Regional UK economic growth gap to widen, with Southern England ahead

The UK overall is expected to see annual average GVA growth of 1.9% between 2024 and 2027 as lower inflation, a strong labour market and the prospect of interest rate reductions lay the foundations for a return to historical levels of growth. London and the South East are forecast to achieve annual GVA growth of 2.1% and 2% respectively, while the South West is expected to see 1.9% growth. Every other region is forecast to fall behind the UK average, with the slowest rates of GVA growth expected in the North East (1.6%), Wales (1.6%) and Scotland (1.5%).

The regional economic imbalance is also set to be reflected in the jobs market. All three regions in the South of England are forecast to exceed the UK’s overall average annual employment growth rate of 1.1% between 2024 and 2027. London, the South East and the South West are expected to see an average annual growth rate in employment of 1.5%, 1.3% and 1.2% respectively. The East of England (1.2%) is the only other region set to surpass the overall national rate – all other locations are forecast to see employment grow at a slower rate than the UK average.

Despite efforts to address the UK’s regional economic disparity in recent years, the EY report highlights that London and the South East accounted for 39% of the UK’s overall GVA in 2023, compared to 36% in 2005. This is expected to increase to 40% by 2027. 

Rohan Malik, EY UK&I Managing Partner for Government & Infrastructure, comments: “While the UK’s prolonged period of economic stagnation should come to an end this year as all regions return to growth, the benefits will not be felt equally across all parts of the country. The UK’s longstanding geographic inequalities means that many of the country’s high-growth sectors have coalesced around a select few locations, and these areas will reap the biggest rewards as the country returns to prosperity in the coming years.

“Nurturing high value sectors can boost resilience in tough times and accelerate growth in better years, but doing so requires regions to build their own tailored growth plans that consider which industries are set to flourish and how to cultivate them locally. High value sectors will require a high value workforce, so building in-demand skillsets and competencies with latest technology should help a region attract investment while bolstering the local economy. For example, Generative AI has the potential to enhance regional and UK productivity rates, but will require a shift in skills to ensure the workforce can collaborate with and complement the technology.

“From a national policy perspective, the link between infrastructure and investment should not be understated, as evidenced by the remarkable growth of tech hubs alongside the M4 corridor. Streamlining the UK’s planning process could accelerate the much-delayed national infrastructure pipeline and help projects move more swiftly from concept phase to shovels in the ground. It should also reassure investors that these projects can offer a viable, timely return and encourage the private sector to contribute capital to priority projects, unlocking a fresh wave of investment, jobs and growth.”

Regional disparities in GVA and disposable incomes

The Regional Economic Forecast also highlights how UK regions fared over the last 12 months. The UK economy ended 2023 in recession, which was reflected in relatively weak GVA performances across the regions and nations of the UK. The fastest growing region of the UK in 2023 was the West Midlands, achieving GVA growth of just 0.6%, with the North East also performing reasonably well with growth of 0.5%. Both of these regions’ manufacturing sectors benefitted from continued normalisation in supply chains and lower energy prices compared to 2022. London was next fastest (0.6%), followed by the North-East (0.5%) and the South East (0.5%). Growth in London and the South East was driven by high end services, with information and communications and administrative and support services performing well.

In contrast, several regions saw outright falls in GVA – including in Wales (-0.3%), Northern Ireland (-0.2%), Yorkshire and Humberside (-0.1%) and the South West (-0.1) – reflecting the cost-of-living squeeze on households and businesses.  

Regions with lower average disposable incomes tended to see poorer economic performances as households in these areas were more exposed to living cost pressures, which constrained consumer spending and subsequent growth. This was particularly evident in Wales (£17,796), Northern Ireland (£18,181) and Yorkshire & the Humberside (£18,508). In contrast, higher income households were generally concentrated in London and the South East and were better able to ride out the squeeze.

The Regional Economic Forecast expects growth to remain subdued for much of 2024, before rising real wages and lower energy prices see economic momentum begin to build towards the end of the year. Moderate levels of growth are expected to return from 2025 and 2026.

However, all nations and regions outside of the South of England are expected to lag behind the UK average in terms of GVA growth between 2024 and 2027. This can partly be attributed to the lower concentration of high value sectors in some parts of the UK.

Peter Arnold, EY UK Chief Economist, comments: “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 & 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. Inflation should fall to the Bank of England’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.”

