UK: Supply constraints are probably less prominent in the south

The extent to which UK employers can respond to likely 2024 interest rate cuts with increased output, rather than rises in prices and wages, will partly reflect the extent of spare capacity. This will inevitably vary by region. Evidence on this is imperfect, but in terms of capital assets (including intangibles) and labour availability, southern regions appear to be in a stronger position than those in the UK’s traditional industrial heartland.

What you will learn:

• Using ONS data on investment flows, we estimate that some regions probably have more spare capital assets than others. The East of England, the South East, and South West are likely to be in a stronger position than Yorkshire and the Humber, Wales, or the North East: three parts of the UK’s industrial heartlands.
• Recent (Q4 2023) survey information from the ICAEW Business Confidence Monitor offers a similar story, with companies in the East of England and South West most likely to have some spare capacity, though less so for the South East. Using this measure, the West Midlands is particularly short of capacity. So too is London, but clearly as a largely service-based economy, the meaning of the term is likely to be slightly different in the capital
• The other main dimension to consider is spare capacity in the labour market. The unemployment rate in the East Midlands was particularly high in Q4 2023, and closer to pre-Covid-19 norms than in other regions—possibly implying spare capacity there. But it may also imply weakness in demand or a skills mismatch.
• Unemployment was also pretty close to historical norms in the South East, reflecting the limited scope for it to fall. Again, it is older industrial regions (Northern Ireland, Yorkshire and the Humber, the North East) where unemployment looks particularly low relative to historical trends, implying they may have the least amount of scope to expand output as monetary policy is eased.
• Data on online vacancies suggest that in London, the South East, and East of England, the labour market is historically not very tight, with employers apparently able to find recruits more easily there than elsewhere, particularly in Northern Ireland, and, to a lesser extent, the North East.