Booming Manchester outshines ‘stagnant’ London
Greater Manchester’s booming economy is outstripping the rest of the country and throwing into sharp relief the “stagnant” state London has found itself in since the 2008 financial crisis, according to a new report.
As Chancellor Rachel Reeves sets out the productivity challenges facing the UK ahead of the Budget, new analysis from Oxford Economics has laid bare the issues facing the capital and compared its progress – or lack thereof – to that of its Northern rival, which has been described as the “trailblazer for local devolution”
The report, written by cities and regions economist Alexander Harvey, argues that “nowhere has the productivity slowdown been more apparent than in London” since the 2008 global financial crisis.
Harvey states that gross value added (GVA) per job in London has increased by an average of 0.2 per cent a year up to 2024. That compares to a national average of 0.6 per cent.
In comparison, before the financial crisis London’s growth and productivity rose by an average of 2.7 per cent per year between 1991 and 2007.
The report also argues that London’s productivity growth has been “weighed down” by large declines in a range of sectors, “from its everyday economy to some of its most competitive and high-profile services” – including health, transport and storage, accommodation and food services, and education.
London still holds key to UK growth
Harvey adds that this broad-based slowdown in productivity performance “is not unique to London” but declines in the capital “have generally been more severe than the country at large”.
The report also sets out that London’s “productivity malaise” is being field by high housing costs which are “limiting agglomeration benefits by pushing workers further away from their place of work and disincentivising labour mobility”.
Other factors including a weak pound and more restrictive immigration requirements for skilled workers, coupled with high energy costs that undermine business competitiveness and reduce disposable income levels, also “all combine to impede growth”.
In the report, Harvey said: “With London making up almost a quarter of the UK economy and 17 per cent of its workforce, any hope of significantly boosting the UK’s productivity growth must include an improvement in the capital’s recent performance.
“To some extent, these very specific growth constraints in London, such as around poor housing supply, are driving a total national slowdown.
“Hence, policymakers need to both unlock growth in London while simultaneously promoting longer-term diversification and stronger performance of cities outside of the capital, to ensure that the UK’s economy can be more resilient.”
The report also sets out the drivers behind the UK’s output per hour being “consistently lower than other advanced economies for decades”.
‘Weak’ UK cities weighing down economy
Harvey highlights the “weak performance” of the UK’s largest cities outside of London, which “underperform relative to the national average and act as a drag on total productivity”.
He said: “In fact, the UK is one of the few advanced nations in which its major cities are sources of national productivity weakness – the most comparable case is Japan, which also happens to have a national productivity problem.”
The report also argues that the poor performance of the UK’s cities “runs counter to the established view that urban economies act as centres of growth by bringing together labour, ideas, and infrastructure”.
According to the analysis, out of the 11 mayoral combined authorities (MCAs) in the UK, ten had a total productivity level lower than the national average – the only exception being the West of England.
Harvey concludes that “rather than being drivers of productivity, the UK’s largest cities are acting as a drag on the national level”.
On why that might be, the report lists low levels of research and development, weak skills stock, poor intracity transport connectivity and low levels of housing density.
Harvey said: “Taken together, these factors make UK cities effectively small, in that their populations are poorly connected to employment centres and less attractive to skilled workers, given their more limited employment opportunities and amenities.
“It is no wonder, then, that many of these city-regions show very limited agglomerative returns.”
Manchester bucks national trend
However, the report does point out that since 2008, productivity growth in the MCAs as an aggregate has broadly matched the UK average.
While the likes of West Yorkshire, South Yorkshire, and Greater Manchester, have all recorded stronger-than-average growth – with the latter being the “star performer”.
Greater Manchester, which was the first MCA to be created, has been hailed as the “trailblazer for local devolution”, and its performance grown significantly faster than the UK average.
Harvey said: “A major part of this success has been an accelerating industrial transition within Greater Manchester.
“The MCA now enjoys a more favourable industrial composition than the national average, as evidenced by the increasing share of workers in high-productivity sectors.
“A prime example of this has been the strong growth in Knowledge Intensive Business Services (KIBS) that Greater Manchester has experienced since 2008.
“Employment in Greater Manchester’s KIBS sector has expanded faster than the national average, London, and all other MCAs, with close to half of these jobs concentrated in the city centre.
“Meanwhile, Greater Manchester also leads the way on overall GVA growth since the GFC; this is perhaps unsurprising given its strong productivity performance, though it is worth nothing that that it has paired this productivity growth with strong employment growth.”
The report also states that a key driver of the strong performance has been Manchester’s city centre which has had an average annual GVA growth rate of 3.6 per cent since 2008.
According to the analysis, the figure is “far higher” than the growth rate seen in the city centre of other MCAs and “much stronger” than the national rate of growth of 1.4 per cent over the same period.
The report added: “The strong performance of Manchester’s urban core points to the importance of city centres to modern economies and serves as a model for other MCAs to follow if they want to improve their productivity performance, create high value employment, and improve access to opportunities across their economic geography.”
‘Productivity malaise at the heart of UK’s weak wage growth and fiscal challenges’
Summing up the report, Harvey said: “The UK’s productivity performance has been lacklustre since the 2008 global financial crisis – both historically and relative to its international peers.
“A collapse in London’s productivity growth coupled with persistent underperformance in the UK’s other major cities lie behind the current productivity malaise, which is at the heart of the country’s weak wage growth and fiscal challenges.
“Stagnating productivity in London has been central to this slowdown given the city’s outsized role in the national economy.
“And the stagnation is broad-based, with London underperforming across most sectors.
“A range of factors have contributed to this shift, including high housing and living costs, a weak pound, and growing competition from other international hubs, which have reduced talent pipelines and limited agglomeration benefits.
“Poor productivity is also not an emerging issue. The historic and ongoing underperformance of the UK’s largest urban centres outside of London means that the economy lacks a critical mass of alternative economic centres that can pick up the slack when London’s growth stutters.
“Weak transport infrastructure, skills shortages, and low investment are major obstacles to urban centres outside of the South of England, preventing cities from capturing the clustering benefits typical in large cities.
“Yet, there are some green shoots. Greater Manchester’s productivity has notably outstripped the rest of the country, driven by strong growth in the city centre and in some of the most productive sectors of its economy.
“Given the growing importance of knowledge-intensive and advanced service sectors globally, UK city-regions such as Manchester should be well-positioned to continue their strong growth rates.”