4% in the EU28. Key European economies remain sluggish; Germany has grown by 0.4% and France by 1.3%, with Italy at last showing some growth of 0.3%.

The UK labour market showed signs of slowing, with the level of employment falling by 56,000 to 32.69m and the level of unemployment increasing by 22,000 to 1.31m or 3.9%.

The euro area unemployment rate was 7.5% in September 2019 with the EU28 rate at 6.3%. The lowest unemployment rate in September 2019 was 2.1% in the Czech Republic and the highest was 16.9% in Greece.

The UK inflation rate was 1.7% in September 2019, unchanged from August 2019. Key downward contributions came from motor fuels, second-hand cars, and electricity, gas and other fuels. These were offset by upward movements from furniture, household appliances, hotel overnight stays, and from recreation and culture items.

Euro area annual inflation is expected to be 0.7% in October 2019, down from 0.8% in September, according to a flash estimate from Eurostat.

British public sector borrowing rose by 21.6% in the first half of the tax year, ending a decade of deficit reduction. Public sector net borrowing in September totalled £9.4bn, excluding public-sector banks, up from £8.8bn in September 2018.

This took borrowing in the six months from April to £40.3bn. Due to increasing public spending the government is on course to miss its target of keeping borrowing below 2% of gross domestic product in 2020/21.

ONS house price data showed average house prices increased by 1.3% in the year to August 2019, up from 0.8% in July 2019. Over the past three years, there has been a general slowdown in UK house price growth, driven mainly by a slowdown in the south and east of England.

The lowest annual growth was in London, where prices fell by 1.4% over the year to August 2019. The highest annual growth in England was in the North East, where prices grew by 3.3% and in the UK, Welsh house prices grew the most, at 4.5%.

Despite continual Brexit woes, we are all a little happier according to the ONS. In the year ending March 2019, there was a slight improvement in average happiness ratings although anxiety ratings increased in Northern Ireland which brought the Province back into line with other UK countries on this measure.

Folk in the Orkney, Western and Shetland Islands and Fermanagh and Omagh in Northern Ireland were the happiest. Residents in the London boroughs of Lambeth, Hackney, Islington and Camden were the most miserable.

Jaywick in the headlines again, the time for regional policy innovation and the ‘Boris Bridge’ to the Emerald Isle

Reading Time: 5 minutesThe effectiveness of regional policy was in the spotlight following the Government’s publication of its deprivation index which looks at an area’s levels of income, employment, education, health and crime as well as housing services and living environment. Jaywick in Essex, again made the headlines and was still the most deprived area of the UK. Geographically though Jaywick was an outlier, the town was followed by nine deprived areas of the North West, most noticeably Blackpool, but then, and despite the wealth passing through it, Anfield.

In terms of local authorities, 49% of Middleborough and Liverpool had deprived areas, Knowsley, Hull and Manchester were next. The first authority from the ‘southern’ half of the country was Great Yarmouth at 25th. What was most significant though, was that in terms of performance since 2015, nine of the top ten areas that have seen deprivation accelerate the fastest in the UK were in the north. Oldham topped the list and saw deprivation increase by c8%, only Worcester appeared to prevent a northern clean sweep. Eight of the ten most improved areas were in London, with Copeland the only northern authority to appear.

In fairness, there was a northern bias to the 100 English towns targeted by the government’s new £3.6bn Towns Fund but this money is unlikely to shift the dial much. Time to try something different? Like him or loath him, Donald Trump’s Opportunity Zones appear to be making a difference in the American Rust Belt. Investors defer or reduce capital gains if funds are invested in projects in deprived areas of the US, resulting in the profits on those projects becoming tax free after a decade. Why not pilot it in Oldham, and then let the Treasury run its slide rule over the numbers.

The government announced the twelve renewable energy projects that had won ‘contracts for difference’ auctions, which guarantee energy prices for suppliers. The new projects will power more than 7m homes for as low as a startling £39.65 per megawatt hour. This is 30% below the £57.50 auction price achieved in 2017 and is below the £50 per megawatt hour that wholesale electricity prices have hovered around this year. These figures suggest no taxpayer subsidy is needed and evidences that offshore wind in particular, is a UK success story that is benefiting deprived eastern coastal towns and cities.

On nuclear, EDF says the cost to complete the Hinkley Point C plant is now estimated to be between £21.5bn and £22.5bn – an increase of £1.9bn to £2.9bn compared to the previous estimate. These cost overruns will not hit UK consumers because the price agreed for the electricity it will produce was £92.50 per megawatt hour (when the wholesale market price was around £40) reflecting EDF’s commitment to absorb any cost increases. Not all of the additional spend will be local, but some will, and few Somerset businesses will complain.

