UK regional growth gap to widen as London pulls further ahead

Britain’s sharp regional divide is on track to deepen with London’s economy pulling further ahead despite the government’s levelling up promises, according to a report.

Ahead of Chancellor Jeremy Hunt’s budget on Wednesday, the accountancy firm EY said it was forecasting stronger economic growth in London and the wider south-east of England than for the rest of the country.

Overall it said economic growth across the UK would average 1.9% a year between 2024 and 2027 – spurred by lower inflation, a strong jobs market and the prospect of interest rate cuts from the Bank of England.

However, London and the south-east would grow by 2% and 2.1%, respectively – above every other region, and significantly stronger than in the north-east of England, Wales and Scotland where growth would average closer to 1.5%.

Despite levelling up efforts, it said London and the south-east would increase their overall contribution to the UK economy from 39% in 2023 to 40% in 2027, having already increased from 36% in 2005.

Rohan Malik, UK and Ireland managing partner for government and infrastructure at EY, said the benefits of economic growth “will not be felt equally across the country” amid a worsening regional growth gap.

“The UK’s longstanding geographic inequalities mean that many of the country’s high-growth sectors have coalesced around a select few locations, and these areas will reap the biggest rewards as the country returns to prosperity in the coming years,” he said.

It comes after the Guardian revealed fewer than a fifth of levelling-up projects approved by Michael Gove to improve towns across England have been completed, in the latest sign of stalling progress for the government’s flagship 2019 election promise.

Britain’s economy fell into recession at the end of 2023 as households reined in spending amid the cost of living crisis. However, some areas were hit harder than others, with EY warning that regions where average incomes tended to be lower suffered sharper falls in economic activity, including Wales, Northern Ireland, Yorkshire and the Humber.

Separate figures from the CBI lobby group show private sector activity continued to fall in the three months to February, with output now either flat or falling since August 2022.

Alpesh Paleja, lead economist at the CBI, said Wednesday’s budget presented the chancellor with an opportunity to remove barriers to growth and “double down” on high-growth sectors.

Saying that activity was expected to strengthen in the next three months, he added: “There’s an opening for the government to capitalise on that momentum and put the country on a path to sustainable growth.”

However, EY warned that a lack of targeted regional support and concentration of high-value economic activities in some parts of the UK – such as professional services and technology – meant the recovery was likely to exacerbate regional divisions.

It said three of the five slowest growing areas from 2024 to 2027 are expected to be in the north of England, with Aberdeen (0.8% annual average growth), Blackpool (1.1%), Warrington (1.3%), Cumberland (1.3%) and Dundee (1.4%) trailing the rest of the UK.

The accountancy firm forecast Reading would overtake Manchester as the UK’s fastest-growing location, with annual growth of 2.5% between 2024 and 2027 fuelled by the town’s position on the M4 corridor enabling it to benefit from an expansion in the technology sector.

The wider Thames Valley and locations including Windsor and Maidenhead would also benefit from an expansion in big tech. Manchester and Bristol were expected to follow with average growth of 2.2% each over the next three years.

Progress would be more mixed in other sectors, including a weaker performance in manufacturing – which typically contributes a larger share of economic activity in places outside London and the south-east.

Peter Arnold, UK chief economist at EY, said the UK’s economic prospects were likely to improve as families benefited from lower energy prices and interest cuts from the Bank of England.

“The UK’s economic prospects for 2025 and 2026 appear even brighter, but this return to moderate growth is unlikely to be balanced across the country.”