Britain’s two nations are continuing to grow ever further apart

Allister Heath

WHEN Benjamin Disraeli, the 19th century Prime Minister, wrote of “two nations, between whom there is no intercourse and no sympathy”, he was of course referring to the rich and the poor. But according to a fascinating report from Deutsche Bank, today’s two nations are what it calls the lands that “fall either side of the M25”.

The gulf between London and the rest of Britain keeps getting larger. As we report today, it’s not always to London’s advantage: the savings crisis is especially pronounced in our capital, where people save less as a proportion of their incomes than elsewhere in the UK according to Halifax figures, in part because of the cost of living. But on just about every other metric, London is still pulling away.

Oliver Harvey, a Deutsche Bank economist, has crunched the numbers in a fascinating note. Economic output per person employed in London is roughly double the UK average; from 1997-2008 the difference in gross value added per person between London and the rest of the UK exploded from £10,000 to £18,000 and has remained roughly constant since then.

In part because of this, London’s regions are remarkably unequal: the UK’s Gini coefficient is 0.13, meaning that there are much greater differences within Britain than there are between Eurozone regions (0.06) or US states (0.03). In fact, the regional differences within Germany – including its Eastern parts – are smaller than within the UK. Only Belgium and Slovakia have greater regional disparity than the UK.

Another major change is that London’s economy is now increasingly out of synch with that of the rest of Britain, while other regions have converged. Over the past 42 years, several regions had low correlations with the rest of the UK, especially the South West at just 0.72 (a correlation of 0 suggests no relationship, a correlation of 1 suggests perfect lockstep).

By contrast, London’s correlation with the rest of the UK during that time was a very high 0.91 – in other words, they both grew in almost perfect lockstep. Since 2001, however, all of the regions have moved almost perfectly together, with correlations ranging from an extremely tight 0.97-0.99 per cent, apart from London, which is now down to just 0.74. The biggest change is that London is now increasingly detached from the fortunes of the old industrial heartlands. The evidence also suggests that not only does London suffer less from recessions than the rest of the UK, it now tends to bounce back more quickly.

Most remarkably of all, if London were a City-state, it would be running the sixth largest current account surplus of any rich nation. Shockingly, the rest of the UK would be running the largest deficit. London’s trade surplus – it is a net importer of goods and energy, but a large exporter of services – is £900m, or around two per cent of GVA (gross value added). Looking at the current account as a whole, which is bolstered by huge flows of income, London’s surplus is around 8 per cent of GVA, and the rest of the UK’s deficit a massive 7 per cent.

It is often said that Germany’s competitiveness allows it to dominate many weaker economies that share the same currency with it, creating problems for monetary policy; but the same is true of London and the UK. The difference between the trade balance of London and the rest of the UK is equivalent to that between Germany and Italy; the current account gap is greater than that between both Germany and Italy and Germany and Greece. The UK’s saving grace is that people move readily and that money flows out of London and the South to poorer regions.

London must be allowed to grow and thrive. The economy is not a zero-sum game; its success doesn’t come at the expense of the rest of the UK. But urgent action needs to be taken to bolster the competitiveness of other parts of Britain, and to make sure that they too can share in the full fruits of the economic upturn.
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