Final_Long_Term_Report_-_Published

Produced by The Regional Economic Forecasting Panel on behalf of the Regional Intelligence Unit. www.nwriu.co.uk

State of the Northwest EconomyLong-term Forecasts

May 2008

This report is published by the Northwest Development Agency Research Team as part of its continuing commitment to inform the economic development of the Northwest of England. It has been produced by SQW Ltd and Cambridge Econometrics Ltd, economic development consultancies, on behalf of the Northwest Economic Forecasting Panel. Whilst every effort has been made to ensure the accuracy of the material in this report neither panel, SQW Ltd, CE Ltd nor the Research Team can accept any responsibility for the decisions based on the material that follows. Further Information If you require further information on the work of the panel, please contact Nicola Christie.Press enquiries should be addressed to Neil Roscoe.

Nicola ChristieEconomistResearch Team, [email protected] 400293

Neil RoscoeSenior Press [email protected] 400232

Executive Summary

• The Panel expects that GVA generated in the Northwest will grow more slowly than in the UK over the next twenty years by an average of some 0.4 percentage points a year. Thus, if growth in the UK turns out to average 2.7 percent a year, that in the Northwest should average 2.3 percent.

• Though this is faster than GVA growth of 1.8 percent a year achieved on average in the Northwest in the 1990s, mainly because the region’s population and working age population are expected to grow rather than fall, as they did then, GVA per resident head is expected to grow on average over the next twenty years by 1.6 per cent a year, as compared with 1.9 per cent in the UK. As a result, the gap in the level of GVA per head in the region, which may presently be around 13.5 percent lower than in the UK, is likely to widen further.

• Growth in GVA is influenced by growth in the number of jobs, and in productivity when measured in terms of value added per job. Value added in turn reflects wages earned and profits generated and retained in the region. So, our method is to identify recent underlying trends in the growth of jobs and in productivity, to understand why these have arisen, and to ask how various influences may affect them in future.

• The recent history of the regional economy includes a period of very rapid jobs growth, especially between 2001 and 2004. This we think was exceptional and unlikely to be seen again. It followed marked recent increases in public spending such that a third of the region’s jobs are now in the public sector; and it also included the out- sourcing of jobs in financial and business services from higher cost places in the South, following a downturn in international financial markets in 2001.

• Shifts in net immigration, which explain why the region’s population began to grow again from 2001, also appear to have been closely related to this exceptional period of growth in job opportunities. While the participation of men has remained stubbornly low, a significant increase of the participation of women in the region’s labour force appears to have been a further response to this same peak in job opportunities. Yet, the underlying trend in the growth of jobs in the Northwest has, we judge, still been running on average around 0.1 percentage points a year below that in the UK.

• Our conclusions about productivity growth are more disappointing. The recent peak in jobs growth in the Northwest was accompanied by a fall back in the growth of productivity, following which there appears to have been some consolidation. Nevertheless, services now represent the bulk of jobs, and productivity levels in all broad service sectors in the region fell relative to the UK between 1995 and 2005. Also, there is little left of an advantage the region once enjoyed in the productivity stakes because of its once considerable concentration of employment in manufacturing, in which labour productivity, which we are measuring, is generally higher than in services.

• We attribute the relative decline in the region’s productivity in services in part to a gradual fall in its price level relative to the UK, which is bound to have had a general effect on relative wages. There has also been a shift in the balance between lower and higher level jobs in favour of the UK. But, especially important has been a widening in disparities in earnings in higher-level jobs between London and other major cities, including Manchester and Liverpool. This effect has been particularly marked in top-end jobs in financial and business services, a sector that now provides almost half of GVA in London as against less than a fifth in the Northwest.

• In short, the main reason why the output gap between the region and the UK has generally grown faster than the Northwest. The main influence has been the performance of London as a global city and as an international provider of high level services, together with consequential growth in an increasingly widespread ‘super city region’ around London. Its direct influence now expands into parts of the East Midlands, the West Midlands, and the South West, as well as into Eastern England and much of the South East.

• Nationally organised service firms operate in Northern regions and in the Territories, and some firms based in these areas also do well in more centrally located markets. But a distinction can be drawn between areas of the UK that are directly influenced by London, and others, such as the Northwest, that are generally further away, and have less well developed links, even if they may host support services for firms based in higher cost places, including the London area.

• Our new forecast says that we expect that these recent trends will continue for reasons we argue based on the best evidence we can assemble. So, the main reason why we expect growth rates in GVA and in GVA per head to continue to diverge with the UK and with England has mainly to do with dynamic effects of economic agglomeration continuing to be stronger in and around London than in and around Manchester and Liverpool. We also expect that the nation’s national and international business is likely to go on becoming still more concentrated in London. Manchester has developed into the equivalent centre for the Northwest, and has some national and international business. But everything is on a smaller scale.

• In addition to spatial factors of this kind, we have looked at the most recent evidence about supply factors that are understood to drive the growth in productivity across the country. We doubt, however, that taken together, these will work to narrow the underlying trends we have identified in productivity or in jobs. On the contrary, there is some risk the reverse could be true. Nor has a review of evidence about the Northwest’s sub-regions led us to amend this view.

• Based on projected trends in total and working age populations, and likely developments in participation, we also expect the effective supply of labour and jobs will go on growing more slowly in the region than in the UK, with a risk that this expected divergence in jobs growth could be wider than we have forecast, depending on where net immigration is concentrated.

• The results of public policy is implicit in these trends but, for reasons argued in the assessment section of our report, we do not expect that it is likely to be able to change them very much. This is because many programmes are similar to those that have been taking effect for some time, while economic performance seems to have been driven mainly by structural change responding to market forces. We might amend our view if we saw firms and other bodies in the region taking increased advantage of strategic opportunities in which the region has strengths (for instance in nuclear, energy, and environment-related industries) and if we saw public policy concentrating an increased proportion of resources on growth, especially on accommodating and underpinning agglomeration through appropriate policies, especially on transport and housing.

• However, we appreciate that policy agendas besides growth are in play, requiring regional institutions to take what amounts to a collective view about how important is faster growth in GVA per head as against other objectives. Our forecast amounts to saying that, even if growth in GVA per head, were given primacy, it would still be a considerable challenge for the region to do better against the target of achieving faster growth in GVA per head that the government has laid down for its policy purposes. • Supported by SQW Consulting and Cambridge Econometrics, this report completes the fifth year of the work of the Northwest Regional Economic Forecasting Panel. We were set up in 2003 as a service to business and to others concerned with the development of the Northwest as a thriving regional economy. We prepare and publish long-term forecasts looking forward twenty years, of which this is the latest annual edition. We also publish short-term forecasts for business looking out three years, and do this each Spring and Autumn. We also keep up to date more factual reports about the regional and sub-regional economies.

• While we enjoy the support of NWDA, we are fully independent of the Agency in the views and material we publish. Our papers may be found at www.nwriu.co.uk, and we would welcome any comments on our work through [email protected].

David Coates Panel Chairman

Contents

• Setting the Scene: Developments since 1990 1 • Developing the Panel’s Forecast 14 Demography & Jobs 16 Productivity Drivers 17 Spatial Aspects of Growth 22 The Sub-regional perspective 28 The Panel Assessment 38 The Panel’s Central Forecast 49 Risks 53

Setting the scene: Developments since 1990

Page 1

Drivers of growth in GVA and GVA per head

• Growth in Gross Value Added (GVA) in the Northwest reflects growth in:

Employment – changes in employees linked to those in the working age population available for work, and therefore in . . .

Population – changes in the resident and working age populations, including net migration to the region, and also in . . .

Productivity – changes in GVA generated per job.

• As in our previous long-term forecasts, we are more interested in understanding how and why the regional economy has grown in recent years relative to the UK, and how it might do so in future, than in predicting its most likely growth path over the next 20 years. Though we offer such a prediction at the end of this report, our approach is essentially comparative, identifying what we judge to be the trends underlying recent growth gaps in employment and productivity, and then how these may widen or narrow because of various influences, leading to an overall judgement about the most likely growth in GVA. This helps to abstract from influences affecting all regions, and therefore the wider UK economy.

• Since our last forecast, the government has published a Review of Sub-National Economic Development and Regeneration (July 2007) setting out new arrangements designed to secure sustainable improvements in the economic performance of all English regions measured in terms of growth in GVA per head and, over the longer term, to reduce the persistent gap in growth rates in GVA per head between regions. GVA per head targets have been set and progress will be monitored in terms of five indicators:

• Employment rates, showing the proportion of the working age population in work

• Business start-up rates, as a measure of enterprise

• GVA per hour worked as a measure of productivity (We focus on GVA per job for data reasons)

• R&D expenditure as a proportion of GVA, as a measure of innovation

• Attainment of basic, intermediate, and higher level skills, to show how skills are improving

• We also focus on progress in GVA per head and on some of these indicators at appropriate points in this report.

Page 2

Figure 1 Annual growth in GVA in the Northwest & UK (2003 prices) (Source: Regional Accounts & Cambridge Econometrics)

Figure 2 GVA per head - % difference between Northwest & UK (current prices) (Source: Regional Accounts & Cambridge Econometrics)

• The Northwest economy has grown every year since 1991. Between 1991 and 2006, its GVA in constant prices increased by nearly two fifths, equivalent to annual growth on average of 2.2% pa. However, there was an average GVA growth gap of 0.5 pp pa with the UK, or of 0.6 pp pa if ‘best fit’ estimates are made using statistical techniques.

• Figure 1 shows how the GVA growth gap has varied. It was at its widest during the second half of the 1990s, and has tended to narrow since 2000 to achieve an average of 0.3 pp pa between 2000 and 2006. However, while results during this more recent period may have been affected by cyclical factors impacting more on the South than the North, the key influence has been a period of very rapid employment growth in the Northwest that has now cooled.

• Figure 2 shows how the gap in GVA per head with the UK widened from the early 1990s to reach a figure of 13% in 2006. While the size of the gap stabilised during the late 1990s and early years of the current decade, it has since widened further. Though its value can also be influenced by relative changes in populations, working age populations, participation and unemployment, the gap is a broad measure of relative levels in productivity, and changes in the gap a measure of relative movements in productivity.

Recent growth performance in the Northwest

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Page 3

What explains the gaps in GVA and GVA per head?

• GVA measures incomes (wages and profits) generated by economic activity, and is the most widely used measure of regional income and of output. This is despite a number of weaknesses that limits its value as an indicator of economic performance, just as GVA per head is more a broad measure of productivity than one of prosperity or well-being.

• GVA, for instance, includes the wages of public sector workers, so comparisons do not fully reflect differences in performance in the private sector, and the share of profits paid to shareholders resident elsewhere is excluded. Also, no account is taken of transfers through the tax and benefit system that affect household incomes, differences in regional price levels that also affect living standards, or of other aspects of the quality of life. Nevertheless, gaps in GVA per head are also widely accepted as prima facie evidence of differences in the capability of regional economies to generate satisfactory incomes for their residents, and this indicator has become the government’s headline target measure of regional performance.