High growth sectors help the South of England build economic pace

According to the report, professional services and technology industries are set to be among the fastest growing sectors for GVA and employment between 2024 and 2027. Professional services is expected to see annual GVA growth of 2.1% and annual employment growth of 1.9%, while information and communication is forecast to see annual GVA growth of 3% and annual employment growth of 1.6%

However, these high-growth sectors are set to remain concentrated in certain parts of the UK. By 2027 the professional services and information and communication sectors combined will comprise just 9.9% of all employment opportunities in the North East, 10% in Yorkshire and the Humberside, 8.2% in Wales and 8.9% in Northern Ireland. In comparison, by the same year they will comprise 14% of employment opportunities across the UK, but 16% of employment opportunities in the South East and 23.1% in London.

Progress is more mixed across other sectors. Between 2024 and 2027 the manufacturing sector’s GVA is forecast to grow by an average rate of 1.3% as the sector benefits from a fall in energy prices and rising consumer spending. In contrast, the sector’s employment is predicted to contract by an average annual rate of -1.3% as the industry implements additional automation technology.

Manufacturing currently comprises 14% of employment opportunities in Yorkshire and the Humberside, 15% in the North East and the North West, and 16% across the Midlands. The exposure of these regions to the manufacturing sector is expected to impact their respective employment growth rates between 2024 and 2027, which are set to be slower than the overall UK average. 

Lower growth regions expected to see lower levels of labour market participation

Alongside sector distribution, there are also significant variations in labour market participation across different UK nations and regions. According to the report, there appears to be a correlation between lower growth and higher levels of economic inactivity among the working age population 16-64 year olds who are not in work.

Across the UK, Northern Ireland has the highest level of inactivity at 25.7%, which is almost three percentage points higher than in any other region. The North West (22.9%), Wales (22%) and the North East (20.7%) also have relatively high levels of inactivity, compared to the UK average (18.3%). In contrast, the lowest rates of inactivity can be found in those regions expected to match or exceed the average UK economic growth rate over the next three years – the South West (14.7%), London (14.9%) and the South East (15.9%).

The UK remains the only major Organisation for Economic Co-operation and Development (OECD) country where the labour market participation rate has not yet returned to the level it was pre-pandemic. In 2023 the economic inactivity rate across the UK was 18.3%, which is a rise from 17.5% in 2019.

Peter Arnold, EY UK Chief Economist, comments: “A lingering theme of the UK’s post-pandemic economy has been a relatively weak labour participation rate, with the number of people registered as economically inactive currently higher than it was in 2019. The data appears to show higher economic inactivity in regions with lower employment growth and subsequent prosperity. While it’s unclear which direction the correlation goes and whether high inactivity leads to low growth or vice versa, encouraging people back into work could help to at least partially close the growth gap in selected regions.

“Addressing this will likely require policymakers to focus on a mix of incentives and programmes to increase participation, alongside health initiatives to address the significant number of people in the UK who have exited the workforce in recent years due to long-term sickness. The sectors that are expected to decline are often in the regions anticipating slower growth, so policymakers may want to consider targeted reskilling and retraining measures in these areas. This could support individuals in pursuing more prosperous opportunities, while helping these locations build up supply in those high-growth industries where demand for labour is set to be greatest.”

The fastest growing local economies

The Regional Economic Forecast includes an analysis of prospects for the UK’s towns and cities. The prominence of certain sectors have again played a key role in determining which locations are forecast to buck regional and national trends.

With predicted annual GVA growth of 2.5% between 2024 and 2027, Reading is projected to overtake Manchester as the UK’s fastest growing location. The town’s position in the M4 corridor is expected to enable it to benefit from an expansion in big technology, with Reading’s information and communication sector forecast to grow by an average annual rate of 3.3% between 2024 and 2027.

Manchester and Bristol follow with expected annual GVA growth of 2.2% each over the next three years. Both cities are expected to feel the growth effects of their particularly strong local technology and professional services sectors.

The leading smaller locations in the medium-term are forecast to be Windsor & Maidenhead (annual average GVA growth of 2.3% over 2024-27) and the wider Thames Valley (2.2%), with both areas expected to benefit disproportionately from an expansion in big tech.

Three of the five slowest growing areas from 2024 to 2027 are expected to be in the North of England, with Aberdeen (0.8% annual average GVA growth), Blackpool (1.1%), Warrington (1.3%), Cumberland (1.3%) and Dundee (1.4%) trailing the rest of the UK.