Construction work continues while the HS2 review is ongoing but if HS2 does goes ahead, the first phase between London and Birmingham will be delayed by up to five years, Transport Secretary, Grant Shapps, has confirmed. That section of the line was due to open at the end of 2026, but it could now be between 2028 and 2031 before the first trains run on the route. HS2’s total cost has risen from £62bn to between £81bn and £88bn.

Channel 4 News has seen documents showing that the Treasury and Department for Transport have been asked for advice on the possible costs and risks of a 20 mile bridge from Scotland to Northern Ireland. Better infrastructure in Galloway suggests a bridge from Portpatrick to Larne is the preferable route at a cost of c£15-£20bn. Where or who will foot the bill for this project is unclear, although the £80bn HS2 project is under review. Every Prime Minister wants a legacy.

The Stats
The ONS said the dominant services sector helped the economy grew 0.3% in July, which meant growth was flat over the quarter, an improvement on the 0.2% contraction seen in April-to-June. On manufacturing, the figures suggest that firms are beginning to restart stockpiling in anticipation of the possibility of no-deal Brexit in October.

The labour figures remained good. The ONS said the UK employment rate was the joint-highest on record since comparable records began in 1971 at 76.1% , and higher than a year earlier (75.5%). The largest increase in employees by industry was in the professional, scientific and technical industry, up 3.3%. The largest decrease by industry was in the information and communication industry, down 1.6%. The UK unemployment rate between May to July was estimated at 3.8%; lower than a year earlier (4.0%) and unchanged on the quarter. If bonuses are included, the ONS estimated that the annual growth in average weekly earnings for employees increased to 4% in the three months to July, from 3.8% in the three months to June, the biggest rise since the mid-2008. In real terms, annual growth in total pay was 2.1%. Another ONS survey into flexible working revealed 42% of public sector workers worked flexibly compared with 21% of private sector workers.

Inflation fell to 1.7% from 2.1% in August driven by a 5% decrease in games, toys and hobbies, especially computer games, plus clothing prices increased by 1.8% compared with a 3.1% rise a year ago. Culture (theatre tickets etc) saw a slower rise of 0.2% in July and August compared with 2.9% a year ago. The cost of bread went up though, along with breakfast cereal and meat.

The annual growth in house prices slowed to its lowest rate since September 2012, with four of the nine English regions seeing prices falling over the year. Average house prices increased by 0.7% in the year to July 2019, down from 1.4% in June 2019, seven years ago the rate was 0.4%.

Whilst the Bank of England held interest rates at 0.75%, on the Continent, the European Central Bank unveiled fresh stimulus measures. The deposit facility rate, paid by banks on their reserves at the ECB, was already negative, but was cut again from -0.4% to -0.5%. The ECB also said it was re-starting quantitative easing and will buy €20bn of debt a month from 1 November.

GDP growth in the euro area and the EU28 rose by 0.2% during the second quarter of 2019 compared with the previous quarter, according to Eurostat. In the first quarter of 2019, GDP had grown by 0.4% in the euro area and by 0.5% in the EU28. Over the year key European economies have been sluggish; Germany has grown by 0.4% and France by 1.4% with Italy contracting by 0.1%.

The euro area (EA19) unemployment rate was 7.4% in August 2019, down from 7.5% in July 2019 and from 8.0% in August 2018. This is the lowest rate recorded in the euro area since May 2008. The EU28 unemployment rate was 6.2% in August 2019, down from 6.3% in July 2019 and from 6.7% in August 2018.

The euro area inflation rate was 1.0% in August 2019, the same as in July. A year earlier, the rate was 2.1%. European Union annual inflation was 1.4% in August 2019; also the same as in to July, a year earlier the rate was 2.2%.

London the best performing ‘regional’ economy in terms of economic growth, HS2 in doubt and the Scottish Government time-shifts back to Callaghan era interventions

Reading Time: 3 minutesThe best regional growth in the UK was achieved by London in the year to June 2019 according to estimates from ESCoE. At 2.3%, London was the best performing ‘region’ with Northern Ireland at 1%, ranked last. Yorkshire & The Humber (2.1%) and the North West (1.6%) performed well relative to other parts of the UK. With the exception of the regions above and the South West, growth in other regional economies was below the national average which suggests these economies have stalled or shrunk.