• Last year the Panel found it helpful in understanding regional performance to bear in mind recent research that had thrown light on the main influences on the scale of gap in GVA between the Northwest and the UK in 2004. Recent revision of the research suggests the GVA gap, which Figure 2 suggests might now be around 12.5%, can be explained as follows:

About a quarter reflects labour market differences, mainly lower participation, but also somewhat fewer hours worked, and less double jobbing in the Northwest, despite broadly similar patterns of part-time working

About a third reflects the fact that employees in the Northwest earn less for similar kinds of work, interpreted as a reflection of the influence of its lower general price level on wage settlements, a price level that has been falling relative to the UK

The rest reflects an additional gap in earnings because of the nature of jobs in the Northwest as compared with jobs in the UK. The fact that there are relatively fewer higher-level jobs, and relatively more lower levels jobs, in the Northwest plays a part, as does an industrial structure in the region with a slight bias towards sectors that tend to generate lower value added per job. But the most important influence here is shown to be comparatively high rewards for higher- level jobs in London and the Wider South East, especially in financial and business services, which now generates nearly half of London’s GVA.

Page 4

Population trends 1990-2006

Figure 3 Working age population in the UK, 1990-2007 (Source: ONS & Cambridge Econometrics)

Figure 4 Working age population in the NW, 1990-2007 (Source: ONS & Cambridge Econometrics)

• Working age population in the UK increased by 7.4% between 1990 and 2007, equivalent to average annual growth of 0.4% per annum. Population growth in the UK was relatively slow prior to 2000, averaging 0.3% per annum. But since 2000, its average growth has accelerated to 0.6% per annum, mainly because of net immigration.

• Growth in the Northwest’s working age population between 1990 and 2007 was far more modest, at 2.0% (or 0.1% per annum), reflecting a period in which the region’s population was still falling, followed by recovery since 2001.

• Since 2000, Northwest’s working age population has grown at an average of 0.4% per annum, whereas during the 1990s it was falling at a rate of 0.1% per annum. As discussed below, net international immigration is likely to have accounted for a significant proportion of the growth in the region’s working age population growth in recent years, though population growth has slowed as net immigration has fallen back since 2004 because of falling job opportunities in 2005 and 2006.

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Page 5

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Figure 5 Number of jobs in the Northwest and the UK (Source: Cambridge Econometrics)

• Jobs growth in the Northwest between 1994 (when employment began to recover in the region after the 1991 recession) and in 2004 was very close to that in the UK (1.14% pa compared with 1.16% pa). In 2004, there were some 360,000 more jobs in the region than in 1994, an increase of 11.9%.

• Between 1998 and 2004, the Northwest performed better than the UK producing an average growth gap in jobs of 0.4 pp pa. Over this period, total jobs increased by 9.1% in the Northwest compared with 6.7% in the UK.

• Jobs growth was exceptionally rapid between 2001 and 2004, reflecting increases in public sector spending and in financial and business services as a result of out-sourcing from London as well as demand growth in the Northwest. However, between 2004 and 2006 the number of jobs in the region fell by 41,000, or by 1.2%, with significant job losses in manufacturing in 2005 and 2006, and a marked slowdown in net job creation in financial and business services. In contrast, jobs in the UK continued to grow at an average of 1.2% pa, in line with experience since 1993.

• Reflecting this recent fall in regional jobs, unemployment increased by 0.7 pp between 2004/05 and 2006/07. However, the region’s unemployment rate of 5.5% in 2006/07 was only 0.1 pp above the UK figure of 5.4%, an improvement, for example, on 1999/2000 when the regional rate was 6.5%, 0.5 pp higher the UK.

• These changes in jobs and unemployment are consistent with the recent slowing in the growth of the region’s working age population. Between 1994 and 2006, this grew by 0.1% pa on average. This was after 0.2 % between 2005 and 2006 and 0.5 % pa between 2000 and 2004, reflecting a peak in net immigration, almost certainly encouraged by the exceptional period of growth of new job opportunities.

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Page 6

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The role of migration and immigration

Figure 6 Internal and international net migration to the Northwest (Source: ONS)

• Total net immigration of 63,200 between 2000 and 2004 was similar to the fall of some 70,000 in the region’s working age population in the 1990s, much of which was the result of net out migration. Linked with exceptional jobs growth, net immigration peaked at 27,200 in 2003 and, as Figure 6 shows, net international immigration, which has dominated the recent picture, has now fallen back. The brief period in which net internal migration also favoured the region, also appears to be over, at least for now.

• Although recently revised ONS 2004-based population projections now estimate that the Northwest will experience net immigration at a rate of 13,600 a year by 2024, three quarters of it net international immigration, we need to understand why the recent position has turned round so sharply, and what this implies for our judgement about the underlying growth gap in jobs. Is it because of diversion as a result of stronger growth elsewhere in the UK following cyclical disturbances earlier this decade, or is it because growth in the demand for labour in the Northwest has eased as jobs data (Figure 5) suggest, or both?

• We know that a strong gross flow of overseas nationals continues to arrive. There has been a relatively pronounced increase in those allocated National Insurance Numbers (NiNos) in the Northwest, some 51,500 allocations in the region in 2006/07, 138% up on 2002/03, and now running at 8% of total UK allocations, just below the region’s share of 8.8% in UK’s working age population. Nearly 40% of foreign nationals allocated NiNos in the Northwest were Poles, who are often known as willing workers, but may not remain as permanent UK residents.

• The Panel has been very concerned in making earlier long-term forecasts about the attrition of young people from peripheral areas of the region into the cities, and from the region to the South, including numbers of ambitious young professionals. These trends seem to be continuing.

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Page 7

Labour Market Developments

Figure 7 Employment rates – the proportion of those of working age in employment (Source: LFS/APS)

Figure 8 Part time jobs as a % of total jobs for the Northwest, Great Britain, and England & Wales (Source: ABI)

• Figure 7 shows a sharp improvement in the region’s employment rate, notably between 2002/03 and 2003/04, narrowing in the gap between the Northwest and Great Britain according to this performance indicator from 2.5 pp in 1996/97 to 1.8 pp in 2006/07.

• However, employment rates have fallen back nationally of late, by 0.4pp in the region from 2003/04 to 2006/07 equally affecting men and women. The region’s total employment rate stood at 72.4% in 2006/07, with 75.7% for men, some 2.8 pp lower than in England and Wales, and 68.9% for women, only 0.5pp lower than in England and Wales. This mirrors differences in inactivity in men and women, and the recent loss in the total number of jobs in the Northwest, which Figure 5, showed has not been shared with the UK.

• Figure 8’s evidence from the ABI illustrates that the total number of jobs in the Northwest grew by 10.5% between 1994 and 2006. At the same time, part-time jobs in the Northwest in 2006 were 31.1% of the total number of jobs, only 1 pp up on 1998, in line with national and comparators’ experience. As a result, the overall increase in jobs has not been driven by a significant increase in double-jobbing (workers holding two jobs or more) and instead is likely to be the result of a marked increase in low value added full-time jobs.

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Inactivity Rates

Figure 9 Male and female inactivity rates (% of working age) in the Northwest and Great Britain (Source LFS/APS)

Figure 10 Benefits claimants as a proportion of the working age population in the Northwest and Great Britain (Source: DWP)

• Economic inactivity in the Northwest fell by 0.8 pp between 1999/00 and 2006/07, though the rate in 2006/07 (23.4%) was still well above that in Great Britain (21.5%).

• Regional results reflect a clear fall of 2.6 pp in female inactivity over the period, 1.7 pp more than in GB. In contrast, male inactivity in the region followed the national trend with an increase of 0.8 pp, reaching 19.2% in 2006/07. This is much higher than 16.7% for males nationally, and higher than in regional comparators. The sharpest fall in female inactivity was in 2002-05, reflecting rapid jobs growth from 2001. It had only risen slightly by 2006/07 despite the fall in regional jobs in 2005 and 2006

• There were 742,000 benefit claimants in the Northwest in May 2007. This figure was down by 7.5% compared with the number in May 2000, but still accounted for 17.5% of the working age population in the region, well above the GB rate (14.2%), and higher than for regional comparators.

• While other claimants in the region increased by over 50,000 between 2000-2007, there was a more than offsetting fall of 122,000 Incapacity Benefit (IB) claimants between 2000 and 2007. The share of the working age population claiming IB in the Northwest fell by 3.1 pp over this period, well above 1.8 pp nationally.

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Page 9

Productivity

Figure 11 GVA per job in the Northwest & the UK (Source: Cambridge Econometrics)

• Over the last decade, productivity in the Northwest has grown on average by 1.7% pa, marginally slower than in the UK. However, its path has been more variable, making it harder to identify the underlying growth gap we need.

• For instance, there was little productivity growth in the Northwest between 2000 and 2003, a period that included both a significant increase in employment, and a temporary fall in productivity, in public services. More generally, productivity growth appears to have been dampened as a big increase in service sector jobs took place. It is only recently that what was a rapidly widening productivity gap has begun to narrow, for example, because of job cuts in manufacturing, and strong productivity growth in financial and business services in 2006, when continuing output growth coincided with much slower job creation in this sector.

• Last year, after even more disparate recent figures, we forecast growth gaps of 0.3 pp pa in productivity and 0.1 pp pa in jobs, giving 0.4 pp pa in GVA. If we were now to use ‘best fit’ results for 2000 to 2006, the figures become 0.2 for productivity, 0.1 for jobs, and 0.3 for GVA. But if we regard 2006 as an outlying point, and use best fit from 1990 to 2005 to put more weight on years before rapid structural change began around 1998, and before the region’s population began to grow largely because of net immigration, we get 0.3 for productivity, 0.3 for jobs, and 0.6 for GVA, which seems to be far too high a gap.

• In the past, the Panel’s view has been that the recent worsening in relative productivity growth in the Northwest would not persist and that a productivity gap of 0.3 pp pa would reassert itself. We concluded that this is the figure to use again for productivity, combined with 0.1 pp pa on jobs, which also fits with the ONS based projections later on.

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Figure 12 Employment as a % of total by main industry grouping for the Northwest and UK (Source: Cambridge Econometrics)

• Over the last 15-20 years, the Northwest has experienced a structural shift in employment away from manufacturing towards services. However, regional employment in manufacturing remains higher as a proportion of total employment than in the UK (11.9% as against 10.5% in 2006), and manufacturing in the Northwest showed a productivity advantage of £48,500 as against £45,500 per job in the UK in 2006.

• As employment in public services has grown broadly in step in the region and UK since 1990, the clearest difference in industrial structure is now in ‘Other services’, 24.1% of employment in the region in 2006 versus 26.4% in the UK.

• This is important because ‘Other services,’ including banking and financial services, can have high and growing productivity. But, in 2006, GVA per job in ‘Other services’ in the Northwest was £30,900 compared with £37,000 in the UK, a productivity gap that has widened from 13.1% in 1990 to 16.5% in 2006. Productivity in the Northwest is also lower in all broad services sectors than in the UK, including in distribution, hotels and catering, and in public services.

