News Release
Britain's Regional Economies
08 November 96
In this speech, Howard Davies considers the degree to which the UK's regional economies differ, in economic terms, both absolutely and by European standards; and also recent trends in their relative positions. He goes on to ask why regional trends should matter to monetary policy makers.
He argues that regional differentials in the UK are quite marked for a mature economy. However, "the UK does not look significantly more unequal than major other European countries. The difference in GDP per head between Greater London and Merseyside is almost two to one. But the ratio is very similar between the Balearic Islands and the Extremadura in Spain. And it is larger between Lombardy and Calabria in Italy. And in the case of Germany, for the moment, the GDP per head ratio between Hamburg and Thuringia in the East is over four to one: though the Eastern Länder are in a special category, and are catching up quite rapidly." Furthermore, wealth inequality across the UK has been reasonably constant over the past ten years.
Within this overall picture, Howard Davies notes two developments. First, the UK regional league table has altered, and in a manner which reflects the differing economic structures of the regions. Second, the variation in regional unemployment rates has diminished over the past twenty-five years.
"In 1975 unemployment in the South East was 2.1%. In Northern Ireland it was two and a half times as high at 5.5%. It was twice as high in the North at 4.2%. Today, employment in the South East is 6.9% while in Northern Ireland it is 11.2% and in the North 9.4%. In statistical terms the amount of variation in unemployment rates by region is only around half, today, what it was twenty years ago."
This has been accompanied by a growth in the dispersion of average weekly earnings, as the labour market has become more flexible and potential employees have priced themselves into work.
Finally, Howard Davies explains why the monetary authorities have to be interested in regional economic developments.
An examination of the differences between regions can improve their understanding of the nature of the economic cycle, and of the likely effect of shocks on the national economy. "Understanding these differential effects is not simply interesting, it provides greater insight into how the whole economy operates and therefore how it is likely to react to changes in policy at national level. We have learned - partly from our analysis of regional trends - that different industries are affected to a greater or lesser extent by changes in interest rates."
Moreover, regional patterns of economic activity may be affected by monetary policy - and, in particular, the authorities need to take account of such patterns when assessing what degree of monetary tightness is appropriate in the pursuit of national price stability.
It was in the light of the significance of regional economic developments that the Bank announced an expansion of its network of Agencies last year - to include new Agencies in Greater London, Cardiff, Nottingham; and a small office in Cambridge. The new Agency for Wales will be launched in Cardiff on 6 December, while that for Greater London will be launched on 11 December. In addition, the Bank is integrating the work of the Agents more closely into the monetary assessment process, and making it more public at the same time.
"In this way we are seeking to produce, if you like, a UK version of what happens in Germany, or the United States. They are, of course, federal countries, which dictates the structure of their central banks. They, too, set only one interest rate, but their central banks devote considerable effort to understanding regional economic trends, nonetheless. In the US, the regional Federal Reserve Banks publish regional analyses of the economies of their areas and send, by rotation, their presidents to Washington to contribute to monetary policy discussions. Similarly, in Germany, the presidents of the regional central banks are also represented on the Bundesbank Council. We do not, in this country, have a federal basis on which that representation can be built. But that does not absolve us from the responsibility of understanding regional trends. So we are equipping ourselves, now, better to do so in the future."
For a copy of this speech please contact Public Information and Enquiries Group on 0207 601 4878.