On unemployment, the South West had the lowest rate at 2.7%; the North East had the highest at 5.3% with the UK rate at 3.9%. UK average earnings grew by 3.7% or by 1.8% after inflation with London again ranked first. Average earnings in London were £831; the North East had the lowest at £537. UK property prices grew by 0.7% to £230,292 during June, which left the annual growth rate unchanged at 0.9%. This time London was ranked last, with prices dropping by 1.9%. This compared with price growth in Northern Ireland at 3.5% and Wales at 4.4%.

On regional policy, it has been a series of mixed messages from the Government on transport. In July, Boris Johnson used his first major policy speech to promise a high speed rail link between Manchester and Leeds. But a month later, the government has launched a review of HS2, with a decision promised by the end of the year. With £7.4bn already spent, newish Transport Secretary, Grant Shapps, has refused to rule out scrapping it entirely.

On interventions, letting British Steel enter compulsory liquidation in May looks the right decision, after Atear Holdings, which owns nearly 50% of Erdemir, Turkey’s biggest steel producer, said it was in advanced talks with the Official Receiver. Likewise, ignoring calls to intervene at Harland and Wolff looks to have paid off, after administrators confirmed they have received a number of non-binding offers to buy the business as a going concern.

The same is not the case with other shipyards. The Scottish Government’s fondness for 1970s style interventions has continued. The Ferguson shipyard in Port Glasgow has been nationalised and Ministers will now operate the yard under a management agreement with administrators Deloitte. The status of two previous taxpayer loans to Ferguson Marine, totalling £45m, is unclear, as are the EU state aid implications of a Government building ships with public funds. An earlier Scottish Government intervention into the renewable energy sector has also continued to unravel. The Scottish government loaned engineering firm, BiFab £19m, then converted this into shares as losses mounted. Audit Scotland has ruled this equity stake is now only worth £6m. Since 2013 Scottish Ministers have also been in the airports business. Taxpayers are unlikely to recover any of the £38.4m they have shelled out to keep Prestwick airport afloat.

The economy contracted over a quarter for the first time in seven years. With the UK economy contracting by 0.2%, UK GDP increased by 1.2% when compared with the same quarter a year ago, down from 1.8%. The ONS said the UK services sector made the only positive contribution to growth in the second quarter and even that only grew by 0.1%. After Brexit stockpiling earlier in the year, the production sector contracted by 1.4%, putting the greatest downward pressure on GDP.

EU growth was 0.2% in both the euro area and the wider EU during the second quarter of 2019, according to Eurostat. Compared with the same quarter of the previous year, GDP rose by 1.1% in the euro area and by 1.3% in the EU28. Like the UK, the German and Swedish economies contracted. During the same period, GDP in the United States increased by 0.5% compared with the previous quarter, and by 2.3% compared with the same quarter of the previous year.

In July, inflation rose to 2.1%, with computer games, consoles and hotel prices rising more than they did last year. Eurozone inflation slowed to 1% in July, according to the Eurostat. Also according to the ONS, ‘the productivity puzzle’ continued, with productivity decreasing by 0.6% for the quarter between April to June compared with the same period last year. The UK public purse showed a surplus of £1.3bn in July, compared to the same month last year. Public sector finances usually show a surplus in July because of income tax payments from individuals. Although tax receipts were higher compared to last year, government spending also rose – up 4.2% or £2.6bn.

Helped by the weak pound, UK tech companies secured a record £5.5bn in foreign investment in the first seven months of this year. This was more than the amount invested per capita in the US tech sector in the same period according to the government. US and Asian firms spent £3.02bn, more than the whole of 2018, however overall, foreign direct investment in the UK hit a six-year low in June. But we are all a little wealthier than we believed, the ONS has updated how it measures GDP, and says the economy in 2016 was £26bn bigger than thought.

Whitehall mandarins admit that they do not assess what impact £12bn of taxpayers’ money has on local economic growth

Reading Time: 3 minutesIn its review this month of the 38 Local Enterprise Partnerships (LEPs) – the private sector-led partnerships between businesses and local public sector bodies that support local economic growth – the powerful Public Accounts Committee (‘PAC’ or the ‘Committee’) of the House of Commons found that from 2015-16 to date; £9.1bn of taxpayers’ money has been awarded to LEPs through three tranches of Growth Deals with a further £3bn allocated via other means. The PAC found that the Ministry of Housing, Communities and Local Government (‘the Ministry’ or ‘the Department’) does not to evaluate the Local Growth Fund which means it has no understanding what impact spending through LEPs has on local economic growth.