• The structural shift from manufacturing (in which the region has an advantage) towards services (in which productivity performance in the Northwest is comparatively poorer than in the UK, and appears to be deteriorating) has contributed to an overall productivity gap with the UK that has increased significantly from 4.5% in 1990 to 7.1% in 2006. On recent trends, the shift has further to go, and the widening productivity gap can be thought of in terms of increasing differences in occupational levels and in pay, especially for the highest levels of work, as well as in pay generally because of widening differences in price levels.

Employment & Productivity - trends by broad sector

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Page 11

Productivity by Industry

Figure 13 Labour productivity in Services, 2005 (£000’s per person employed) (Source: Cambridge Econometrics)

Figure 14 Change in labour productivity in Services in the Northwest (UK=100), 1995 and 2005 (Source: Cambridge Econometrics)

• In 2005, productivity in the Northwest in all sectors, with the exception of textiles, clothing & leather and transport equipment was below UK levels. Other manufacturing sectors, such as electronics, electrical & instrument engineering, had productivity gaps as large as 20%. Services generally had big gaps, particularly in those that can have the highest productivity, including financial and business services. Also, productivity gaps with the UK have widened in all service sectors over the past decade, partly because of movements in price levels, shifts in where higher and lower levels of jobs are done (especially in financial and other business services as a result of increasingly high earnings in London reflecting competition for skills, scale and specialisation), London’s place in national and international markets, and the size of transactions to which fees often relate.

• Overall productivity performance also varies considerably within the region, reflecting the sectoral mix of each sub-region and also variations in productivity within sectors. For example, in Cumbria, productivity in banking and financial services is 20% lower than the average for the Northwest as a whole, while in Cheshire it is 10% higher.

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Page 12

Table 1 Average per annum growth and Future Economic Growth, 2006-26 (Source: Panel Forecast, 2007) Northwest (%) UK (%) NW differential (pp) Population growth pa 1990-2006 0.0 0.3 -0.3 2000-2006 0.1 0.4 -0.3 March 2007 Forecast 0.3 0.4 -0.1

Employment growth pa 1990-2006 0.2 0.5 -0.3 2000-2006 1.9 1.1 -0.2 March 2007 Forecast 0.4 0.5 -0.1

Productivity growth (GVA per job) 1990-2006 1.8 2.0 -0.2 2000-2006 1.5 1.7 -0.2 March 2007 Forecast 1.6 1.9 -0.3

GVA growth 1990-2006 2.0 2.5 -0.5 2000-2006 2.4 2.8 -0.4 March 2007 Forecast 2.1 2.5 -0.4

• Since 1990, GVA growth in the Northwest has continued to be weaker than in the UK as a whole, though since 2000 its growth in the Northwest has strengthened, both absolutely and relatively to the UK as a whole. Despite an accompanying slowdown in productivity growth, this strengthening was due to exceptional growth in jobs, especially between 2001 and 2004.

• The Panel’s view last year was that this period of rapid jobs growth was exceptional, and that long-term growth prospects for the Northwest economy would continue to lag those in the UK, with a slight improvement in relative performance as compared with the previous 16 years.

• Compared with the period since 1990, the outlook was for stronger population growth, and for this to be reflected in stronger underlying growth in employment. Nationally, the outlook was for productivity growth to be slightly weaker than since 1990, and the Panel’s view was that productivity growth in the Northwest would be slightly weaker than in the UK, mainly for spatial reasons. The expected outcome was a widening in the gap between the UK and Northwest both in terms of GVA and GVA per head.

Summary of the Panel’s Long-Term Forecast in March 2007

Page 13

Developing the panel’s forecast for 2007 - 2027

Page 14

Developing our new Long-Term Forecast

• In revising our long-term forecast, we need to consider whether Northwest growth will continue to lag behind the UK by 0.4% per annum, as we thought last year, and to what extent this should be modified. To inform our thinking on the forecast growth differential, and the likely relativities between the region and the wider UK, we need to revisit our analysis on the following fronts:

Jobs – population, working age population, participation, and other factors such as double jobbing and part-time jobs

Productivity – as in earlier long term forecasts, we needed to look at the Treasury’s five supply drivers of productivity - Skills, Enterprise, Investment, Innovation and Competition - as perspectives through which to view region’s performance in comparison with that of the UK. Comparative evidence about the first four drivers is set out at pages 17 to 21. Again, where possible, and within the confines of trying to achieve a concise report, our analysis provides comparisons with the West Midlands and Yorkshire and Humber, regional economies which share many similarities with the Northwest

Spatial Factors – This section, which looks at the spatial pattern of growth in the Northwest and the UK, and various influences on it arising from the behaviour of individuals and of firms, proved to be particularly influential on our final forecast last year. This material has been revised and updated in the light of recent research

Risks - to which our view might be subject.

• This year, we have added a new element. Recognising the focus that the Sub-National Review gives to narrower geographies, we have complemented our analysis of the spatial aspects of growth to include some initial material at a sub-regional level, presenting data for the five sub-regions within the Northwest. We were not being asked to produce forecasts as such for the sub-regions. Rather the material was included to provide the basis for a consistency check on our emerging forecast after we had taken account of supply side and spatial considerations.

Page 15

Demography & Jobs

Figure 15 Working age population in the Northwest and UK (Index 100 = 1990) (Source: ONS mid-year population estimates, ONS 2004-based sub-national population projections)

Figure 16 Indexed Employment Growth the UK, Northwest by sector (Index 100 = 1990) (Source: Cambridge Econometrics)

• The Northwest’s population began to recover in 2001, and has since grown by 80,000, some 1.2%, or an average of 0.2% pa. The ONS recently updated UK population projections we have relied on before, so average increases of 0.5-0.7% pa may be expected nationally, up from 0.3- 0.4% pa because of revised views on net immigration. Sub-national projections are not yet available on the same basis, but scaling existing sub- national projections in line with the new national projections gives an expected average growth of population in the Northwest of 0.5-0.6% pa, a shade below the UK figure of 0.5-0.7%.

• On the same basis, the working age population in the Northwest is projected to rise by on average by 0.4% pa between 2007-27, with the strongest growth occurring between 2010-20 as the state retirement age for females comes into line that with for males. This is also around 0.1 pp slower than is forecast for the UK.

• Forecasts published by Cambridge Econometrics anticipate average employment growth of 0.3% pa in the region as against 0.6% pa in the UK based on a less favourable view of relative population growth than is shown in the ONS trend-based projections above. They still imply a further decline in manufacturing employment more than offset by increases in services, especially in ‘Other services’.

80

85

115

UK

Northwest

1990

120

125

130

Ind

ex, 1

990

= 1

00

90

95

100

105

110

1995 2000 2005 2010 2015 2020 2025

40

60

180 Manufacturing - NW

Manufacturing - UK

1990

Ind

ex, 1

990

= 1

00

80

100

120

140

160

1995 1990 2000 2005 2010 2015 2020 2025

Distribution, hotels & catering - NW

Other services - NW

Other services - UK

Distribution, hotels & catering - UK

Page 16

Productivity drivers - Skills 1

Figure 17 Highest qualification attained (Source: LFS)

Figure 18 Proportion of employees receiving job related training in the last 4 weeks (Source: LFS)

• The Northwest has tended to have relatively low recorded skill levels. In 1999/00, 19.1% of the working age population had no qualifications in the region compared to 16.7% in England and Wales. The comparative proportion with the highest level qualifications (Level 4+) was 19.6% in the Northwest and 22.3% in England and Wales. However, skills levels in the region have improved in recent years, both in absolute and relative terms in comparison with England and Wales, leading to a tighter labour market.

• Those with no qualifications in the region in 2006 accounted for 15.8% of the working age population, where the associated gap with England and Wales had narrowed to 2 pp from 2.4 pp in 1999/00. And 24.8% of the working age population in the region had Level 4+ qualifications, a gap of 2.2 pp with England and Wales from 2.7 pp in 1999/00. Comparator regions have not done as well. In Yorkshire and Humber in particular, gaps with England and Wales in the proportions with Level 4+ and without qualifications have both widened.

• Regionally, a higher proportion of employees received job related training than in England and comparator regions in 2006. The proportion was markedly higher in 2006 than 1999, an increase of 1.0 pp, in contrast to a decrease in the proportion for the UK and comparator regions.

13.5%

14.0%

14.5%

15.5%

United Kingdom

Northwest Yorkshire & Humbershire

West Midlands

1999

200616.0%

0%

5%

10%

15%

Mar 1999 - Feb 2000

Jan 2006 - Dec 2006

Mar 1999 - Feb 2000

Jan 2006 - Dec 2006

Northwest England & Wales

NVQ1

NVQ2

NVQ3

NVQ4+

20%

25%

30%

No qualitfications

16.5%

17.0%

17.5%

15.0%

Page 17

Productivity drivers - Skills 2

Figure 19 Occupations by occupational category in 2006 (% of total jobs) (Source: APS)

Figure 20: Relative earnings by occupational category in 2006 England = 100% (Source: ASHE)

• There remain significant differences in occupational structures across regions. Compared with England, and especially with the Wider South East (East of England, London, and the South East), the Northwest has a relatively low proportion of high-level occupations. Similarly, the region, along with Yorkshire/Humberside and the West Midlands, continues to have a higher share of low-level occupations than in England and the Wider South East.

• In addition to a lower share of high-level occupations in the Northwest, earnings in these occupations are significantly lower than in England, and especially so compared with the Wider South East. Although the gap in earnings between England and the Northwest is the smallest of its comparator regions, latest figures indicate that the West Midlands and Yorkshire and the Humber have experienced increased earnings relative to the Northwest.

• Based on previous Panel discussions and productivity research, we think there could well be an issue about the future supply of experienced high-level skills in the region if ambitious plans for its major city regions are to be realised, and if some manufacturing sectors are to protect their competitiveness internationally.

0%

High Level

Medium Level

Low Level

20% 40% 60% 80% 100% 120%

0%

High Level

Medium Level

Low Level

10% 20% 30% 40% 50% 60%

Northwest

Yorkshire & Humberside

West Midlands

Wider South East

England

Northwest

Yorkshire & Humberside

West Midlands

Wider South East

England

Page 18

Productivity drivers - Enterprise

Figure 21 VAT registrations per 10,000 of working age population (Source: NOMIS & ONS)

• The most widely used proxy for enterprise in an area is the number of new firms registering for VAT as a ratio of the working age population. In 2006, there were 41.4 registrations per 10,000 of the Northwest’s working age population compared to 48.6 in England and Wales. However, this rate, 14.9% below the figure for England and Wales, is an improvement on the gap of 18.8% in 1996.

• The VAT registration rate in the Northwest in 2006 was slightly behind the West Midlands’ level (44.1), but ahead of Yorkshire and Humber (39.5).

• Registrations remain concentrated in the region’s cities and their hinterlands. More than a quarter of registrations in 2006 were in Manchester (1,385), Trafford (930), Liverpool (905), Stockport (860) and Bolton (785). However, a number of (often more rural) hotspots also perform strongly: Macclesfield, Congleton, Ribble Valley, South Lakeland, Chester, and Eden had over 50 registrations per 10,000 of the working age population in 2006.

