Huge place-based economic scarring requires revitalised return to levelling up

17 June 2020

By Andy Norman

5 minute read

The UK economy is facing its biggest recession in a generation. In the years that follow, different parts of the country are set to experience very different recovery paths, with more resilient areas likely to bounce back more quickly than vulnerable places. To deliver an inclusive recovery for all parts of the country, the government should adopt a shore-up then level-up approach, increasing resilience in the short-term and reducing existing place-based inequalities in the longer term.

The economic impacts of Covid-19 are already huge. The UK economy shrank by a record 20.4% in April, 8.7 million workers are currently furloughed and universal credit claims have skyrocketed. Less certain, however, is what the longer-term recovery will look like. Discussion has covered an alphabet of possibilities: will the UK experience the rapid bounce back of a V-shaped recovery, the prolonged bottoming out of a U-shaped recovery, the slow and steady return to growth under a ‘Nike swoosh’ recovery, or the much feared L-shaped non-recovery? Analysis here at the Centre for Progressive Policy (CPP) for our recent report, Back from the brink: Avoiding a lost generation, suggests that the UK may well experience all of them, with different parts of the country set to experience very different recovery paths

It is likely that economies across the world will never fully recover from the outbreak of Covid-19. Research from the IMF in 2017 suggests that all types of recession lead to significant output loss in the long run, relative to the trend rate of growth. This so-called ‘economic scarring’ occurs through a number of channels. For instance, a prolonged period out of the labour market can clearly reduce an individual’s lifetime earnings, but it can also lead to a permanent loss of skills, which dampens future economic growth. For businesses, the economic uncertainty of a recession can cause them to reduce investment and restrict research and development spending, with both pull down productivity.

CPP analysis of past recessions in the UK shows that different local areas tend to recover at different rates. For example, while many parts of the country rebounded quickly after the 2008 recession, 26 local authorities still have not yet recovered.

Our report combines analysis of the local variation in recovery from past recessions with national recovery projections for the current recession to estimate long run recovery rates for different local areas. To do this, we separate local authorities into three categories – vulnerable, moderate and resilient – based on a several criteria, including skill levels, unemployment rate and time taken to recover from the previous recession.

The results show clear regional differences. The average GVA loss relative to trend after 5 years is highest in the North East, at 11.7%. The lowest average GVA loss is in the South East, with a 5.4% decline relative to trend predicted by 2025. Areas covered in the Red Wall – parliamentary seats in the North and the Midlands which switched from Labour to Tory in the last election – are projected to be an average of 12.1% behind trend levels of GVA by 2025.

Given this regional effect, with the North and the Midlands likely to be hit much harder that the South East and parts of London, we outline a roadmap to recovery that goes from ‘shoring up’ to ‘levelling up’. The government must shore up local economies in the short-run to limit economic hardship and to head-off greater unemployment down the line. In the long-run the government must return with renewed commitment to the levelling-up agenda it outlined pre-outbreak. This means closing the economic gaps that persist across the country and are set to be exacerbated by Covid-19.

Against this backdrop, the report sets out five ambitious but critical tests for policymakers if they are to be successful in making good on their commitment to level up the economy and deliver an inclusive recovery. These are:

  1. Return income and unemployment in the hardest hit areas to pre-crisis levels by the end of 2021
  2. Halve the gap in skills and good jobs between vulnerable and resilient areas within a generation
  3. Halve the gap in health between vulnerable and resilient areas within a generation
  4. Close the investment gap between vulnerable and resilient areas within a generation
  5. Reduce by half the inequalities between and within places within a generation

The Covid-19 outbreak has put local economies under unprecedented pressure. As we start to look to the recovery, we must ensure parts of the country do not fall further behind. This will require bold action from policymakers, including investing in social and physical infrastructure and doing more to redirect resources outside of the greater South East. By following a shore-up then level-up approach we can not only deliver an inclusive recovery, but also tackle the entrenched place-based inequalities that have plagued this country for decades.

This article was first published by Devoconnect.