The Committee observed that the Department chose not to set quantifiable objectives for Growth Deals and that its assertion that every £1 of local growth funding could generate £4.81 in benefits was an unsubstantiated estimate. It found that the Department does receive quarterly performance data from LEPs but fails to use this to measure what value for money LEPs have delivered. Also mandarins were not able to give MPs examples of the private sector match funding and investment generated through LEPs. Civil servants did commit to include methods of evaluation in the design of the UK Shared Prosperity Fund.

The PAC found the Department has improved the assurance framework for LEPs but observed that there was a long way to go before all LEPs were held to account and their work scrutinised effectively. The Committee also recommended that the Department should set out a clear timetable showing how it will meet the April 2020 deadline to remove the four overlapping LEP geographical boundaries and what action it will take if local authorities fail to agree. Additionally the PAC recommended that within the next 12 months, the Ministry should work with LEPs to agree a broader set of diversity targets for LEP boards.

MPs found that LEPs underspent £1.1bn in the three years to the end of 2017/18 which called into question their capacity to deliver complex projects. The Ministry thought capacity issues were unlikely to be the only reason why LEPs were under spending, but the PAC was not clear on how it had reached this conclusion given that civil servants had not completed any systematic analysis in this area. Mandarins told MPs that the Department had now commissioned a research project which will look at the capacity issue.

The Committee also considered the risk that funding allocated on the basis of local industrial strategies may not reach areas with the greatest need. The Department has tied the future of LEPs to the development of local industrial strategies, but the EU funding that is being replaced has largely been focused on areas that are deprived, as opposed to areas which already have relatively high productivity and the potential to build on existing growth. The Department acknowledged the importance of striking a balance between support to local economies that are further behind and support to areas that can build on existing high productivity. MPs were not convinced how the Department will achieve this in practice. Mandarins were unable to specify how the local industrial strategies will be used to determine the funding that local areas receive.

On the economy, a return to work in car factories that shut down in preparation for a no-deal Brexit drove a return to growth in the economy in May of 0.3%. GDP grew moderately with IT, communications and retail showing strength. Both the services and production sectors grew by 0.3% contributing positively to headline GDP growth. However, construction growth was flat over the same period with zero contribution According to the ONS, the UK’s overall trade deficit decreased by £4.6bn to £12.6bn for the three months to May 2019, due mainly to the trade in goods deficit narrowing by £4.6bn to £39.7bn. Falling imports of transport equipment, machinery and chemicals, as well as increased exports of fuels all helped.

There was a surprise 1% rise in retail sales during June, mainly due to growth in non-food stores with increased sales in second-hand goods, including charity shops and antiques. Retail sales growth has slowed in the latest three months though as food stores saw falling sales for the first time this year and department stores continued their steady decline.

Inflation remained unchanged at 2% in June. Key drivers were petrol and diesel prices, which fell this year but rose a year ago, and clothes prices, which dropped by less than this time last year. At 2%, inflation remains below average UK wage growth which rose to 3.6% in May, the highest rate since 2008.

Government borrowing was higher than expected in June. The ONS said that in June 2019, the public sector spent more money than it received in taxes and other income and had to borrow £7.2bn, £3.8bn more than in June 2018. Although government receipts in June 2019 increased by £800m, government expenditure also increased by £4.3bn. The ONS said there was a notable increase in expenditure on goods and services of £1.2bn, while the UK’s contribution to the European Union increased by £400m compared with that in June 2018. The government’s debt repayments rose by £2.1bn. Public borrowing in 2018/19 was at a 17 year low of £23.5bn; while at the end of March 2019, debt stood at a record high of £1,801.1bn.

London and the South East win half of UK inward investment, London secures 24% of taxpayer funded start up loans and the economic picture still benign

Reading Time: 3 minutesThere was a drop in inward investment into the UK by foreign firms last year with new investment down 12% and expansion of existing investment down 22%. Despite this, the UK remained the number one destination in Europe in 2018, ahead of Germany and France, securing its third-highest number of projects in 20 years. Projects in Germany also fell by 13% largely due to a slump in business services investment, but in France they increased by 1%, moving it into second place in Europe above Germany, suggesting some of President Macron’s reforms are working.

Of the 1730 projects which took place in a single location, 627 or 36% were in London. If the South East is included, then nearly half (48%) of projects were south of the Watford Gap. Across the home nations, 1518 projects were in England, with Scotland, Wales and Northern Ireland winning 126, 51 and 35 each. Outside London and the South East, the West Midlands performed best, securing 155 projects, with the North East the worst performing English region with 59 projects. In terms of sectors, software and computer services were top with 366 projects, with extraction industries and renewable energy joint bottom with 41 projects. The Americans were the biggest inward investors with 440 projects followed by the Germans on 109 and the Indians on 106.