• One-year business survival rates in the Northwest in 2004 stood at 92.1%, the same level as in the UK. This rate improved by 5.8 pp in the region from 1995-2004, closing the gap with the UK that in 1997, for example, stood at 2.7 pp.

• Care should nevertheless be exercised in interpreting registration data, especially in making spatial comparisons of business behaviour. The current turnover threshold above which it is mandatory to register for VAT is £64,000, a less demanding limit in places with low price levels. And registration need not imply that businesses will choose to grow and employ others, for instance the many self-employed people who provide high value professional services in larger urban centres like Manchester and especially London, such as in IT, and earn above the VAT limit.

0.0

10.0

England and Wales

%

1996 2001

Northwest West Midlands

2006

20.0

30.0

40.0

50.0

60.0

Yorkshire & Humberside

Page 19

Productivity drivers - Investment

Figure 22 Manufacturing & services investment (by UK-owned companies) as a percentage of regional GVA (Source: ABI and ONS)

Figure 23 Average net capital investment per business (Source: ABI and NOMIS)

• Investment (as measured by net capital expenditure by firms) has accounted for a consistently higher proportion of regional GVA in the Northwest than for the UK as a whole. In manufacturing in 2004, this investment accounted for 1.2% of regional GVA, 0.5 pp higher than in the UK.

• This trend also holds true in the service sector, with net capital investment accounting for 5.2% of regional GVA in 2004 in the Northwest compared to 4.4% in the UK.

• Average net capital expenditure per business in the region was £49,200 in 2004 compared to £43,800 in Great Britain. According to this data, businesses in the region on average invest 12.4% more per annum than those in Great Britain.

• This data is heavily influenced by the industrial structure of the region’s economy, with its manufacturing, and particularly its energy sectors, impacting on overall results. Although data is bound to fluctuate, as in Figure 23, the region has consistently done well in business investment.

• However, data on Gross Fixed Capital Formation per 10,000 residents in 1998 and 2000 suggests that, overall, under-investment might be a contributory cause to relatively low levels of productivity in the Northwest. In 2000, total investment in the region was 19%, almost a fifth below the then national average.

0.0%

1.0%

UK

Northwest

Manufacturing Services

1998

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2000 2002 2004 1998 2000 2002 2004

£35,000

£40,000

£45,000

£50,000

£55,000

£60,000

Yorkshire & Humberside

West Midlands

Northwest

GB

£30,000

1998 1999 2000 2001 2002 2003 2004

Page 20

Productivity drivers - Innovation

Figure 24 Gross domestic expenditure on R&D, as a proportion of Total GVA (Source: ONS)

Figure 25 R&D expenditure by manufacturing, as a proportion of sectoral GVA (Source: ONS)

• Figure 24 shows that innovation measured by gross R&D expenditure as a proportion of GVA has been consistently strong in the Northwest, well above national levels and regional comparators, helped by the still relatively important role of manufacturing in regional output. R&D expenditure in this sector rose from 6.9% of total GVA in 1999 to 8.6% in 2004, above the 2004 rate of 6.8% in the UK, and well above regional comparators. However, these results are likely to have been influenced by the concentration of aerospace and pharmaceuticals in the Northwest, so other parts of its manufacturing sector may be under-invested.

• Service-related R&D in the UK has accounted for 0.3% of GVA annually since 1999. In the Northwest, the level fell from 0.2% in 1999 to 0.1% annually since 2000. The Panel has pointed out that much innovation in financial and business services remains concentrated in London.

• Uptake of ICT is a general indicator of innovative behaviour in business relating on productivity. In 2007, 54% of regional firms had a website, up from 43% in 2004. Separately, OFCOM data at 2006 reported that 59% of regional SMEs and 59% of regional households very using broadband, compared to 62% and 61% respectively for the UK (the South East region was at 74% and 67%, respectively).

0.0

0.5

2.0

UK

%

1999 2001

1.0

1.5

2.5

Northwest York / Hside West Mids

2003 2004

0.0

2.0

8.0

%

4.0

6.0

10.0

2000 2001 2002 2003 20041999

Northwest UK West Mids York / Hside

Page 21

Spatial aspects of growth - Introduction

• Evidence about productivity drivers has been presented in terms of aggregate figures for the region and the UK, taking no account of where growth has been taking place, or where it is likely to take place in future.

• Spatial evidence on the next two pages shows how far Northwest growth has been concentrated since 1995 in a corridor including Greater Manchester South and Liverpool, an area in which productivity growth has also held up better than elsewhere in the region. It also shows that growth in the UK has generally been concentrated in cities and city regions, especially so in the London ‘Global City Region’ that spreads well beyond London.

• Greater Manchester South (GMS) was the fastest growing NUTS3 area in the Northwest between 1995 and 2005. Yet this growth measured with workplace-based GVA data only approached that of the whole of London and the South East, roughly a third of the UK economy. GMS also grew much more slowly than Inner London, which generated nearly fives times as much GVA as GMS in 2005.

• GMS in turn generated more than a quarter of the region’s GVA in 2005, over three fifths of that of the growth corridor, and four times that of Liverpool. The rest of the Northwest, including the rest of the corridor, and North Manchester in particular, grew more slowly than GMS, and therefore more slowly than London and the South East.

• Narrowing growth gaps in GVA and GVA per head means reversing trends of this kind, given their determining influence on overall measures of relative performance. Also, given the weight of GMS and the growth corridor in the economy of the Northwest, and that of London and its ‘Global City Region’ in the economy of the UK, our judgement as a Panel about the prospects for these two entities relative to one another was bound to have a big influence on the view we reached about the scale and direction of the most likely overall GVA growth gap between the Northwest and the UK.

• Last year, we identified a number of questions that helped us to reach a view on this centrally important issue. These we revisited in the light of further experience and research, and asked in addition about the scope for transferring high-level work, bearing in mind that last year’s forecast of regional growth relative to the UK was much influenced by spatial factors.

Page 22

Spatial aspects of growth - GVA growth

Figure 26 Percentage change in Regional GVA share (1995-2005) Figure 27 GVA per capita % change (1995-2003)

Eden

Allerdale

Carlisle

South Lakeland

Copeland

Lancaster

Wyre

Chester

Ribble Valley

Wirral

Macclesfield

Vale Royal

Fylde

SeftonWigan

Chorley

Pendle

Bolton

Congleton

Oldham

Rochdale

Burnley

West LancashireBury

Crewe and Nantwich

Preston

WarringtonLiverpool

St Helens

Halton

Trafford

Salford

Stockport

Rossendale

TamesideManchester

Knowsley

South RibbleHyndburn

Barrow-in-Furness

Blackburn with Darwen

Blackpool

Ellesmere Port and Neston

Produced by SQW Ltd, January 2008© Ordnance Survey. Crown Copyright. License Number 100019086© Collins BartholemewData Source: ONS

Percentage change in regional GVA share

(1995-2005)

Under -10.0

-9.9 - -5.0

-4.9 - 0.0

0.1 - 5.0

Over 5.0

YORK

LEEDS

DERBY

LONDON

OXFORD

SWINDON

READINGBRISTOL

BELFAST

GLASGOW

CARDIFF

COVENTRY

ABERDEEN

SHEFFIELD

LIVERPOOL

GUILDFORD

CAMBRIDGE

EDINBURGH

NOTTINGHAM

MANCHESTER

BIRMINGHAM

MILTON KEYNES

NEWCASTLE UPON TYNE

WREXHAM

KINGSTON UPON HULL

MIDDLESBROUGH

SOUTHAMPTON

PLYMOUTH

GVA PER CAPITA

% Change 1995 - 200315.1 - 20.8

20.9 - 28.2

28.3 - 33.6

33.7 - 40.2

40.3 - 45.6

45.7 - 50.1

50.2 - 55.6

55.7 - 62.6

62.7 - 76.7

76.8 - 95.6

Sources: GVA statistics - National Statistics website: www.statistics.gov.ukNUTS boundaries - Geodan IT bvCrown copyright material is reproduced with the permission of the Controller of HMSO

Mapping by:

UNITED KINGDOM NUTS 3 AREAS

Sources: GVA Statistics, National Statistics website - www.statistics.gov.ukNUTS Boundaries - Geodan IT bvCrown Copyright Material is reproduced with the permission of the controller of HMSO

Page 23

Spatial aspects of growth - UK Cities

Table 2 Performance of City Regions (NUTS3 areas) across England (Source: ONS & ABI)

Northwest Northwest average 15,571 4.7% 0.3% 1.3%

Lancashire CC 17,394 5.7% 14,966 4.6% 0.6% 1.4%

Liverpool 7,133 2.3% 16,321 5.1% 0.0% 1.8%

Greater Manchester South 27,925 9.1% 20,422 6.1% 0.5% 1.4%

Yorkshire Yorkshire/Humberside average 15,372 5.0% 0.5% 1.4%

& Humberside Leeds 15,628 5.0% 20,613 5.7% 0.8% 1.4%

York 3,692 1.2% 19,469 5.6% 1.4% 1.8%

West Midlands West Midlands average 15,841 4.7% 0.3% 1.1%

Birmingham 18,038 5.9% 17,984 4.9% 0.4% 0.7%

Coventry 5,538 1.8% 18,145 4.4% 0.5% 1.1%

Warwickshire 9,209 3.0% 17,748 5.7% 0.5% 2.0%

London London average 27,762 6.5% 1.2% 1.6%

Inner London - West 84,724 27.7% 78,285 7.0% 2.1% 1.3%

Inner London - East 47,714 15.6% 25,625 7.8% 1.5% 2.7%

South East South East average 19,434 6.2% 0.7% 2.1%

Milton Keynes 5,963 1.9% 26,934 7.7% 1.7% 3.1%

East East average 16,980 5.6% 0.7% 1.6%

Cambridge CC 11,127 3.6% 19,081 6.4% 1.2% 1.9%

Region Absolute GVA £m (2005, at current basic prices)

City region area (NUTS 3) GVA as % of GVA in all City Regions

GVA per head (£, 2005, at current basic prices)

GVA - % change p.a (1995 - 2005)

Working age population- % change p.a (1995 - 2005)

Page 24

Spatial aspects of growth - City Regions

• Agglomeration is likely to have played a big part in these city-centred developments. This reflects the advantage to consumers, producers, and employees, especially in knowledge-based industries, of being located near one another, thereby increasing opportunities and specialisation, service and choice. More and more participants are drawn in until costs rise far enough to choke off further agglomeration, unless these can be mitigated, for instance by out-sourcing mobile blocs of work to lower cost centres, including parts of the Northwest, rather than having it done in and around London.

• Having a critical mass of high value activities and opportunities is one of a number of conditions research shows is necessary for agglomeration to become dynamically self-reinforcing in City Regions. Others are (i) external and internal connectivity, for instance to London and abroad, offset by congestion and inadequate transport infrastructure; (ii) a sufficient quality of life to help to retain and attract skilled and enterprising people, including ‘buzz’ for younger people, and a good enough offer on attractive housing and schools for more experienced people with families; and (iii) an environment for business able to foster innovative firms and to attract inward investment in high value and knowledge intensive activities.

