In the latest issues of the Deloitte Economic Review, Roger Bootle, Economic Advisor to Deloitte, turns his attention to the outlook for the UK's regional economies and whether the divergences of past years look set to narrow or instead get even wider. His main points are as follows:

  • The common perception is that the fiscal squeeze will prompt the traditional North-South divide to widen. However, we think it is more likely that the different regions of the UK will see a more uniform performance in the next few years than in the past.
  • Their dependence on public sector spending often marks Northern Ireland, Wales, Scotland and the North out as being in for the roughest ride over the next few years.
  • But not all government spending will be cut equally. For example, benefit cuts are initially focused on housing benefit and London will be one of the biggest losers from this.
  • What's more, the fiscal squeeze is not just about government spending cuts. Given that the tax increases have been aimed at higher earners, Londoners are again the worst off from the changes.
  • Meanwhile, government spending cuts are not the only influence on regional economies. And those regions most dependent on public spending are also best-placed to take advantage of a minirevival in manufacturing.
  • Admittedly, there have been signs recently that the previously strong manufacturing recovery has faltered. But if any sector is going to do well over the next couple of years, it should be industry, given that the lower pound has yet to have its full benefit. Exports of goods account for the highest percentage of regional output in the North East and Wales. London, by contrast, will be held back by its reliance on the financial sector.
  • A final reason to think that London and the South East might struggle to pull ahead is that they might start to hit various constraints on how fast they can grow. Perhaps the most obvious constraint is the cost of living and the shortage of affordable housing. Slower population growth is also likely to hold back London's growth rate somewhat.
  • We doubt that regional growth rates will converge completely. While the South East could increase its share of overall UK GDP by almost 0.5% over the next decade, Scotland could lose almost the same. But the various constraints facing London suggest that the capital could see its share of overall UK GDP fall over the next few years.
  • In the longer-term, this will mean that all regions will share more equally in the fruits of the UK's success. In the near-term, however, it means that the pain of the next couple of years will be borne more equally.
  • We now expect real GDP growth this year of just 1% (compared to our previous forecast of 1.5%). We still expect growth of only 1.5% in 2012 and think that it is unlikely to beat 2% or so in 2013.
  • With the economy failing to grow fast enough to use up the slack in the economy, inflation still looks likely to fall sharply next year. Accordingly, we still expect interest rates to remain on hold until 2013 or even 2014.

For further information, please download our full report ' Economic Review: Growing apart or coming together?'. (PDF)

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