The taxpayer funded British Business Bank has loaned £500m to start ups since opening its programme in 2012. With UK banks still shell shocked after the financial crisis, the Bank was tasked with supporting business investment directly with its own funds and also giving confidence to other lenders via lending guarantees. Data from Start Up Loans, which is part of the bank, showed London has gained a disproportionate share of the funds, with 14,000 of nearly 70,000 start-up firms loaned £118m. The North West region fared best outside of London, receiving 7,841 loans worth £60m followed by the South East with 5,680 loans worth £48m. In the devolved nations, £29m was lent in Scotland, £26m in Wales and £7m in Northern Ireland. Of the English regions, at £25.9m, the smallest amount loaned was in the East Midlands. For more established businesses in the East Midlands, the £250m Midlands Engine Investment Fund – which is also operated by the British Business Bank – can provide debt or equity finance. The Fund is drawn from UK taxpayers, EU finds and the European Investment Bank and has so far deployed £50m in the region.

On the economy, figures from the ONS confirmed UK annual growth at 1.8% in the first quarter of the year with the economy growing by 0.5% from the previous quarter. Later in the month though, the April figures showed a fall in car production and an easing of stockpiling by manufacturers caused the economy shrink, contracting 0.4% from the month before, which resulted in growth for the three months to April at 0.3%. Factory shutdowns designed to cope with disruption from a March Brexit was the main reason, for example BMW’s Mini factory in Oxford brought forward its summer shutdown to April. The economy had grown impressively in the run-up to the proposed March date for the UK leaving the European Union, as manufacturers stockpiled parts, raw materials and goods but after the Brexit deadline was extended to October the reverse happened.

Wages grew by 3.4% in the three months to April with the biggest increases in the construction and financial services industries. After taking inflation into account, wage growth was 1.4%. The unemployment rate remained at 3.8%, the lowest since October to December 1974. The employment rate for women was 72%, the highest on record, largely because of changes to the state pension age which has meant fewer women retiring between the ages of 60 and 65.

The government borrowed £5.1bn in May, £1bn more than the previous May. Total borrowing in the first two months of the financial year was £11.9bn, 18% more than last year. The ONS expects the government to borrow £24bn this financial year – £500m more than it had previously estimated.

Inflation was 2.0% in May, down from 2.1% in April. Falling fares for transport services, and falling car prices offset rising prices of furniture, furnishings and toys.

Eurozone GDP rose 0.4% in the first quarter or 0.5% when all 28 EU countries are included according to Eurostat. This compared to the previous quarter when GDP climbed by 0.2% in the eurozone and 0.3% across the wider EU area. Croatia recorded the highest growth, with GDP climbing 1.8% compared to the previous quarter which meant 3.9% annually. German and French annual growth is 0.7% and 1.2%.

The eurozone unemployment rate was 7.6% in April 2019, down from 7.7% in March 2019 and from 8.4% in April 2018. This is the lowest rate recorded in the euro area since August 2008. The wider EU unemployment rate was 6.4% in April 2019, stable compared with March 2019 and down from 7.0% in April 2018.

Further afield, the unemployment rate in the US increased from 3.6% to 3.7% and inflation dropped by 0.2% to 1.6%. The US economy grew annually by 3.2%.

The UK outperforms Eurozone rivals, uneven regional growth continues and Trumpian interventions in Oldham

Reading Time: 4 minutesThe fastest manufacturing growth in 30 years, stockpiling, and resilient consumer spending pushed UK GDP Q1 growth up to 0.5% or 1.8% annually. Rising energy prices and air fares added to inflation but computer games and package holidays became cheaper. UK inflation rose to 2.1% in April from 1.9% in March.

Average house prices in the UK increased by 1.4% to £232,000 in the year to March and the number of residential property transactions also increased by 1.4%. The UK’s unemployment rate fell to 3.8%, the lowest since October to December 1974. Excluding bonuses, weekly earnings for employees in Great Britain have increased by 3.3% before inflation, and by 1.5% after inflation, compared with a year earlier.

After a robust quarter, retail sales volumes were flat in April, with growth in clothing sales, non-store retailing and fuel being offset by falls in all other main sectors.

It is unlikely that the UK will continue with this level of growth as stocks unwind and consumer spending eases. A forthcoming economic slowdown is highlighted by the car industry, which reduced production by 44% in April, costing the industry some £2bn.

On the Continent, GDP Q1 growth in the euro area rose by 0.4% which meant annually GDP was up by 1.2%. On an annual basis German GDP was 0.7% and French GDP was 1.1%. The euro area unemployment rate was 7.6% in April 2019, down from 7.7% in March 2019. Eurozone inflation was 1.7% in April, up from 1.4% in March.