• Given recent evidence and further experience of these conditions, we asked if there was good reason to shift our view about the prospects for GMS and the corridor, and perhaps other UK cities and City Regions, relative to London and its Global City Region. While Greater Manchester (GM) might still have the best prospects among City Regions outside London’s sphere, not least because of the international connectivity allowed by its airport, we asked if its growth is ever likely to match that of London, a global city with a concentration and range of high level services unrivalled in Europe, and one in which headquarters control of business is also being increasingly concentrated?

• Panel Members have expressed some concerns about the difficulty of attracting mature specialist skills; constraints on housing and transport infrastructure discussed last time; that Manchester’s airport is unmatched outside London, but is still limited in direct routes in comparison; and that, while the Northwest has quite a good recent record of attracting inward investment in manufacturing, its comparative performance in services is very disappointing.

• Recent research has suggested that some NUTS3 areas beyond the cities may be beginning to share in their success through ‘spill over’ effects of a kind more familiar in the South. We also asked what this might mean for growth potential in the region.

Page 25

Spatial aspects of growth - Producer services

• Productivity gap research summarised on Page 4 points to some influence from differences in structure, to differences in levels of work done in different places in terms of occupational groups, and especially to the effect of higher earnings reflecting specialisation and competition for skills especially in London in addition to the general effect of price levels on wages. We found that analysis of this kind helped us to explain why, as at Figure 13, productivity has been falling in all Northwest service sectors relative to the UK in recent years, and we asked whether this was likely to continue in each of the service sectors that we knew.

• On financial and business services in particular, which in 2005 provided nearly a fifth of Northwest GVA, almost 30% of that of the Wider South East, and nearly half that of London, spatial research shows the sector is dominated in the North by London-controlled firms. They tend to do a higher proportion of their work for national and international clients in London, and otherwise generally organize and supply services according to regional and more local needs.

• As well as segmenting their markets spatially in this way, the activities of producer services firms outside London have also been increasingly concentrated in larger urban centres to take advantage of agglomeration. This, in turn, has reinforced the emergence of a hierarchy of centres, with larger centres supporting smaller ones with their specialist skills, including support for Manchester from London, and from Manchester to other places in the Northwest. We asked how likely it was that these trends would continue.

• Linked to this, the Panel has previously pointed to the fact that highly specialised and innovative work in producer services tends to be done in London, and that rewards and opportunities are such that London, like other international centres, exerts a ‘pull’ on ambitious young people. Some may return for quality of life reasons later on, and some high skills can be recruited worldwide. But, there is a net drain towards Manchester in the Northwest, and from the Northwest to London. We therefore asked how these flows were likely to develop, and what effect such developments might have.

• We noted that there is only one FTSE 100 firm headquartered in the Northwest, and that mergers and acquisitions have resulted in a continuing shift of control and headquarters of Northwest firms, often towards London, affecting high-level management jobs in acquired firms, and in some of their high-level service providers. We explored the scale on which this ‘headquarters effect’ on the location of higher value added jobs was likely to continue.

Page 26

Spatial aspects of growth - Transfer of work in services from London

• Relative costs continue to rise in London, and there may be more scope than has already been seen for high-level work as well as supporting work originating in London to be done in the Northwest. We therefore needed to take a view on the scope and direction of future transfer of high-level work.

• Here, research points to the scope for doing some London-generated transactions wotk in the Northwest for price sensitive clients, but also to the desire of London clients to have work done by people they know, and in co-located teams. This may act as a break on such transfers, as may clients generally being less sensitive to price when issues are of great importance to them, and if total deal costs are much greater than professional fees for services seen as vital to their success. Also, expectations about where the best work is done might play a part, as against the greater attention some Northwest providers are known to give to local clients who might well be seen as smaller fry in London

• As well as these factors, and perhaps others, we considered what the effect of fastre train times might be. The comment was made last year that Manchester is already too near London for its firms to need develop a full range of specialist services, and quicker services are expected before long. If much faster trains we introduced, might this mean that more high-level work and more good people would be transferred to London or, alternatively, would more high-level work be done in Manchester for distant clients? If both effects were likely, what might be the balance of advantage look like?

• And what, if any, effect might faster and perhaps more frequent trains also have on the transfer of supporting blocs of work?

Page 27

Table 3 Performance of Sub-Regions across England (Source: ONS, ABI and Cambridge Econometrics)

Northwest Northwest average 106,501 15,571 4.7 0.2 0.0 1.0

Cheshire 19,306 18.1% 19,367 4.8 0.2 0.2 1.1

Cumbria 6,687 6.3% 13,491 3.1 0.1 0.2 0.5

Greater Manchester 42,082 39.5% 16,546 5.0 0.3 0.0 1.0

Lancashire 21,073 19.8% 14,568 4.3 0.4 0.2 0.9

Merseyside 17,352 16.3% 12,784 4.8 -0.1 -0.4 1.3

• Table 3 shows how the sub-regional economies have performed over the last decade on various indicators. The dominance of the Greater Manchester economy is clear. It represents 40% of Northwest GVA and is twice as large as the second-largest sub-regional economy, Lancashire. In contrast, Cumbria represents just 6% of the Northwest output.

• The data illustrate similarities and important differences between the Northwest’s two conurbations. Greater Manchester and Merseyside have both been important in underpinning growth in the Northwest over the past decade, achieving GVA growth rates in excess of the Northwest average. However, there are clear differences between the two sub-regions in addition to their relative size, with Greater Manchester generating higher levels of GVA per head and having experienced stronger growth in its working age population. In contrast, GVA per head in Merseyside is the lowest in the Northwest, partly because of high inactivity levels, and the population in the sub-region has continued to decline despite strong growth in employment that has been seen in recent years.

• The aging of the population has been most severe in Cheshire and Cumbria, due to legacy effects and the prevalence of out-migration of young adults. Both sub-regions have seen slower growth in their populations of working age than in their overall populations. Despite this, Cheshire has seen strong employment growth over the period.

• The following pages provide a snap-shot and a SWOT analysis for each of the individual sub-regions of the Northwest.

The sub-regional perspective 1

Region Sub-regions (NUTS 2)

Absolute GVA £M (2005, at current basic prices

GVA as % of GVA in the Northwest

GVA per head (£, 2005, at current basic prices)

GVA - % change p.a (1995 - 2005)

Working age population- % change p.a (1995 - 2005)

Population- % change p.a (1995 - 2005)

Employment- % change p.a (1995 - 2005)

Page 28

The sub-regional perspective 2

Sub-Region Snap-shot

Greater Manchester GVA per head in Greater Manchester (GM) was £16,546 in 2005, well below £18,546 in the UK. However, this masks a city region embracing two distinct economic geographies. Also in

2005, GVA per head in Greater Manchester South (GMS) was £20,4221, higher than in the UK, and in the Wider South East, helped by strengths in higher value added knowledge

intensive sectors. In contrast, Greater Manchester North (GMN) achieved a level of GVA per head of only £12,039, well behind the Northwest’s figure of £15,571. While these are

workplace-based figures, and therefore those for GMS are swelled by the output of commuters resident elsewhere, the 2001 census showed relatively little commuting from GMN into

GMS that might have helped to explain the contrast between the two. Forging connections between residents in GMN and income earning opportunities in GMS is a challenge for GM,

and how well this might be achieved becomes an issue in judging GM’s future prospects.

Recent rates of VAT registrations in GM are better than in the Northwest, but lower than in the UK. However, GM’s qualifications profile lags behind regional and national levels. Although

attainment levels are improving, nearly half of its young people who left school in 2005 did so without NVQ 2 or equivalent qualifications, and nearly a fifth of working age people in GM

were without any qualifications in 2005, when GM also had relatively high numbers of 16-18 year olds who were not in employment, education, or training.

Lancashire GVA per capita of £14,568 in Lancashire in 2005 was lower than £15,571 in the Northwest, a gap that has been widening. Below this level, the sub-region is divided spatially with GVA per

head in the Lancashire County of £14,966 in 2005 notably higher than £11,990 in Blackpool, again possibly influenced by differences in inactivity. Across the sub-region as a whole,

unemployment is relatively low, 5.0% compared with 5.4% in the UK in 2006/07, whilst deprivation remains an issue in the urban centres and larger seaside resorts.

Lancashire’s current economy is diverse, with a mix of international and indigenous companies. Many businesses are small (84% of its workplaces employed fewer than ten people in 2006,

a shade above the Northwest). Manufacturing remains a key employer, with 17% of workplace employees in the sector in Lancashire in 2006 compared with 11% in England; and despite

an overall decline in employment in manufacturing, a good deal of high technology employment has developed, particularly associated with the aerospace industry. Meanwhile, the overall

structure of employment continues to shift towards services, with some focus on low value added service jobs in health. Public administration, education, and health sector now accounts

for 29.5% of employment in Lancashire, less than in Merseyside, but rather higher than 27.8% in the Northwest, and higher than 26.5% in England. Prospects may again be mixed.

1 Provisional 2005 Figures, ONS

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Sub-Region Snap-shot

Cheshire and

Warrington GVA per capita in Cheshire and Warrington of £19,367 in 2005 was higher than in the Northwest and in the UK. Cheshire residents are also increasingly affluent, with higher disposable

household incomes than in other sub-regions of the Northwest. Mean gross full-time residence-based earnings were £489 a week in 2007 in the Cheshire County Council area, compared

with £440 in Warrington, £433 in the Northwest, and £459 in Great Britain. Workplace earnings in 2007 were also quite high at £456 in Cheshire and £479 in Warrington, compared with

£434 in the Northwest and £457 in the United Kingdom. Comparison of these residence and workplace-based figures suggests some enhancement of income levels in Cheshire as a result

of residents who commute to work elsewhere, and workplace earnings in Warrington appear to be enhanced by those who live elsewhere.

The sub-region has also seen its population grow faster than in the Northwest and Great Britain, suggesting an inflow of residents attracted by its very good quality of life. However, the

proportion of people aged 20-39 is low and falling, for instance by 5.7% between 2001 and 2006 as compared with falls of 1.8% in the Northwest and 0.9% in England in the same period.

As this fall has been particularly marked in the Cheshire County Council area, pointing to the future sustainability of local employment an issue, especially given evidence of commuting to

work elsewhere. And housing affordability could be a further issue with a bearing on the local workforce in future, as average house prices in Cheshire and Warrington of over £196,000

were close to national levels in 2006, and affordability ratios indicate that it is becoming increasingly difficult even for some of those on above average incomes to purchase homes in the

sub-region. Without new housing, this sub-region might begin to suffer from its own recent success.

Merseyside GVA per capita in Merseyside has recently been growing at the same rate as in the UK, and faster than in the Northwest. But at £12,784, its GVA per head in 2005 was still well below

£15,571 in the Northwest. This result is much influenced by the sub-region’s relatively high rate of inactivity in its population of working age of 26.6%, as against 23.4% in the Northwest

and 21.7% in the UK.

