UK regional growth gap set to widen as London moves further ahead

Britain’s deep regional divide will deepen as London’s economy moves further forward, despite the government’s stepped-up commitments, a report says.

Ahead of Chancellor Jeremy Hunt’s budget on Wednesday, accounting firm Ernst & Young said it expects stronger economic growth in London and southeast England than in the rest of the UK.

Overall, it said the UK economy would grow by an average of 1.9% between 2024 and 2027, spurred by low inflation, a strong jobs market and the prospect of interest rate cuts from the Bank of England.

However, London and the South East will see growth rates of 2% and 2.1% respectively, higher than all other regions and significantly stronger than North East England, Wales and Scotland, where average growth is closer to 1.5%.

Despite the increased efforts, London and the South East’s overall contribution to the UK economy will increase from 36% in 2005 to 39% in 2027 and to 40% in 2027.

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

He said: “The UK’s long-standing geographical inequality means that many of the country’s high-growth industries are concentrated in a select few locations, which will reap the greatest returns as the country returns to prosperity in the coming years.”

It comes after The Guardian revealed that less than a fifth of upgrade projects approved by Michael Gove to improve England’s towns and cities have been completed, the latest sign that progress on the government’s 2019 election promises has stalled.

The UK economy slipped into recession at the end of 2023 as households curbed spending amid a cost-of-living crisis. However, some areas have been hit harder than others, with EY warning that economic activity has fallen more sharply in areas where average incomes tend to be lower, including Wales, Northern Ireland, Yorkshire and the Humber.

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

Alpesh Paleja, chief economist at the Confederation of British Industry (CBI), said Wednesday’s budget provided the German chancellor with an opportunity to remove barriers to growth and “double down” on high-growth sectors.

He said economic activity is expected to strengthen over the next three months and “the government has an opportunity to capitalize on this momentum and put the country on a path to sustainable growth.”

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

The report said that three of the five slowest growing regions from 2024 to 2027 are expected to be in the north of England, namely Aberdeen (average annual growth rate of 0.8%), Blackpool (1.1%), Warrington ( 1.3%), Cumberland (1.3%) and Dundee (1.4%) lag behind the rest of the UK.

The accountancy firm predicts Reading will overtake Manchester as the UK’s fastest growing city, with annual growth rates between 2024 and 2027 thanks to the town’s location on the M4 corridor, which allows it to benefit from the expansion of the tech sector. will reach 2.5%.

The wider Thames Valley and regions including Windsor and Maidenhead will also benefit from the expansion of Big Tech. Manchester and Bristol are expected to follow, with average growth of 2.2% each over the next three years.

Progress in other sectors will be more complex, including weakness in manufacturing – which typically contributes a larger share of economic activity outside London and the South East.

Peter Arnold, EY UK chief economist, said the UK’s economic outlook was likely to improve as households benefited from lower energy prices and a Bank of England interest rate cut.

“The UK’s economic outlook appears brighter in 2025 and 2026, but this return to moderate growth is unlikely to be balanced across the country.”