Chief Economist’s note: Levelling-up and COVID-19

Chief Economist’s note: Levelling-up and COVID-19

Yael Selfin, Chief Economist in the UK assess the UK regional impact of COVID-19.

Yael Selfin - Chief Economist at KPMG in the UK.

Chief Economist

KPMG in the UK


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Over the past few weeks, I’ve been talking to our people and clients across the UK. My main impression is that, while many businesses have similar concerns, the impact of COVID-19 is varied within sectors. Factors like the exact client profile, their supply chain strategy and their agility all play their part.

Having said that, we did look at the impact COVID-19 could have across the UK over the next two years (see chart), and our forecasts are based on the sectoral make-up of each region.

Forecast of regional GVA growth in 2020 and 2021

Source: ONS, KPMG analysis

London’s services-based economy is the least affected

In the short term, our analysis highlights how the government’s ambition to ‘level-up’ the UK will face a setback as a result of the pandemic. We expect that the gap between performance in London and the rest of the UK will widen this year.

The region that will feel the biggest impact of the pandemic in 2020 could be the West Midlands; we forecast its economy will contract by just over 10 percent. This is because it is home to many automotive manufacturers; they make up nearly 6 percent of the local economy. This sector faces a severe downturn as a result of supply-chain factors interrupting production and falling demand as consumers cut back spending. According to the Society of Motor Manufacturing and Traders, the number of new car registrations fell by 44 percent in March, compared to one year ago. Lockdown hadn’t even been in place for the entire month.

In the East of England, the relatively high share of construction sector activity means the region is expected to undergo a 10 percent fall in GDP this year. Current social distancing restrictions have put a halt on the majority of this sector’s activities.

At the other end, we expect London will be the least affected region. We forecast the economy will contract by just over 7 percent in 2020. A relatively higher share of services that are less impacted by COVID-19, like financial and professional services, mean the capital’s economy is more resilient to the restrictions imposed by the lockdown. An ONS survey conducted last year showed that more than 34 percent of London workers had worked from home at least once, compared to 27 percent for the UK as a whole.

Northern Ireland follows close behind London; we expect it will shrink by 8 percent in 2020. The region hosts a large share of food manufacturing businesses, which continue to operate throughout the period of lockdown. It also has a strong presence of life science businesses and government employment, which leads to a lower overall impact on the Northern Irish economy.

The chart also shows the scale of the recovery in 2021, which tends to mirror the scale of the contraction in 2020. We forecast economies could recover a significant proportion of the ground lost during the pandemic.

The travel and hospitality sectors will take longer to recover

Some of the most enduring impacts of the pandemic will be in the travel and hospitality sectors over the next two years.  In particular, businesses in the tourism sector are exposed to a sharp decline in international travel. The chart shows ten of the regions with the highest levels of spending by international tourists compared to the size of the local economy. 

Spend by international visitors as a share of local economy

Source: ONS International Passenger Survey, 2018, KPMG analysis

The highest level of exposure could be in the region around Edinburgh, with spending equivalent to 3.4 percent of the region’s economy. This could lead to significant economic disruption as the prolonged slump in demand will have knock-on effects on other sectors.

On the upside, reluctance to travel overseas could see more domestic holidaymakers opting for a ‘staycation’. If they spend their holidays in the UK, that could help make up for some of the drop in the demand.

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