There are some promising signs. The number of its VAT registered business increased by 2.2% between 2005 and 2006, above the national increase of 2.0%, though its business density,

the stock of VAT registered businesses as a proportion of its resident population, has remained unchanged. According to the Global Entrepreneurship Monitor, entrepreneurship was

relatively high in 2007 among its younger people, but overall rates were still below the national average. The proportion of NEETs, that of young people not in education, employment or

training in its population of 16-18 year olds, was recently slightly lower in Merseyside at 10.3% than in England at 11.0%, and school attainment levels are showing signs of improvement.

The sub-region has experienced some increase in graduate retention. And although these numbers are modest compared with overall levels of GVA, Capital of Culture celebrations this year

in Liverpool, with associated spill-out effects into the wider Merseyside area, could bring £50 million in visitor spend into the wider Northwest in addition to a further £50 million brought to

the Merseyside economy.

However, as its population continues to fall, there is an issue as to whether, despite commuting from elsewhere, the future supply of labour in Merseyside may temper prospects for growth

both in jobs and income following after the more buoyant conditions experienced recently.

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Sub-Region Snap-shot

Cumbria Although GVA per head in Cumbria has been improving, especially since 2001, its level of £13,4912 in 2005 still lagged behind the Northwest at £15,571. The sub-region

remains over-reliant for jobs on sectors that continue to decline (for instance, agriculture and manufacturing), it is under-represented in others (financial and business services), and a

number of its locations are over-reliant on specific sectors. However, nuclear power is a key employer in the sub-region, which therefore should be well placed to take advantage of the

recent announcement that nuclear power is set to be part of the Government’s strategy for a low carbon economy.

Between 2000 and 2006, there has been an increase in the stock of VAT registered enterprises of 11.4% in Cumbria, the same as the Northwest, compared with an increase of 10.7% in

Great Britain. Also VAT based survival rates have been higher than in the Northwest and in England. Average residence based earnings of £22,339 in Cumbria in 2005 were very close to

those in the UK at £22,374, relatively high compared with £21,938 in the Northwest. This may imply some enhancement of sub-regional income from residents commuting to work

elsewhere, and perhaps from running businesses distant from their markets with the help of ICT. However, growth in Cumbria’s working age population has been slow, and this has been

mirrored by low growth in its employment. This cause for concern is compounded by a continued growth in its population of those aged 65+ of 12.7% compared with 6.6% in England

between 1991 and 2006, and by a fall in the same period in its population of those aged between 15 and 29 of 20.4% compared with 10.6% in the Northwest and 7.0% in England.

Cumbria’s prospects may therefore be mixed.

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2 Provisional 2005 Figures, ONS

The sub-regional perspective 3a - Greater Manchester

• Key Issues: Pronounced north/south divide within City Region, undeveloped linkages to labour pools north of the city, rising costs, congestion and some very deprived urban areas. But international airport, strong university, Media City, and a vibrant and growing city centre. NW GVA weight in 2005 = 40%

Strengths

Includes the fastest growing economy in the region

Regional centre for finance, business , retail, health and higher education, including 4 universities could encourage further agglomeration

Transport links, including International Airport, motorway network, and a 2 hour train service to London

Opportunities

Grow Manchester Airport, sort Manchester‘s rail hub, and improve transport offer to commuters, including Metrolink

Media City & enterprise zone in Salford

Regenerate areas of urban decay and deliver further employment sites

Port of Salford

Weaknesses

Most major businesses controlled from elsewhere

Poor performance on skills, especially NVQ Level 2 & 4

Polarised communities and pockets of high deprivation

High levels of worklessness in some areas that have not yet gained from growth nearby

Threats

Growing but ageing population

Transport links to wider region and utilities infrastructure as barriers to growth

May not be able to attract and retain enough experienced higher level skills needed for continued rapid growth

Negative perceptions of some of its urban centres

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Strengths

Good public transport infrastructure

High value added manufacturing present in range of sectors

Home to 3 major HEIs

Diverse culture, heritage, environmental quality

High quality housing offer in some places Opportunities

Build on recent service sector growth in Preston

Enhance public transport links to centres of jobs growth in Greater Manchester, Merseyside & Yorkshire

Create regional parks in E. Lancashire; invest in high quality public realm in Preston, URC & HMR areas; and capitalise on private sector investment around major towns & cities

Long-term plan for Blackpool in light of casino decision

Weaknesses

Low skills & aspirations - particularly in East Lancashire - and poor graduate retention - except Lancaster

Many low level, low value jobs

Issues of worklessness in major towns, and severe pockets of deprivation in Blackburn & Burnley

Office accommodation needs improving in Preston

Threats

Failure to diversify from manufacturing/textiles legacy base

Low levels of investment in manufacturing in East Lancs

Housing market weaknesses in under performing places

Blackpool’s over dependency on declining tourism sector

The sub-regional perspective 3b - Lancashire

• Key issues: Linkages to employment, very diverse areas, diverging needs, Blackpool, quality of commercial office space, housing markets, Preston re-development. NW GVA weight in 2005 = 20%

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The sub-regional perspective 3c - Cheshire

• Key issues: High GVA per head and good skills levels, opportunity in Crewe, lack of appropriate/affordable housing, ageing population, skills shortages, and heavy dependency on a small number of employers. NW GVA weight in 2005 = 18%

Strengths

GVA per head consistently above UK

Household earnings high partly from commuting

Educational achievement and skills high at all levels

Presence of high value added sectors e.g. Pharmaceuticals

Opportunities

Further engagement with Manchester and Liverpool City Regions Crewe Rail Gateway and Town Centre re-development, and initiatives in Ellesmere Port, Chester, Macclesfield and Warrington to improve performance

Business Link arrangements/Business simplification in all sub-regions

Weaknesses

Signs that growth in GVA per head slowing down

Shortage of affordable housing

Skills shortages – particularly technical skills

Pockets of social & economic deprivation

Threats

Working age population declining

Congested transport infrastructure around Warrington is barrier to growth

Professional services no longer growing as in 1990’s and signs of flat growth in workplace based earnings

Decline expected in pharmaceuticals in Macclesfield

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The sub-regional perspective 3d - Greater Merseyside

• Key issues: Will labour supply constrain further rapid growth? What capacity to attract major investors? Quality of commercial offering, Capital of Culture, and investment in Port and Airport. Ongoing grant dependency, and much deprivation despite substantial spend. NW GVA weight in 2005 = 16%

Strengths

Culture, heritage & history

Public Realm Potential

Wirral and Cheshire attractive for families

Growth of Business Parks and concentration of chemicals in Halton

Opportunities

Development of Port and John Lennon Airport

Build on cultural diversity and Capital of Culture 08

Build on tourism and developments in Liverpool One and the Wirral waterfront

Daresbury Science Park and public sector schemes

Weaknesses

Low levels of participation and too many deprived communities

Lower life expectancy and visible signs of deprivation

High unemployment

Wirral’s ageing population

Threats

Fragile image

Scaling down of EU funds after much grant dependency

Dependency on large employers and sectors e.g. glass in St Helens and risks of shortages in experienced higher level skills if rapid growth continues

Call centre and back office service jobs could be moved overseas

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The sub-regional perspective 3e - Cumbria

• Key Issues: Remote but attractive places, ageing population and strain on support services, reliance on public sector contracts, Nuclear and Energy industries. NW GVA weight in 2005 = 6%

Strengths

Key sectors in Nuclear, energy & environmental technologies

High share of self employed compared with regional average

National parks and other attractive places encourage leisure, tourism, outdoor education and wealthy incomers

Concentration of wealth in South Cumbria

Opportunities

Secure maximum benefit from the nuclear agenda

Public sector initiatives for Carlisle, Barrow and the

University of Cumbria

South Cumbria could gain from spill over from Manchester

Weaknesses

Has seen relatively slow growth in GVA and GVA per head

Traditional dependencies on agriculture and on manufacturing (especially in W. Cumbria)

Many places have poor skills and are not well connected to major centres or transport routes

High incidence of worklessness in Barrow & West Cumbria

Threats

High wage levels in nuclear industry on West Coast distort local labour markets

Generally high level of grant expectation

West Cumbria heavy reliance on nuclear industry and failure to reach consensus on nuclear waste

Challenges in maintaining the sustainability of its communities

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The sub-regional perspective 4

Figure 28 GVA Growth in the Sub-regions (Source: Cambridge Econometrics)

Figure 29 Employment Growth in the Sub-regions (Source: Cambridge Econometrics)

• Based on current industrial structures and the relative historical performance of sectors in different parts of the region, and a model-based projection consistent with the long-term forecast described in Table 4 , we should expect slightly slower growth in most sub-regions on average over the next twenty years than was achieved between 1995 and 2006. The exception on this basis would be Cumbria, where future growth could be somewhat faster than in the past decade. The two urban conurbations would continue to benefit from strong growth in financial & business services. The strongest outlook for growth would be in Cheshire. In addition to a relatively strong business service sector, this has strength in some high-technology manufacturing sectors.

• There is a potential downside risk in these projections, particularly for Cumbria. The projections assume that employment in any industry in a sub-region will not decline in the future unless the industry is projected to do so in the region as a whole. For some sectors, such as financial & professional services in Cumbria, the direction of past changes in employment has differed from the regional average. For instance, Carlisle already sources some services from Newcastle.

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The Panel’s Assesment

Page 38

Identifying and understanding recent trends

• We forecast by identifying underlying trends in the growth of jobs and in productivity before exploring how various influences might affect these trends over the next twenty years. We concentrate on a comparison of trends in the Northwest relative to those in the UK more than absolute values since our aim is to forecast the likely ‘growth gap’ in GVA between the region and the UK. This depends on differences in trends in jobs and in value added per job, our definition of productivity. The growth gap in GVA per resident head also depends particularly on any expected changes in the relative growth in productivity, with which it moves very closely.

• This section of the report first reports our discussion on recent changes in jobs and on productivity, and then demography and jobs, and on possible supply and demand side influences on underlying trends in growth gaps in jobs and in productivity over the next twenty years or so. We also looked at evidence about the sub-regions as a check on our emerging judgements.

• Our Assessment leads into a short account of the prospects we think are the most likely for the region over the next twenty years focussing especially on GVA, jobs and GVA per head, and we have added a summary of what we see as the most significant risks to our forecast being correct. The balance of risks around the most likely outcome is on the downside. In other words, if our most likely forecast is incorrect, the risks are such that a more cautious outcome is more likely than one that favours the Northwest.

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Jobs

• The first section of this report, which charts developments since 1990, shows that the past few years have been unusual in the Northwest. The region’s population fell back through the 1980s and 1990s, especially as people affected by industrial contraction moved elsewhere. In this decade, the region’s population has begun to grow again, largely because of a shift in trends in net international immigration, and a more modest shift in net internal migration. These shifts coincided with a period of jobs growth that was faster than in the UK for a time. Jobs growth in the region peaked in 2004, and then fell back, as can be seen from Figure 5. So, shifts in net immigration appear to have responded quite sensitively to changes in the growth in job opportunities in the region and elsewhere. Much increased opportunities in the Northwest also led a marked increase in its participation of women. Figure 9 shows that this had more or less reached the national level by 2004, and has only fallen back a shade since. Unfortunately, participation among men has still been stubbornly low.

