Economic Prospects for the West Midlands

When I last wrote about the talk given by Glynn Jones, the Bank of England’s deputy agent for the West Midlands and Oxfordshire, I said that I would follow this up by writing about the prospects for the West Midlands.  A good deal of this is derived from work done by Dr Jones in his previous job up until 2011 as Head of Economy and Strategy at Advantage West Midlands, the regional development agency until its recent demise due to changing government policy.

Until the present recession the West Midlands region tended to suffer a higher impact on unemployment benefit claims in a down-turn but came back to the national average level of impact more quickly (i.e. we often fell more sharply but then recovered well).  This started to change in the 1990s.  We could say this was due to the decline in manufacturing but the East Midlands, also a manufacturing area, fared better.  Gross Value Added (GVA) growth rates also started to slip away from tracking the national average in the late 1990s – indeed GVA growth per head was the worst of the regions from 2000-2007.

The West Midlands was also the only region in which the private sector contracted in this period with numbers employed made up by the public sector.  A large proportion of the region’s counties and metropolitan/unitary authority areas had below the national average of ‘high value added’ firms with a low proportion of high growth firms – the ones that create the most employment growth.  The region also performed poorly on knowledge-based employment and perhaps surprisingly especially in high value-added firms.  And given its size and importance to the region, Birmingham’s performance  on these measures within the region as a whole has been poor.

We are now seeing some recovery along with improved prospects for manufacturing, especially in exports (though these are now weakening) and particularly in selling into emerging markets.  The position in domestic markets, though, is relatively poorer reflecting the current depressed nature of the UK economy.  There has also been a slight improvement in GVA per head after the long decline noted above, and the differential to the national average on unemployment is beginning to decrease.  There is a large amount of innovation in the automotive sector and its supply chain and this may be having an effect.  However, manufacturing output is still below 2007 levels although the overall decline in production is slightly lower than the headline figures because of the effect on the national figures of the continuing drop in North Sea Oil production.

Productivity generally is weak, though this is predominantly a service sector issue, but it is also true in manufacturing.  When demand rises it may be difficult to meet this efficiently.  There is, though, a debate about how much of this is temporary (due, for example, to hoarding of labour as orders drop off rather than making people redundant) and whether productivity will come back when volumes increase.

We are seeing some repatriation of production to the UK (i.e. manufacturing and other work that was ‘off-shored’ to countries with cheaper labour costs) but this may be over-stated.  It is often in low-volume areas where quality or lead-times are an issue.  Sometimes the production is moved from the Far East, not to the UK, but to Eastern Europe.  That which is moved back to the UK tends to be high value goods that can accommodate higher costs.  Some of this trend is due to increasing labour rates in the Far East but productivity has also risen, and the markets are growing there, so it may still be worth producing close to market.  The service sector is still off-shoring, for example to India.

If there is a growth in production here, whether through repatriation or otherwise, there are concerns about supply-chain capacity (e.g. the factories have gone) and skill issues.  The West Midlands has the highest proportion in England of 16-64 year-olds with no qualifications – and Worcestershire is above the national average for 16-64 year-olds who are economically inactive, though better than the West Midlands region as a whole.

Despite the best efforts of Advantage West Midlands over its lifespan from the late 1990s until year or so ago I observed many plans and strategies, and no doubt the input of many resources, to try to overcome the problems of the region and its relative under-performance.  Alongside this I also saw, and continue to see, the work of many at county and district level in both the public and private sector to wrestle with these issues.  I would not say their efforts were in vain but it seems to me that beyond certain individual triumphs and generally working hard to keep up, it is hard to see real progress even though AWM was regarded as performing pretty well amongst its peers.  Clearly, some of these difficulties are due to structural changes in the economy over many years, if not decades, that are hard to fight against.  But one perhaps wonders if the UK as a whole finds it hard to see the changes occurring around it in the world and is too slow or unwilling to adapt both its business practices but also its attitudes to the skills and attributes needed and the way in which this burden, or more correctly investment, should be shared.  There is a very interesting article, which I will post separately, about some research on the differences in youth unemployment and the ways that countries manage the transition from education to work.

Incidentally, if you want to read the latest report of the Bank of England’s regional agents dated 18 July, you can find it here.