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The economy: Is there really a north-south divide?

RBS

North South divides are a common theme of many analyses of the UK, not least when it comes to economic performance. But today the story of how Britain’s economy is doing is far more nuanced and many of those old maxims have been turned on their head.

Take business confidence for example. Which region’s firms are most optimistic about growth in the next 12 months? Yorkshire and the Humber comes top of the table with very closely followed by the North West and with the North East in fourth position. London is the least optimistic English region.

It is tempting to speculate that this some sort of Brexit-induced phenomenon, where regions that voted to leave the EU are happier about the future. But that view doesn’t fit the data. At various points over the last two years London’s confidence about the future has exceeded that of the North, but the capital has failed to cement that position.

Instead I think it speaks volumes about how businesses are gearing up for growth or exercising considerable caution. From talking to our customers there is a noticeable cooling of the business climate the closer you get to London, the exact opposite what’s been normal throughout most of the recovery.

So what’s driving that about turn? The state of consumer finances and the housing market has a lot to do with it. The recovery was quickest to catch hold in the South, with London having an astonishing 27% more jobs today than it did in 2007. Other regions can only imagine that sort of growth. Yorkshire has managed 6%, the North West has seen employment rise by 5%. But there can be a drawback from such rapid expansion.

Despite a skyline cluttered with cranes there aren’t 27% more homes for people to live in in London. So property prices rocketed and topped out around 70% higher than their pre-crisis peak. The North never got on that bandwagon and outside of a few localised hotspots house prices are generally within about 10% of where they were a decade ago.

But having stretched themselves to the max consumers in the south are now feeling the pinch. Prices have risen more rapidly than incomes, hurting demand across the country. But consumers have reacted more strongly where they’ve been most stretched and that means sentiment turning sour in the south.

So whilst no part of the UK will be immune from the pressures on household spending and the impact on the high street, its good to see that firms in the North have confidence they can growth through this patch.

Sebastian Burnside
Chief Economist
RBS