• At the same time as jobs were growing rapidly, productivity growth in the region, already slower than in the UK, fell back, but has recovered since as jobs have also fallen back. We anticipated such changes in preparing last year’s forecast, but were still left with the challenge of understanding of how these changes came about, and of judging what they might mean for the underlying trends we needed to identify for our forecast.

• Employment data show the exceptional period in jobs growth reflected two main changes: a marked expansion in the public sector, notably in health services, and a period of strong jobs growth in financial and business services. The public sector changes were a direct result of rapid growth in government spending that has since been much more modest. And although Panel Members say new high level jobs in financial and business services were also being created, the main reason for an unusual expansion of jobs in this sector appears to have been the creation of significant numbers of jobs in support functions for national firms, many out-sourced from higher cost places in the South as pressures on their profits apparently followed the sharp downturn in international financial markets in 2001.

• We think, therefore, that the period of rapid jobs growth, in which GVA growth in the region approached and then overtook that in the UK in 2004 for the first time in years, was an exception, the result of a coincidence of factors rather than a marked shift in performance. The underlying trend in jobs growth is more modest than in the recent peak. After reviewing the evidence, we chose an underlying growth gap in jobs of around 0.1 percentage points per annum (pp pa) as a starting point for our forecast.

Page 40

Productivity

• Turning to productivity, Figure 12 shows a continuing structural shift in jobs out of manufacturing and into services, and Figures 13 and 14 show that the region’s productivity in all major services fell back relative to the UK between 1995 and 2005. This includes the period of very rapid jobs growth in services, and must in part reflect the same changes in the structure of the region’s employment. However, this is unlikely to be the whole story.

• We therefore also took account of research described earlier in this report that implies that changes in regional price levels almost certainly help to explain the growth gap in productivity measured in terms of value added per job. This is because prices have a bearing on wages and on profits, and value added is measured in terms of wages and profits. Survey evidence on price movements is restricted to 2000 and 2004, but it does suggest that the price level in the UK has been increasing 0.1 pp pa faster than in the Northwest. The result partly reflects house prices.

• The same research implies that productivity gaps are also likely to have widened if there have been differences between regions in rates of creation of lower as against higher level jobs, which has been observed as between the Northwest and the UK; and especially if earnings growth in top end jobs has been faster in some parts of the country than others. Here, the experience of Panel Members firmly supports evidence of higher rewards at the top end of London’s financial and business services in comparison with other major cities, including Manchester and Liverpool. And what happens in this sector clearly has an influence on the economy as a whole; it now generates about a fifth of GVA across much of the country, including the Northwest, but almost half of that in London, where top-end jobs are concentrated.

• The continuing structural decline in jobs in manufacturing has also been unhelpful to overall productivity in the Northwest, since labour productivity, which we are measuring, tends to be higher in manufacturing because of its generally greater use of fixed capital. However, while there is still a concentration of relatively capital intensive manufacturing in the Northwest, leaving it with slight advantages in the productivity stakes on the latest figures, the Panel expects that the shift in jobs in the region and elsewhere out of manufacturing and into services still has further to go.

• Our best judgement in the light of these considerations and all the available evidence, including members’ knowledge of particular sectors, is that the underlying trend growth gap in productivity between the Northwest and the UK is about 0.3 pp pa. This is supported by analysis of data since 1990, which implies the fall back in regional productivity growth associated with the recent peak in jobs growth has been followed by a period of consolidation. In part, this might reflect a loss of some of the more marginal or mobile jobs created in peak conditions. It may also reflect the result of training, familiarity with work, and improved organisation and practices after the passing of the peak. In any event, productivity growth seems broadly to have recovered its trend.

Page 41

• The fall back in jobs in the region in 2005 and 2006 shown in Figure 5 was concentrated in manufacturing, especially in textiles and in sectors members say have experienced difficulties because of the stronger dollar. This came at a time when jobs growth in financial and business services flattened off, clearly affecting the overall picture because this sector has been second only to the public sector in generating new jobs in the Northwest since 2001. Though jobs growth in financial and business services has now picked up again, Members say that top end jobs were still being created in the sector during the lull in 2006, implying there has indeed been a net shakeout in lower level jobs, some of which are known to have been shifted to lower cost locations overseas.

• It is convenient to mention two points here that arose in other parts of our discussion, since both are relevant to productivity. The first is about the interpretation that might put on the evidence from Figure 17 about training levels in the region running ahead of those in England and comparator regions. Members pointed out that higher levels of training might be needed if there were more churn in local labour markets, or if greater structural change had been taking place than on average elsewhere, not necessarily that improved levels of skills might result. Further information was needed to make a judgement on this point.

• Second, on the possible impact of faster and perhaps more frequent trains to London, Members felt that these could increase opportunities for firms based especially in Manchester and Liverpool to secure high value work in London, depending on where the trains ran. However, such links would also enable nationally organised firms to supply more higher value work presently done in the Northwest from London. UK productivity overall could well increase since more efficient resource allocation was likely to follow, but it was not obvious that the balance of advantage would fall to the Northwest.

• The location of support services was likely to go on reflecting the relative costs of operating in different places taken together with the quality of service clients were likely to enjoy. Faster transport links likely to make less difference than in higher-level work since electronic communications were far more important than face-to- face meetings in providing support. It was pointed out that one major bank that had outsourced to India had brought support functions back because of adverse client reactions. The future position of the Northwest was likely to depend on its supply of suitable recruits, and crucially on how its costs developed relative to alternative locations for out- sourced work.

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Future Demography and Growth in Jobs

• Looking forward, our first task was to take a view on future trends in populations, in populations of working age, and in participation in the region relative to the UK, this to give us a basis for projecting likely trends in jobs. Here, we usually put a lot weight on population projections by the Office for National Statistics for the UK and the region, which last year gave grounds for assuming a continuing average growth gap in jobs of 0.1 pp pa. However, the ONS has now published significantly more buoyant population projections for the UK. These assume quite considerable net immigration flows, but ONS have yet to say how they think these might be divided between the regions.

• Absent of such guidance, and following ONS’ earlier projections, we first assumed a differential of 0.1 pp pa between the future growth of total and working age populations in the Northwest and UK would continue. However, we noted that, although there are some signs that recent immigrants have spread quite widely across the country, the spatial distribution of the much larger numbers ONS now expects over the next twenty year seems likely to be influenced by the growth of employment and income opportunities. If so, this would point to a greater concentration of working age people in and around London.

• In keeping with the sensitivity of net immigration flows to changes in opportunities as mentioned above, this could imply a somewhat more marked gap in the growth of working age populations, as could widen differentials in the cost of living on activity and double jobbing on the overall growth gap in jobs. Given these considerations, we have assumed an average jobs growth gap of between 0.1 and 0.2 pp pa, and done our figuring within this range at 0.15 pp pa. But we also think there is a risk that this figure could be too low.

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Future Productivity Growth - Supply Side Drivers

• Turning to future influences on the growth gap in productivity, we first looked at drivers on the supply side of the economy. Of these, it was encouraging to see further evidence of a narrowing gap in levels of educational achievement in the Northwest as compared with the UK, especially against the background of anticipated changes in future demand for skills, and still large numbers of those in the workforce without any formal qualifications. However, our discussion of the likely influence on productivity growth of expected patterns of investment was less encouraging. Although there is welcome evidence that firms in the Northwest in services and in manufacturing have been investing relatively heavily, investment plans in and around London linked for instance with the Olympics, Cross Rail, and Heathrow, are not matched in the region.

• Enterprise was not easy to comment on since it was pointed out that VAT registration data, usually seen as an indicator of firms with the potential to grow, includes the registration of large numbers of self-employed professionals in IT and other services, most of whom have no intention of taking on employees. Members also mentioned a tendency in manufacturing to splinter larger firms into smaller ones on the same site, which swell the data while activity goes on much as before. The latter effect is likely to be more prevalent in the Northwest, simply because of its relative concentration in manufacturing; the former in cities big enough to create markets for self- employed professionals with earnings sufficient to trigger VAT registrations, especially London.

• We concluded that we had insufficient evidence to say whether differences in enterprise were likely to affect the widening productivity growth gap one way or the other, and therefore took its effect as neutral. The same conclusion applied to innovation. While R&D data for manufacturing in the Northwest are encouraging, they are much concentrated in Aerospace and Pharmaceuticals, in which one major employer in the region has been releasing staff. And a Member who visits engineering firms in business parks across the country commented on a worrying contrast in the type of firms located on such parks in the region as compared with those across the South. Also, other Members confirmed that much of innovation in banking and professional services in nationally and internationally organised firms is concentrated in London.

• Looking across the supply side drivers together, we agreed that there was insufficient reason on balance to adjust our projected average productivity growth gap figure of 0.3 pp pa. Nevertheless, there were aspects of our discussion that pointed to risks that this gap might be expected to widen further rather than to begin to narrow.

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Future Productivity Growth - Spatial Factors

• Moving to spatial influences on the future growth in productivity - still in terms of value added per job Figure 26 and Table 2 clearly show how growth in the Northwest over at least over the past ten years has been concentrated in a growth corridor across the South of the region. Within the corridor, the highest average rate of growth has been in Greater Manchester South, which stands out among places in the North and the Midlands. But this growth has been slower than in London, and even slightly slower than in the whole of the South East.

• Figure 27 also shows how growth across the UK has been fastest in major cities and city regions, which we understand in terms of the dynamic effects of agglomeration. This is the growth and drawing in of activity, especially in knowledge-based activities, in and into larger urban centres, which in turn generates demand for other locally produced goods and especially services.

• Given continuing structural change towards services, and the attraction of operating in or near dynamic places for knowledge-based manufacturing as well as service firms, the Panel expects agglomeration will continue to play a very significant part in regional and national patterns of growth over the next twenty years. We also expect that the influence of major cities may well spread over into wider surrounding areas, much as London has done over the past twenty years. However, save some disaster, London, together with the ‘Global City Region’ around it, seems likely to go on dominating the performance of the UK economy. Its emergence over the past twenty year as a truly super city goes a long way to explaining the comparative changes in productivity, in GVA, and in GVA per head, we have seen over the period, such as those shown in Figure 1, and Figures 12 and 13 about comparative changes in productivity in services.

• We remain convinced that the operations of nationally and internationally organised services firms have contributed to these results, since they tend to serve wider markets from London, and regional and more local markets from regional centres, such as Manchester and Leeds. And while some London generated work is done in the Northwest where costs are lower, and some businesses based in the Northwest are increasingly active in London, it is hard to see why London will not go on pulling-in young talent, and why London-based businesses will not go on acquiring businesses in the Northwest. This, once credit markets have settled again, will affect both higher-level management jobs and the demand for higher-level services often procured through headquarters. All in all, we expect these dynamic changes will continue, reinforcing our judgement that the productivity gap will continue to widen, perhaps by more than our most likely figure of 0.3 pp pa.

