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Brexit could be a re-run of the 2008 recession for UK cities

It’s become commonplace to suggest that voters in the predominantly pro-Leave areas will suffer the brunt of the decision to leave the EU. However analysis from Centre for Cities and the Centre for Economic Performance (CEP) shows that these places will actually be less directly affected by Brexit than cities in the South East, at least when it comes to the impact of our changing trade relationships with the EU and the rest of the world.

So is the conventional wisdom on the geographical impact of Brexit wrong? The answer is not entirely – but it’s complicated.

The report examines the headwinds ahead for local economies based on how much trade they do with Europe and how exposed their industries are to changes to World Trade Organisation (WTO) rules. It shows that cities in the Greater South East are most vulnerable to the shocks the UK faces in the ten years after we leave the EU, because their large share of private-sector knowledge-intensive services jobs make them more vulnerable to non-tariff barriers (much more so than in places with big manufacturing bases, where WTO tariffs are already very low for many goods).

But we can’t ignore the ability of places to adapt to change. The basic issue is that the underlying drivers of the north/south divide will not change post Brexit. While London might face some of the largest headwinds after Brexit, its size and diversity means that the capital is far better placed to make it through rough seas that could cause havoc and seasickness for smaller, less flexible city economies.

To understand the potential geographical implications of Brexit, it is useful to draw a parallel with how different UK cities bounced back from the financial crisis. Initially, London was most exposed due to its status as a global leader in financial and related services, starting with Lehman Brothers in September 2008. But from 2010 to 2015, the number of private sector jobs in London grew by 17 per cent. More broadly, cities in the Greater South East, which are home to large numbers of high-skilled workers and complementary economies, saw the biggest rates of jobs growth since the financial crisis. The impact of Brexit may be different, but it is reasonable to think that the underlying reasons for London and the GSE’s strong economic growth since 2010 will be repeated if we say farewell to the Customs Union and single market membership. 

In the global market place for knowledge and innovation, the adaptable skills of those who lost jobs in finance are other industries’ gain. Their concentration in London and the diversity of other world-leading sectors in the capital for them to apply their skills to creates ideal conditions for the unemployed to ‘reallocate’ themselves productively and potentially support the creation of the vital ‘new work’ sectors (such as the creative, digital and professional industries). After taking the biggest initial shock, economic growth and opportunities is resumed after a short pause for breath and adjustment.

As such, in the aftermath of Brexit, cities in the Greater South East will remain best placed to attract new sectors and firms and to bounce back. Cities elsewhere have shown themselves less able to adapt to change and are likely to continue to perform relatively poorer unless they make themselves more attractive places for business investment. Our analysis should therefore not be interpreted as showing that a hard Brexit offers an opportunity to rebalance the geography of economic growth in the UK economy away from London. In truth, the poorest parts of the country will find it much harder to be ‘only’ a little bit poorer in 10 years’ time, than the richer cities who are facing a bigger economic shock – a reality which should be a central concern for those politicians charged with charting the UK’s path out of the EU, and with drawing up plans for the post-Brexit economy.

Simon Jeffrey is a Researcher and External Affairs Officer at Centre for Cities. This article is reprinted from www.centreforcities.org

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