Outside Europe, GDP in the United States increased by 0.8% compared with the previous quarter, resulting in GDP growth of 3.2% annually. First quarter figures showed Japan’s economy expanded by 2.1% annually. At 5.8%, India is expanding at its slowest pace for 17 quarters.

The ONS has found that businesses that were older and larger – in terms of employment – were more productive on average in 2017 than smaller businesses. Also foreign-owned businesses were around 18% more productive than equivalent, domestically-owned businesses. UK average annual labour productivity growth between 2008 and 2018 was around 0.6%, which compares with around 1.8% over the decade prior to 2008. The most productive 10% of workers in the UK added value of more than £100,000 per worker per year, median value added per worker per year was around £28,000 in 2017.

The CBI has pointed out that business rates are entrenching regional unfairness. Rate revaluations occur every three years which means they lag behind economic cycles and property prices. The CBI cited areas like Redcar, on Teesside, which saw a significant rise in unemployment alongside a drop in property prices following the closure of its steelworks four years ago. Teesside is likely to become a Special Economic Area where, uniquely, the collection of business rates will be devolved.

Further south, at another steelworks in Scunthorpe, the Government resisted the temptation to put £75m of taxpayers’ money into British Steel’s ailing plant. Whether EU state aid rules would even have permitted a ‘Tony Benn’ style intervention is a moot point. The government lent the firm £120m to pay an EU carbon bill in April and it is not clear whether this can be recovered.

Votes of confidence in the UK. First from Warren Buffett, who wants to invest more in the UK irrespective of the Brexit outcome. The Sage of Omaha is keen on making a large acquisition in the UK. Secondly, the European Bank for Reconstruction and Development – founded in 1991 to help fund the rebuilding of the former Communist bloc and which now focuses on 38 emerging economies in three continents – will move its London headquarters from the City of London to Canary Wharf in 2022.

Despite the above, a survey of 180 financial executives by Duff & Phelps found that London is no longer regarded as the top financial centre. About half of respondents said New York was the world’s top financial centre, up 10% from 2018, while 36% said London was still top (down 17%.) According to Deloitte’s Crane Index, however, new office building in central London is at a three-year high, with 13.2m square feet of space under construction, up 12% on the figure six months ago.

The importance of London to UK plc was highlighted by the ONS this month. In its estimate of regional public spending and regional tax revenues in 2018, it concluded that the only areas of the UK to run surpluses were the South East, the East of England and London, which had the highest surplus of £34.3bn or £3,905 per person. The North West had a deficit of £20.9bn and Northern Ireland had the largest per person deficit at £4,939.

According to estimates from ESCoE, London had by far the highest UK growth rate in Q1 at 2.7%, its nearest rival was the South West at 2.1%, with growth dropping as you head further north. At 0.8% and 1.0% the North East and North West were below the UK average of 1.5%, although Scotland bucked the trend with 2.0% growth.

How can policymakers shift some of this wealth generation up the M1 and M6 – HS2? Huge c£15bn interventions like the RDAs have had mixed results. A PwC study in 2009, jointly commissioned by the Government and the RDAs, found on one metric that the agencies only delivered a return of £1 for every £1 of taxpayers’ money invested.

Time to try something different? Like him or loath him, Donald Trump’s Opportunity Zones appear to be making a difference in the American Rust Belt. Investors defer or reduce capital gains if funds are invested in projects in deprived areas of the US, resulting in the profits on those projects becoming tax free after a decade. Why not pilot it in Oldham, then let the Treasury run its slide rule over the numbers.

Cumbria’s low unemployment rate in focus across the EU, blue sky thinking on the railways and Brexit benefits (for some)

Reading Time: 4 minutesCumbria in the spotlight in Europe. In its assessment of regional unemployment rates across the EU regions in 2018, Eurostat – part of the European Commission that provides EU statistics to the EU institutions – stated the lowest rates recorded were two Czech regions, Prague (1.3%) and South-West (1.5%), then Mittelfranken (1.8%) in Germany, followed by Cumbria (1.9%). The euro zone project can have few supporters in some parts of Greece and Spain, however, where unemployment rates are very high, particularly West Macedonia (27%) Western Greece (24.1%) and Extremadura (23.7%).

