In the latest issue of the Deloitte Economic Review, the business advisory firm’s Economic Adviser, Roger Bootle, considers the prospects for the different regions of the UK economy over the next two decades. His main points are as follows:

• The UK economy is currently seriously unbalanced. There is a clear divide between the “haves” in London and the South East and the “have-nots” in the rest of the country.
• Shifts in the sectoral make-up of the UK economy have primarily been to blame. Looking ahead, the East Midlands, North East and Wales are the regions most reliant on manufacturing and so have most to lose from any further decline in the relative importance of this sector.
• The impending squeeze on government spending means that those regions that are heavily dependent on handouts from the state will also suffer. Government spending accounts for just 32% of GDP in the South East, but 60% of GDP in Wales.
• In contrast, agricultural regions such as the South West could benefit from further growth of the UK’s nascent biofuels sector. And continued strong growth of global financial services should maintain London’s lifeblood. Accordingly, the “haves” are likely to become the “have-mores” and the gap in incomes between the country’s richest and poorest regions is likely to increase.
• That said the divergence between regional growth rates is unlikely to be as large as in the past. For a start, the bulk of the decline in manufacturing is now largely behind us. We think that the manufacturing sector could easily contract further, from 13% of GDP to around 11% over the next ten years, but this would be small fry compared to the fall from 25% seen since the early 1980s.
• Meanwhile, the traditional divide between the manufacturing North and services-oriented south is blurring. For example, Leeds and Edinburgh are now leading financial centres. Between 1994 and 2004, the share of Scottish GDP accounted for by financial services rose from 5.4% to over 8%.
• Indeed, over the next few years, Scotland and Yorkshire and Humberside could well see their share of UK output rise, after falling over the past ten years.
• Moreover, it is not hard to envisage a scenario where some of the “haves” decamp from their traditional setting in the South. Pollution, congestion and a shortage of affordable housing will increase the incentives for workers to move away from London and the South East. In today’s internet age, the two Bs – BlackBerry and broadband –have made it significantly easier to work from home. And spiralling property costs might prompt some firms to relocate elsewhere too.
• Of course, every region will not perform equally well. Northern Ireland, the South West and London could be in the best position to top the table. Meanwhile, Wales, the Midlands and the North could be left fighting for the wooden spoon, at least in relative terms.
• But the key point is that although some regions will receive a shrinking share of the pie, the pie itself is getting bigger. Indeed, all regions should see a decent rise in output over the next decade or two. The upshot is that I expect the different regions of the UK to start to contribute more equally to the economy’s progress – and share the fruits of it.
• Meanwhile, the key uncertainty regarding the near-term prospects of the UK as a whole is the impact of higher interest rates. Although investment growth should remain robust, we expect a mild slowdown in consumer spending growth to prompt overall GDP growth to slow from around 2.8% this year to about 2.2% in 2008. It is easy to imagine a sharper slowdown, though, particularly if the housing market cools more abruptly. 
• But inflation concerns are currently the priority of the Monetary Policy Committee. And with inflation expectations still elevated and firms’ pricing intentions high, we see interest rates rising to 6% - or quite possibly even further.

Ends

Notes to editors
This press release has been prepared by Roger Bootle, Economic Adviser to Deloitte.  If you have any questions regarding the views in it, please contact Roger Bootle directly on 020 7823 5000 or 020 8948 4605 (home), via email on business@capitaleconomics.com.

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