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Economics: Local needs

Economic policy in the UK is usually debated in terms of the
national economy, as though it is a single, easily defined entity. There is,
admittedly, only one interest rate and a single exchange rate, and taxes are
generally levied at the same rate throughout the country. But the UK is a
political or geographic concept. The economy is much more complex and the
national economy is merely the aggregate of smaller economies operating within
national boundaries. Dividing the UK into regions is one way of trying to get a
handle on what is happening at a level just below the national.

This is something the Bank of England has recognised. A network of regional
agents has been appointed to liase with local companies and business groups, and
report directly to the MPC. This government has also taken steps to refine
regional policy. Up to 1997, the UK government typically had a national policy
for the regions, which was Whitehall-led. In recent years, however, a national
network of local bodies, Regional Development Agencies, has been established,
which brings together local businesses and government to establish priorities
for their own region.

An assessment of regional variations should, of course, underpin any macro
forecast. The impact of interest rate changes, shifts in the exchange rate or
reductions in government spending, for example, will vary by region, depending
on the structure of local business. A region which has a large number of
manufacturing companies which rely on exports will be in a different position to
an area that is dependent on financial services. Unfortunately, data limitations
mean that activity at regional level is imperfectly understood, except in the
most general way, and so ‘bottom up’ forecasting is not really practicable.

It is clear, however, that during the UK’s long period of growth, many of the
traditional regional differentials have narrowed. House price growth has been
fastest outside the south east, and the falls in unemployment have been most
marked in areas where the jobless total was previously high. These are obvious
signs that the growth has been more evenly distributed and the best estimates of
increases in GDP by the 12 Government Office Regions (GORs) in the UK, suggest
some convergence of economic performance.

This seems unlikely to continue, however, and may well have been exaggerated
anyway. The house price gap has certainly closed and unemployment differentials
may have fallen, but the question of how sustainable much of the growth has been
remains. London and the South East dominates. It covers 8% of the land area, is
home to one-quarter of the population and accounts for one-third of GDP. As a
result, income per head in London is 36% above the national average, while the
rest of the South East and the East are the only other regions with income per
head above the average.

Ultimately, past performance and future trends depend on the local industrial
structures, and the southern parts of the country seem to have more of those
industries which are growing the fastest, such as banking, finance and business
services. Using the technical ‘location quotients’ to measure industrial
concentrations, it is clear that the northern regions are still
disproportionately dependent on manufacturing, as are the West and East
Midlands. Too often, moreover, it is the more vulnerable sectors of
manufacturing, the lower productivity, lower added-value activities in which
countries like China have demonstrated a substantial comparative advantage. In
Scotland, Wales and Northern Ireland, public sector spending has been the key
driver of regional growth. This is perfectly justified as long as it acts as a
springboard for attracting private sector investment.
Too often, however, it has tended to create a dependency on government.
The brightest prospects remain in London and the South East, together with the
East and South West. But it is not difficult to identify the factors which could
undermine the prospects in each region and turn these forecasts on their head.
Manufacturing, as ever, has the threat of China hanging over it and the current
upward move in interest rates and the strengthening of sterling will only add to
the threat. Then again, Alistair Darling’s first parliamentary set-piece will be
the comprehensive spending review. A tightening of the public purse after Gordon
Brown’s spending spree is widely expected, and this will pose problems from the
Midlands northwards.

On the other hand, London and the South East must be keeping a wary eye on
the current turbulence in financial markets which could spread very quickly. In
addition, regions like Greater London, the East and South West, the most heavily
borrowed and with the highest house price to earnings ratios, will be the first
to feel the pressure of higher interest rates.

All this demonstrates that there are undercurrents in the economy that make
forecasting and understanding ‘national’ GDP even more speculative. And it
raises again the question of whether, in terms of managing the economy, one size
really can fit all.

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