More positively, the euro zone area’s seasonally-adjusted unemployment rate was 7.7% in March 2019, down from 7.8% in February 2019 and down from 8.5% in March 2018, according to Eurostat. That is the lowest rate recorded since September 2008, the start of the global financial crisis. The unemployment rate in the wider EU also dropped to 6.4% in March 2019, down from 6.5% in February 2019 and from 7.0% in March 2018.

Also, the flash estimate of European GDP for the first three months of 2019 showed an uplift to 0.4% in the euro zone and to 0.5% in the wider EU, compared with the previous quarter. France’s economy grew by 0.3% in the first quarter of the year – helped by a pick-up in consumer spending – and Italy posted a 0.2% growth rate in the first three months of 2019, marking the end of a technical recession. A concern remains over French and German manufacturing which data suggests is still in contraction. The German manufacturing sector figures showed a marginal rise to 44.5, below the 50 point level which would mark expansion. In France, manufacturing output fell from 49.7 to 49.6.

Outside Europe, the US economy grew by 3.2% driven by net exports, an acceleration in inventory building and government spending especially on highways and roads. China’s economy grew slightly faster than expected in the three months to March, expanding at 6.4% in the first quarter from a year earlier.

In the UK, some mixed data. Car production in the UK fell by 14.4% from the same month last year to 126,195 cars but monthly retail sales were up 1.1% as British shoppers spent heavily in March, meaning retail sales volumes were up a startling 6.7% year-on-year. UK house prices grew by 0.6% for the year to February 2019, compared to the year to January 2019, when prices fell 1.7%. Heathrow saw more than 6.5m passengers in March – the 29th consecutive month of record growth for the airport. The unemployment rate was 3.9%, the lowest since November 1974 to January 1975, but the number of personal insolvencies in Scotland rose by 5% in 2018-19.

Government borrowing last year fell to its lowest annual level in 17 years, at £24.7bn it was £17.2bn less than in the previous financial year. This equates to 1.2%, of UK economic output.

A vote of confidence in the UK as a report from accountants E&Y into global investment destinations found that the UK accounted for 10% of Mergers & Acquisitions globally worth a combined £305bn – its second-best year since the financial crisis. Also Norway’s state investment fund has said it will increase its investment in the UK. The sovereign wealth fund, which has £750bn to invest from Norway’s oil and gas income, said that it will continue to be a significant investor in the UK, despite Brexit. The fund takes a long-term investment view of 30-years and expects its UK investment to rise over that period.

Does the UK want a shale gas industry or not? Natascha Engel, the shale gas Czar who has resigned – after only six months – has criticised laws that force companies to stop operations for 18 hours if there is an earth tremor greater than 0.5 on the Richter scale. In the US – which is experiencing a shale gas boom – the threshold is 4. The UK’s gas imports, particularly from liquefied natural gas, are increasing every year.

Some blue sky thinking on the railways this month. The Rail Delivery Group (RDG) – in submissions made by the rail companies to a government-appointed review into rail – suggests an independent body should oversee the rail network and that commuter routes should be handed over to local authorities and organised in a similar way to TfL’s London Overground. It also recommends long-distance routes should be serviced by more than one company.

The Strategic Rail Authority, which was established in 2000, used to oversee the network, but it was abolished in 2004. Currently, most UK rail services are operated by fixed-term franchises which train companies submit bids for; the DfT then selects the best bid. In London, local government oversees timetables with private operators subcontracted to provide the services. Virgin Trains has also suggested an airline style model for long-distance operators which would see them competing against each other via slots that they own indefinitely.

In the air, Scottish ministers’ plans to set up a devolved air departure tax (ADT) which would immediately cut the levy by 50% have been put on hold until at least 2020. The Scottish Parliament was given powers to charge tax on passengers leaving Scottish airports under the Scotland Act, which came into force in 2017. Tensions with the Scottish Greens – whom the SNP relies on for its majority at Holyrood – over the environmental impact and complexities with EU state aid rules, which currently see airports in the Highlands and Islands given an exemption, have forced a delay.

Also on state aid, P&O is taking legal action against the UK government, claiming Eurotunnel was unlawfully given a £33m subsidy. Last month, the DfT settled out of court with Eurotunnel, which had challenged the procurement of no-deal Brexit shipping contracts. As part of this deal, Eurotunnel agreed to make improvements to its terminal which P&O argues put its business at a disadvantage. The case will likely turn on whether securing improvement projects as part of the Eurotunnel settlement means an otherwise lawful settlement agreement becomes an unlawful public contract. P&O may also argue that the settlement amounts to unlawful state aid, on the grounds that it confers an advantage on Eurotunnel over its competitors.

It was never really in any doubt that there would be some benefits from Brexit – for lawyers.

