Imagine, for a second, that on 23 June 2016 Britain had voted to remain in the European Union. David Cameron would probably still be Prime Minister, with George Osborne his most likely successor.
Rather than gruelling Brexit negotiations consuming the Government’s bandwidth, British politics would most likely be dominated by debates about living standards, the NHS and austerity. Even if the Brexit debate had been consigned to the history books, Britain’s economy would still be facing significant challenges.
The extent of those challenges was laid bare in November last year, when the Office for Budget Responsibility (OBR) significantly downgraded its previous growth forecasts for the UK’s economy. The OBR’s calculations had been overly-optimistic about national productivity levels, which had remained sluggish since the 2008 global financial crisis.
Britain’s cities should lead national productivity. After all, concentrating jobs and businesses in specific places leads to them being more productive – a process known as agglomeration. Instead, cities are where this productivity crisis is mainly playing out.
A recent Centre for Cities briefing showed 50 out of 62 British cities lagging below the national productivity average in 2015, including big cities such as Manchester, Liverpool and Birmingham. Of the 12 that were above the national average, eight were in the Greater South East – showing the clear economic disparities which exist across the country (and helped to fuel the vote for Brexit).
The coming decades will pose new economic questions for cities, as they seek to adapt to the disruption that automation and globalisation are likely to bring. The new Cities Outlook 2018 report shows these changes will bring significant opportunities, but could also entrench existing economic disparities.
Cities in the north and the midlands are more exposed to potential job losses, while cities in the south are better placed to secure more high-paying, high-skilled jobs in the coming decades. These issues would pose significant challenges regardless of Britain’s decision to leave the EU. However, it is also clear that Brexit will compound the challenges that cities face.
Take trade, for example. British cities are critically dependent on trade with the EU, which is the biggest export market for 61 out of Britain’s 62 main urban areas. Two thirds of British cities (41 out of 62) trade half or more of their exports to the EU, with even Derby – the city least reliant on EU markets – still selling a quarter of its exports to EU countries.
It follows, then, that any disruption to this trade will have a negative impact on the economies of UK cities. Some insight into how this might play out can be found in research produced by Centre for Cities with the Centre for Economic Performance at the LSE, which charts the likely impact of both a ‘hard’ or ‘soft’ Brexit on UK cities in the decade after new trade arrangements with the EU are put in place.
Under either scenario, the news isn’t good.
All British cities are set to see a fall in economic output as a result of leaving the EU, because of the predicted increase in trade costs that both a ‘hard’ and ‘soft’ Brexit will bring. The economic impact will be almost twice as big in the event of a ‘hard’ Brexit, which the research predicts will bring an average 2.3% reduction in economic output across all UK cities – compared to a 1.2% decrease if we have a soft Brexit.
In both scenarios, it is economically vibrant cities – predominantly in the south of England – which will be hardest and most directly hit by Brexit. This reflects the fact that these cities specialise in large, knowledge-intensive sectors such as financial services, which research from the Centre for Economic Performance shows will be most affected by the increase in tariff and non-tariff barriers that Brexit could bring.
However, the most-affected cities are also best-placed to respond to the predicted shocks ahead. Places such as London, Reading and Aberdeen are home to large highly-skilled labour, significant numbers of innovative firms and strong business networks – all of which are crucial in enabling a city to reinvent or adapt its industrial structure to changing economic circumstances.
In contrast, the cities least directly affected by either form of Brexit are mostly less prosperous places in the north, midlands and Wales – often dubbed the UK’s ‘left behind’ regions – credited with driving the vote to leave the EU. These cities are largely characterised by low numbers of high-skilled firms and workers, and smaller knowledge-intensive private sectors.
So, whilst they are less vulnerable to the predicted post-Brexit downturn, they are also less well-equipped to respond to the economic challenges ahead.
Figure 1: The impact of a ‘hard’ and soft’ Brexit on economic output in the UK’s Cities
As such, the response to Brexit is likely to be similar to the response we saw in the aftermath of the 2008 recession – when London and the south east were initially most exposed, but also recovered more quickly and strongly than other parts of the country.
Research by the Centre for Economic Performance research shows that, to minimise the economic downsides of Brexit, the Government needs to ensure post-Brexit trading arrangements are as close as possible to the UK’s current relationship with Europe. In short, this means pushing for the softest Brexit possible.
Secondly, the Government must get to grips with the diverse economic challenges facing different parts of the country as we leave the EU. As Chloe Billing, Philip McCann and Raquel Ortega-Argilés set out in the Brexit: Local and Devolved Government report, we should have an industrial strategy which empowers cities and regions to make these strategic decisions.
This will that be crucial to enable cities to adapt to Brexit. But it is also necessary to enable cities to address other big ‘future of work’ challenges arising from globalisation and automation, which will become increasingly significant in the decade ahead.
This means giving metro-mayors and cities across the country the investment, powers and responsibilities they need to make their economies as successful and competitive as possible.
If Brexit leads to the Government further centralising power at the national level, the already difficult issue of tweaking national policies to meet the needs of increasingly diverse cities will only get worse.
On the other hand, if Brexit leads to the wholesale devolution of policies, allowing local politicians much more control over the issues that affect the daily lives of the people they represent, then bridging the stark political and economic divides within the country might be possible.
The views expressed in this analysis post are those of the authors and not necessarily those of the UK in a Changing Europe initiative.