Strong Warwickshire economy bucking the national trend
Two recent stories regarding the national economy have led to some head-scratching by economists. Both are negative - but closer inspection reveals a rather different and more favourable picture regarding the Warwickshire's economy.
The first conundrum is that the manufacturing sector nationally continues to stall, with recent data showing that economic output generated by the manufacturing sector is falling behind our global competitors. British manufacturing output has slipped to ninth globally, now behind France, and reversing the recovery since the financial crash.
This is despite a policy drive to support the rebalancing of the UK economy away from a dependence on the service sector; and favourable changes in the exchange rate that should have boosted export activity for the country’s manufacturing sector.
However, the picture for Warwickshire, and the local economy more generally, could not be more different.
Since 2009, the economic output generated from the manufacturing sector in Warwickshire has increased significantly – growth of nearly 150% over from 2009-2016 represents an increase of some £1.6bn in terms of Gross Value Added to the economy. The contribution of this sector to the total economic output of the county has increased by 6.7% - rising from 9.7% in 2009 to 16.4% of all output.
Of all county and unitary council areas in the country, Warwickshire has seen the second-largest growth in manufacturing output. Solihull has seen the strongest growth (+205%) with Coventry third (+109.5%), making this small sub-regional area a key driver of manufacturing activity in the country.
At a smaller geographic level, Stratford District Council has, by a significant margin, seen the strongest growth in the country of all local authority districts. Stratford District has seen growth of manufacturing output of a staggering 394% over the period 2009-2016, nearly double the nearest competitor. This has been driven by the automotive sector and growth from Jaguar Land Rover and Aston Martin in particular. This has undoubtedly been a key factor in the strong economic and productivity growth experienced within Warwickshire in recent years.
The second economic puzzle nationally is the continued sluggish growth in wages, despite record low levels of unemployment and businesses raising concerns around labour and skills shortages. Economic theory would suggest that, as the supply of available labour reduces due to fewer people being out of work, then businesses demanding workers will be forced to increase wages to tempt those in employment to change jobs, or to encourage those out of work but not seeking employment to change their minds.
When this happens, other companies would need to respond to maintain their own workforce, thus pushing up wages. This would then lead to “wage-push” inflation – increased salaries lead to high costs for businesses, and therefore higher prices.
This is, to a large extent, the thinking behind the recent increase in interest rates by the Bank of England. They believe the current tight labour market will push up wages, and therefore prices, driving inflation above their target levels.
However, there is no evidence to date that wages are being forced up. Indeed, the latest figures from the Office for National Statistics show the annual growth rate in total pay dipped from 2.5% to 2.4% between Q1 and Q2 of 2018. Real pay (average earnings adjusted for inflation) edged up by just 0.1% compared with a year earlier - due largely to fall in the rate of inflation.
The lack of sustained upward pressure on wages is becoming increasingly difficult to explain, but is likely to be due to the growth in insecure and low-paid work where the employee either lacks, or that they believe they lack, effective bargaining power around wage demands.
However, the recent Quarterly Labour Market Briefing - produced by our new economist, Emily Newport https://labourmarketbulletin.warwickshire.gov.uk/august-2018/introduction/introduction – shows that the picture is slightly different within Warwickshire. As with the rest of the country, the unemployment rate in Warwickshire is falling, and at record low levels (now standing at 2.0% of the working age population). However, wages for residents within the county are growing at a faster rate than both the national average and regional averages since 2008.
Over the last year (2016 to 2017), the county experienced more than double the rate of growth in wages compared to England as whole, increasing by 4.7% compared to 2.1%.
This mirrors the findings from a recent Quarterly Economic Survey (late 2017), which had a special focus on recruitment and skills shortages. Nearly two-thirds of businesses surveyed stated that they were experiencing skills shortages, and were struggling to recruit the staff they needed. As a result of difficulties in recruitment, the survey found that 80% of businesses said they would be implementing pay rises over the coming year.
In continue to record stronger growth than the country as a whole, with the expansion of the manufacturing sector a key factor, Warwickshire's economy continues to buck national trends and exceed expectations.