A £1.6bn Stronger Towns Fund looks to the North, a new record of 32.7m employed with the jobless rate the lowest since 1975, the public finances in good shape and living standards and the economy continue to defy expectations

Reading Time: 3 minutesThe headline regional policy development this month was HMG’s £1.6bn Stronger Towns Fund. The Fund will be broken down over seven years into £600m, available in any part of England, and £1bn, allocated to North West: £281m, North East: £105m, Yorkshire and the Humber: £197m, West Midlands: £212m, East Midlands: £110m, South-west England: £33m, South-east England: £37m, East England: £25m. At the time of writing, how these funds are distributed has not been revealed but allocation is based on a combination of productivity, income, skills, deprivation metrics and proportion of the population living in towns. More than half of the money will go to the north of England and the Midlands, targeting funding at those places with economies that are performing relatively less well to the England average. London is not on the list, but towns within Greater London can bid for a share of the £600m pot. The Department of Housing, Communities and Local Government said there will be additional announcements for Wales, Scotland and Northern Ireland. The Department also stated that communities would be able to draw up plans for their town with the support and advice of their Local Enterprise Partnerships. It is likely that those areas missed by the City and Growth Deals initiatives will benefit. This fund does not replace EU structural funds and the Government has said it will come up with a Shared Prosperity Fund to replace EU money. The Stronger Towns Fund is dwarfed by EU funding, which might have increased post 2020 when the EU produces its new aid map; which will show that the poorer parts of the UK have slipped further behind the EU average and will therefore qualify for more state aid.

Defying expectations the UK economy grew by 0.2% in the three months to January, driven by a pick-up in activity that month when the economy expanded by 0.5%. Growth in the IT, health services and wholesale trading sectors – probably due to Brexit stockpiling – outweighed falls in the manufacturing of metals and cars, and construction repair work. The ONS said the services sector – 80% of the private sector – grew by 0.5% of which 0.3% was in January after a 0.2% fall in December.

ONS figures this month also showed the number of employed people in the UK was at a new record of 32.7m; at 76.1%, it is the highest since records began in 1971. Unemployment fell by 35,000 to 1.34m; with the jobless rate of 3.9%, the lowest since 1975. Also weekly earnings increased by 3.4% – down by 0.1% on the previous month – outstripping inflation which is at 1.9% and boosting living standards. The regional figures showed the south-west of England employed most at 79.9% with an unemployment rate of 2.9%, comparing favourably with the UK’s highest unemployment rate of 5.2% in the North East; the North West saw the biggest drop in unemployment from 4.1% to 3.6%.

During the month ONS statistics also showed which occupations are at highest risk of being automated. The ONS said around 1.5m jobs or about 7.4% of the workforce are at high risk; notably waiters, bar staff, catering assistants, sales assistants, pharmacists, theme park staff, security guards, printing machine assistants, bus drivers, automobile assemblers, sewing machinists, coal miners and road construction operatives.

Inflation – measured by the Consumer Prices Index – rose to 1.9% from 1.8% in January; the first rise since August 2018. The ONS said that a rise in food and alcohol prices were offset by lower price rises in clothing and footwear. On food, there was an uplift in bread, cereals and vegetables and additional duty on rose wine and some ciders announced in the Autumn Budget increased alcohol.

Given the political furore, economic conditions are reasonably benign and although the MPC looks two years ahead it is difficult to see a rate rise this year. Not so in the Eurozone where the ECB triggered an unexpected fresh round of stimulus pushing cheap loans at banks to help revive the economy. Growth in the zone is now forecast to be 1.1% this year (versus 1.7%) and inflation is expected to be 1.2% (versus 1.6%.); the ECB said growth was 0.2% in the final quarter of 2018.

In his Spring Statement the Chancellor said the OBR forecast that the UK economy will grow at 1.2%. The government is expected to borrow £22.8bn this financial year,£3bn lower than the £25.5bn predicted by the OBR in the October Budget. The State’s debt at the end of February was £1,785.6bn or 82.8% of GDP; 1.4 % lower than a year ago. With public finances in good shape he pledged to spend £26.6bn to stimulate the economy if MPs vote to leave the European Union with a deal.

In March, the ONS said UK house prices rose by an annual 1.7% – the smallest increase since June 2013 -.largely driven by a 1.6% fall in London house prices.
House prices in the East of England also fell on an annual basis by 0.2% for the first time since October 2011, this compared with the East Midlands and Northern Ireland where prices rose by 4.4% and 5.5% respectively. The North West and Yorkshire and the Humber also showed strong annual house price growth, of 3.4% and 2.9% respectively