News Article

WMiC, Issue 17 - West Midlands’ inward investment, exports, income and Brexit

Posted on 26 July 2017 (Permalink)

The West Midlands was hit badly by the recession and although it has bounced back, progress has been patchy. Recent research has shown that the region’s income levels have only been improving slowly, while unemployment is close to being the highest in the country. Helping to address these issues has been the region’s exporting strength and its attractiveness to foreign investment. With both activities dependent upon the region’s relationship with the outside world, it’s possible the outcomes from the Brexit and trade negotiations could be more important to the West Midlands than for many other parts of the country. 

 

Getting better

There has been some mixed news for the West Midlands over the last couple of months. In the plus column, the Department for International Trade (DIT) inward investment figures for 2016/17 brought good news, as the region secured the third highest number of foreign direct investment (FDI) projects in England and the second highest number of jobs. Meanwhile, buoyed by the successes of the region’s automotive industry, exports have been continuing to grow. Between March 2016 and March 2017, HMRC statistics showed that the value of these grew at a UK high rate of 18%.

As an indication of the region’s relative strength in the automotive field, a House of Commons briefing noted that in 2015 the West Midlands employed just over a third of the nation’s 155,000 car workers. The Society of Motor Manufactures and Traders (SMMT) estimate for 2016 was higher, but perhaps more significantly, suggested that 814,000 people had jobs dependent on the automotive sector. Although no geographical distribution was given for these jobs, it would seem likely that the region is home to a significant number of them.

Another tick in the plus column came with the latest regional labour market statistics that showed the West Midlands had recorded the UK’s biggest annual increase in workforce jobs. In the debit column from the same report, however, was the fact that unemployment continued to be stubbornly high, only a shade better than the UK’s worst performing region. Perhaps indicating the distance the region still has to travel, elsewhere new research by the Institute of Fiscal Studies (IFS) showed that median income in the West Midlands is 9% below the Great Britain median, the lowest in Britain.

 

It don’t come easy

With unemployment and income fragile, the continued success in exporting and inward investment would appear to be important factors in securing the region’s economic and social health. As such, it’s perhaps worth looking at the recent inward investment reports produced by the Department of International Trade and EY (Ernst Young) in a little more detail.

The DIT figures show us that for 2016/17 the region performed well in relation to other places, but compared to the year before the number of West Midlands’ projects fell from 168 to 151 and jobs from 11,119 to 6,570. Of course, levels do fluctuate from year to year and how things look can depend on methodologies and timeframes. A more positive picture comes from the EY review of inward investment. This differs from the DIT figures, for example in excluding mergers and acquisitions in its reckonings. For 2016 their methodology found West Midlands’ projects increasing to the extent that the region had its highest national share over the past ten years. This was a particularly good showing bearing in mind the UK had remained the EU’s leading destination for inward investment.

Even so, EY state that nationally “for every positive indicator there is an equivalent negative development”. For example, while the number of projects heading to the UK grew to a record level, it is not increasing as fast as for Europe as a whole as the EU cake is getting bigger, faster than the UK’s slice of it. Moreover, needless to say, not all inward investment is the same. An interesting feature of the EY report is their analysis of some of the more future oriented types of investment such as the proportion of new, as distinct from expansion investment and the number of R&D related projects. These are areas where the UK’s performance looks less rosy. Indeed it seems that the UK’s share of European R&D projects fell from 26% to 16%, its smallest share since 2011. On the positive side, the UK had significant increases in logistics investment and the country continued to lead Europe in the financial services and business services sectors.

 

We can work it out

A major feature of the EY report is its survey of investor attitudes. Among its findings, they say that “investors’ perceptions point to short term stability” but that for the longer term “perceptions are increasingly negative”. Of particular concern was the “sharp fall” in how the UK is seen on key criteria such as education, transport infrastructure, local labour skills, political stability and access to the European market. Overall, on the basis of its findings, EY says that the UK “can secure its future attractiveness” but that it needs to act quickly, suggesting a plan that covers engaging with investors on the post-Brexit environment, a UK trade strategy, improving infrastructure delivery, improving skills, and empowering and supporting the UK’s regions.

 

Here there and everywhere

Although they do differ, both the EY and government methodologies place the US as the UK’s biggest single country inward investor. That said, according to EY, the proportion of American projects was the lowest since the survey started. On the other hand and closer to home, EY found that collectively the EU was not only the UK’s biggest investor, with investments from the European Economic Area making up 40% of UK projects, but that that investment has been increasing.

One of the features of the automotive sector is the cross-boundary nature of the supply and value chains, with parts and other work sometimes criss-crossing borders as value is added. As such, its worth noting EY’s comment that “investors appear concerned about the UK having reduced access to these value chains in the future”. With a number of major automotive investment decisions expected in the next few years, these concerns could have significant implications for the region. Giving some idea of the volume of this cross boundary activity, a House of Commons briefing stated that last year the country imported £13.4 billion worth of vehicle engines and parts, 80% of which were from the EU. Emphasising the importance of the European market, HMRC figures show that 47% of the West Midlands’ exports are destined for the EU. By comparison, the north American market was worth around 20%.

 

Tomorrow never knows

Clearly, there is scope for other markets to grow in importance and for there to be more domestic business. Indeed, even with their concerns about the nature of the future European trade relationships, the SMMT (Society of Motor Manufacturers and Traders) has said that “the opportunity for UK suppliers in still very clear. With post Brexit investments continuing to come to the UK … suppliers have a significant sourcing opportunity” for re-shoring supply chain work, this they suggest, could be worth in the order of £6 billion.

As the House of Commons motor industry briefing said “Brexit could radically alter the UKs attractiveness, positively and negatively”. How this plays out could vary by sector and geography. Needless to say, the outcomes will be of great consequence to the region.

 

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