West Midlands economy hardest hit from Covid-19 as auto sector stalls

The economic impact of the coronavirus pandemic will hit the West Midlands harder than any other region and leave London the least affected, according to an assessment of the worst affected areas of the UK.

Consultancy KPMG said that an analysis of the likely impact this year on the UK’s regions showed that the closure of car plants and mothballing of hundreds of factories connected to the automotive sector meant the region’s economy would shrink by 10.1%.

In a report that matched economic forecasts for each region with the mix of local industries and how they will fare in the pandemic, KPMG said London was better placed than other areas to maintain its economic activity, despite suffering the highest number of cases and deaths in the pandemic.

London will contract by 7.3% this year, the report found.

The report said London’s services sector, from marketing and advertising to architecture and financial services, could carry on remotely through the lockdown and recover lost ground in the months after the lockdown eases.

Meanwhile, the double hit to the automotive sector - which makes up 6% of the local economy - from factory shutdowns and a collapse in demand for new cars meant that a major sector in the West Midlands would be dormant through the lockdown and take time to recover during the rest of the year.

KPMG’s chief economist, Yael Selfin, said the damage caused to the UK’s regions outside London and the south east would be a setback for the government’s plans to “level up” the north and west of the country with the east and the south.

“Our analysis highlights how the government’s ambition to ‘level up’ the UK will face a setback as a result of the pandemic. We expect that the gap between performance in London and the rest of the UK will widen this year,” she said.

The north west and east midlands, which also rely on manufacturing industries and lack many of the most resilient service industries, will also suffer more than most regions along with the East of England region, which KPMG said relies disproportionately on residential and commercial building, which has ceased during the lockdown.

The gross domestic product (GDP) of the north west and the east midlands will contract by 9.5% and 9.7% respectively while the GDP of the East of England region will shrink by 10%, KPMG predicts.

“At the other end, we expect London will be the least affected region,” Selfin said. “We forecast the economy will contract by just over 7% in 2020. A relatively higher share of services that are less impacted by Covid-19, like financial and professional services, mean the capital’s economy is more resilient to the restrictions imposed by the lockdown.

“An ONS survey conducted last year showed that more than 34% of London workers had worked from home at least once, compared to 27% for the UK as a whole,” she added.

Northern Ireland and the north east, which will contract by 8% and 8.4% respectively, perform relatively well because they boast large food manufacturing businesses, which have maintained or increased production, and a higher proportion of public sector employers.

Northern Ireland also has a cluster of life science businesses that have benefited from an emphasis on healthcare and pharmaceutical spending by the government and private sector.

Earlier this month the Treasury’s economic forecaster, the Office for Budget Responsibility, said Britain’s economy could shrink by 35% this spring and unemployment soar by more than 2m due to the coronavirus crisis.

It said Covid-19 lockdown measures would cut GDP by more than a third in the second quarter of the year and by 13% for 2020 as a whole.