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A Sub-Regional Perspective

• As a departure, we next looked at the material assembled on the sub-regions of the Northwest. This includes data and notes on relative performance and on the strengths and weaknesses of the sub-regions, and on the opportunities and threats they face. Figures 28 and 29 also illustrate what our forecast might mean based on current structures for the distribution of GVA and employment growth among them. However, our purpose was not to make sub-regional forecasts as such, since we would need far more extensive background information to do this. Instead we wanted to test whether this sub-regional material might lead us to amend our emerging view of likely growth gaps in jobs and in productivity at regional level, and also our expectation that patterns of growth across the region are not likely to vary all that much over the next twenty years from those seen over the past ten years, as in the map at Figure 26.

• Having reviewed the sub-regional evidence, we saw no reason to amend these views. There was, however, a problem in interpreting this information in that the sub-regions tend not coincide with the region’s functional economic geographies. These we think it would be more revealing to study in relation to overall performance. Thus, the growth corridor includes Greater Manchester South, but not Greater Manchester North, and only parts of Cheshire and Warrington besides much of Merseyside. Lancashire has a number of functionally different areas of which East Lancashire is more like Greater Manchester North than Central Lancashire. And West Cumbria has grown more slowly than the rest of its sub-region. It would be a challenge to overcome data problems to address these functional geographies, but such data might also help in preparations for the forthcoming Integrated Regional Strategy.

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The Impact of Policy and Strategic Opportunities

• Our forecast does not take explicit account of the current Regional Economic Strategy (RES). To do so in detail would require a good deal of critical analysis and evaluation evidence that is not yet available. However, we note that ours is a comparative approach, and that all regions and territories are engaged in similar processes. Much would therefore depend on whether the Northwest is better than other regions in securing desirable outcomes. Also much of the content of these programmes is an extension of similar actions that have been conducted over the years by a variety of agencies at and below national level, the aggregate effects of which are reflected in the evidence of developments from 1990 on which our work is based.

• What might make a difference are programmes that are radically different in kind or likely effectiveness than those so far attempted, and it appears that completion of some projects included in the RES could together have effects on a sufficient scale to bear on our numbers, for instance all those aimed at improving the transport infrastructure in and around Greater Manchester, including its access to labour markets. However, given GM’s weight in the regional economy, outcomes could also be less than forecast if these projects were not completed as planned, or better if these initiatives proved to be particularly effective, this together with future developments in housing that might also help to attract the high level experienced skills we think sustained growth will need. Attention was also drawn to the potential effect over the next twenty years of a number of major private sector led capital projects, though scale is again relative, and GVA in the region is already well over £100bn a year at current prices.

• While public policy interventions tend to be on the supply side of the economy, market forces on the demand side have done so much to shape recent developments, including the emergence off the growth corridor helped by market process of agglomeration. Given these, we discussed whether any identifiable changes in patterns of future demand might offer oppurtunities that might help the Northwest to improve its game.

• One area in which the Panel thought demand side changes might offer scope of this kind to firms and institutions in the Northwest was in nuclear and energy industries. This is because of environmental challenges that seem likely to intensify over the period of this forecast. We thought the scale of the opportunity these industries might face should be looked at carefully with a view to focussing support, even if the scale of their present contribution to regional GVA meant in realism that even a doubling or trebling of their output over twenty years would still be relatively small in relation to the regional economy, remembering also that the resources they would need would probably displace other activities, albeit activities that might offer lower value added.

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Conclusion

• Bringing our thinking together, our central forecast of the most likely gap in GVA growth between the Northwest and the UK over the next twenty years is therefore an average of 0.4 percentage points per annum, or a little more. We are not aware of evidence to suggest that this growth gap might narrow significantly. On the contrary, the balance of risks identified below veers towards a more cautious view, not least because of where population seems likely to become even more concentrated across the country.

• It is nonetheless implicit in this view that the Northwest’s economy will continue to grow more rapidly in than in the 1990s, and also that living standards in the region will continue to improve on average even if the gap in GVA per head is expected to widen. As in much of our analysis, the main reason is that we expect London to continue to succeed, and to do so because of the range of services it offers in national and in international markets, a range which is not matched in Europe, never mind elsewhere in the UK. Though we also expect the Northwest’s growth corridor will flourish, and that its influence will spread geographically, especially given effective transport and spatial policies, the corridor is simply different in character and scale, and less of an integrated whole at present, than is London and its surroundings.

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The Panel’s Central Forecast

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Table 4 Summary of growth projections, 2007-2027 (Source: Cambridge Econometrics)

Northwest UK NW differential with UK

Population 0.54 0.67 -0.1

Working age population 0.44 0.55 -0.1

Jobs 0.51 0.65 -0.15

Productivity 1.63 1.91 -0.3

GVA 2.15 2.56 -0.4

GVA per capita 1.6 1.88 -0.3

• Average GVA growth in the Northwest since 2000 has been closer to that in the UK than in the two previous decades, with an exceptional period of jobs growth having played a key role in this recent success. However, though productivity growth has improved since jobs have recently fallen back, it flattened off with rapid jobs growth. Looking through this exceptional period, our view of underlying trends since 1990 is consistent with a growth gaps with the UK in jobs of 0.1 pp pa and in productivity of 0.3 pp pa.

• Having reviewed the latest evidence on future population growth, participation, and supply and demand side spatial factors influencing productivity, and taken into account evidence about the sub-regions, it remains our view that the most likely long term prospect for the Northwest economy is that it will achieve weaker growth in GVA and in GVA per head than the UK.

• Numerically we forecast a GVA growth gap with the UK averaging 0.4 pp pa. Assuming the UK economy generates GVA growth of 2.6% pa on average over the next 20 years, the Northwest economy can be expected grow on average by 2.1% pa. Though slower in the region and in the UK than average growth rates achieved between 2000 and 2006, this GVA growth would still be stronger than the Northwest achieved on average through the 1990s.

• Our forecast for GVA per head compares with an average annual rate of growth in GVA per head of 1.8% between 1990 and 2002, the last full economic cycle. Besides shifts in relative price levels, this outcome reflects structural shifts in the Northwest economy and across the UK, especially linked with London’s success as a global city. Our Assessment concludes that we expect trends of this kind to continue. Please note we have used 2003 price deflators throughout this forecast and Table 4 includes rounding.

Panel Forecast - Growth in GVA and GVA per head

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Panel Forecast - Jobs

Figure 31 Jobs Growth (Source: Panel Forecast)

• In our forecast, we assume the Northwest’s population will grow on average by 0.5% pa, and its working age population by 0.4% pa. Increases in economic activity of 0.1% pa will support jobs growth of 0.5% pa, a rate 0.1 pp slower than that expected for the UK. Nevertheless, employment rates as a proportion of the working age populations will rise.

• There is an unusual degree of uncertainty around the long-term forecast for population, with the latest projections for the UK revising its population growth upwards sharply to 0.7% pa as a result of continuing net immigration. Our forecast assumes that the Northwest will see its share of the UK population growth. There is a risk that a faster growing Greater South East may attract more of the additional population than we have assumed. If so, we would expect this to result in slower growth in jobs and GVA.

• The impact on GVA per head will depend on who fills net new jobs. Increases in participation tend to increase GVA per head, since they increase GVA relative to resident populations. But if new jobs are filled by net immigrants, the value added by new jobs needs to be higher than recent averages to increase GVA per head since net immigrants add to jobs and also to resident populations. Hence, our view it will be crucial to attract experienced migrants capable of high earnings to meet the needs of further agglomeration.

• Overall employment could increase by the order of 360,000 jobs between 2007 and 2027. We expect structural trends experienced over the previous two decades to continue, with financial & business services continuing to be the largest source of employment growth in the Northwest. It is possible that the region’s nuclear, energy and environmental sectors will emerge as significantly more important if all concerned are able to exploit opportunities we think are likely to become increasingly significant.

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Panel Forecast - more on GVA per head

Figure 30 GVA per capita in the Northwest (Source: Panel Forecast)

• Recent movements in GVA per head are normally quoted in current prices, as in Figure 2, which shows GVA per head in the region measured in current prices was 13% lower than in UK in 2006. As we are forecasting in constant 2003 prices, Figure 30 shows how GVA per head is expected to increase in the region and in the UK starting from a gap of 12% in 2006 and increasing to some 17%, over the next 20 years, all in 2003 prices. The gap in current prices would be wider than this.

• Broadly speaking, growth and growth gaps in GVA per head reflect those in productivity since movements in jobs tend to follow those in resident populations. Changes in demography, in activity and in unemployment are not likely to diverge that much across the country, making relative improvements in the productivity the key to better comparative results for GVA per head. And since we concluded that productivity growth measured in terms of GVA per job is likely to go on being 0.3 pp pa slower on average in the region than in UK, this figure is likely to be close to the rate at which its GVA per head gap with UK is likely to widen, as in Figure 30.

• Who fills net new jobs can, however, have some impact on GVA per head. For instance, increases in participation tend to increase levels of GVA per head, since jobs and GVA are increased, but resident populations are left unchanged. But, if net new jobs result in changes in net immigration, as recently, the value added by new jobs needs to be higher than the previous average to increase GVA per head since net immigrants add to resident populations as well as to the jobs they fill. Hence, the importance for policy of seeking to encourage the creation of better paid jobs, and of seeking to attract skilled and experienced migrants and to retain resident workers who are similarly capable of filling them.

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Risks to the long-term forecast

• The following risks to our most likely long-term forecast are seen as the most significant:

Geopolitical events, terrorist attacks, major shocks in key markets, and prolonged weakness of the dollar, and possibly the pound. Further adjustment could also be required if the balance of world activity shifts away from the West faster than expected, for instance as one consequence of present turmoil in credit and financial markets.

Increasing globalisation in markets may act as a further factor drawing activity and resources, particularly high-level activity and skilled people, from the Northwest to London and the South East.

Economic activity could become even more London centric than we have assumed, which could be helped by much faster rail links, coupled in turn with more supply and outsourcing from London. However, London is highly dependent on its concentration of high level service activities, and a shift away to other international centres could help the region’s relative performance

The shift in control of businesses from the Northwest with a bearing on the location of high-level managerial jobs and the demand for high-level services could be greater or less than we have anticipated.

Trends in net international immigration and demography may not be as assumed in the population projections. The effect could be either to further increase or decrease the future working age population, and therefore the potential supply of labour. There is a risk that the region will attract less of its share of expected increases in net immigration. This could widen the GVA growth gap

The structural shift in the participation of women of working age may have further to go. Combined with further progress in improved qualifications in the region’s workforce compared with the UK, this could result in faster growth than we have forecast.

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LONG TERM FORECAST FOR THE NORTHWEST ECONOMY - February 2007

Government programmes to encourage those currently inactive or excluded into the labour market could be more effective than we expect, and impact relatively helpfully on labour supply in the Northwest. This could also help GVA per head as well as GVA

The effect of the 2012 Olympics on public funding in regions outside London and the South East could have been underestimated, as could the impact of public spending on housing and transport in the South.

Increasingly pervasive elements of climate change may start to alter business models substantially, with a marked impact in the Northwest given its relatively high concentration of carbon-intensive industries. But its nuclear, energy and environmental industries could expand faster than expected if considerable investment programmes in these areas follow at home and abroad.

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NWDA VIVID 05/08