UK regional economic gap to widen in next three years, EY says

The UK regional economic gap is set to widen over the next three years, according to the EY UK Regional Economic Forecast 2025. The UK overall is expected to see annual average Gross Value Added (GVA) growth of 1.6% between 2025 and 2028 as the combined impact of rising real wages, falling inflation and interest rate reductions help economic momentum start to build towards the end of this year. However, London and the East of England are expected to grow at a faster pace than the UK average, with both forecast to achieve annual GVA growth of 1.7% between 2025 and 2028. Close behind are the South East, the South West and Northern Ireland, which are all forecast to match the UK’s pace, with annual GVA growth of 1.6% between 2025 and 2028. The recovery in these regions will be underpinned by a greater concentration of high-value sectors and relatively robust growth expected in industries such as information and communication, professional services, utilities and construction. Every other part of the UK is expected to fall behind the national average over the same period, with the slowest rates of GVA growth expected in Scotland (1.4%) and the North East (1.3%). The next twelve months are expected to show a similar disparity. A weaker-than-expected end to 2024 and persistent inflation are forecast to weigh on the UK’s economic momentum, with national GVA growth predicted to be just 1% in 2025. London is the only part of the UK expected to outpace the national average, with 1.3% GVA growth over the next 12 months. The South East, the East of England and Northern Ireland are forecast to match the UK average this year, while every other part of the UK is expected to lag behind. The regions with the slowest GVA growth over the next 12 months are forecast to be the North East (0.5%) and the West Midlands (0.6%). Rohan Malik, EY EMEIA and UKI managing partner for government and public sector, said: “The UK is forecast to make a welcome return to steady growth this year, but the varied mix of sectors around the country means that some areas will feel that uplift more than others. Technology and professional services are expected to feature in the UK’s upcoming Industrial Strategy, with the hope that these sectors will support economic momentum. “Our analysis shows that these knowledge-intensive sectors are set to generate a wave of new and lucrative job opportunities, even as the wider UK labour market remains relatively flat. The challenge for policymakers will be how to foster growth in areas most in need.” According to the forecast, knowledge-intensive industries are expected to be among the UK’s fastest growing sectors over the next three years. Information and communication (which involves technology-led activity) and professional, scientific and technical activities (which includes R&D as well as business-to-business services) are expected to achieve average annual GVA growth of 2.6% and 2.2% respectively. These high growth sectors continue to be largely concentrated in specific areas. Over the next three years, more than half (55%) of the net new jobs created in information and communication and 43% of new professional scientific and technical jobs are expected to be in London and the South East. However, degrees of growth in these knowledge-intensive sectors will also be felt in local economies across the country. Employment in professional, scientific and technical activities is expected to grow on average by 2.3% per year in Manchester, 2.2% in Cambridge, and 1.9% in Edinburgh. Strong growth is expected in information & communication activities in Stirling (1.4%) and Leicester (1.2%). Peter Arnold, EY UK chief economist, said: “The years since the global pandemic have seen a two-speed economy emerge in the UK between knowledge-based industries and more consumer-facing sectors. While tech and professional services have recovered well and are around a fifth larger than they were pre-pandemic, sectors like hospitality and retail have struggled due to elevated energy and labour costs. “It’s perhaps no surprise that locations with higher concentrations of these knowledge-based businesses are therefore expected to see higher levels of growth and employment.