THE ECONOMIC PROSPECTS FOR THE CITY OF LEEDS. Report to: CEG.

Transcription

1 THE ECONOMIC PROSPECTS FOR THE CITY OF LEEDS Report to: CEG 1

2 Acknowledgements This study has been undertaken by Professor Pete Tyler (Project Director, St Catharine s College), Ben Gardiner (Cambridge Econometrics), Jon Stenning (Cambridge Econometrics) and Dr Adam Brown (Cambridge Econometrics). It has been guided by Richard Crabtree, Strategic Development Manager at CEG. Issue 10 March

3 Contents Executive Summary 1. The aims and scope of the study 2. The growth of the Leeds economy since The relative competitiveness of the Leeds economy 4. The potential for future growth, key constraints on growth and the agenda for policy Annexes 3

4 Executive Summary The aims and scope of the study Leeds has undergone an economic transformation in recent years, shaking off the legacy of industrial decline and developing economic opportunities and thus jobs in new and growing sectors, most notably in financial services. The economic future for Leeds looks brighter than it has for many years but there is a shortage of evidence on what that future might hold and the key opportunities and challenges that exist as Leeds moves to consolidate its position as the leading centre of economic growth and vitality in the North of England. To understand more about the growth of the Leeds economy this Report considers: How the Leeds economy has performed in the period since 1990 compared to the UK; How the pace of change has varied across different economic sectors in which the Leeds economy tends to specialise; How the relative competitiveness of the Leeds economy compares with that of other cities with which it competes for investment, most notably Manchester and Birmingham, and the possible impact of the Northern Powerhouse and HS2; The potential for the growth in the Leeds City Region; and The key policies/ investment initiatives that could help to unlock the growth potential and thus underpin the growth of the Leeds economy, particularly as they relate to land use and skills. The growth of the Leeds economy since 1990 Population growth in much of the North of England including Leeds was relatively weak compared to the South until the turn of the century. However, since then the position has strengthened considerably. In Leeds, Birmingham, Manchester and Sheffield there is now quite rapid growth; Leeds has demonstrated an ability to grow faster than other leading centres with which it is often compared; most notably Manchester and Birmingham. However, its momentum has varied, falling back somewhat in recent years; The Leeds economy has undergone significant economic restructuring. It been successfully repositioning from a past industrial base and begun to build its position as probably the leading financial and business services centre after London. It also has seen growth in education, health, IT services and other professional services. 4

5 The relative competiveness of the Leeds economy The Leeds economy is restructuring away from its traditional manufacturing sectors and increasingly towards Knowledge Intensive Business Services (KIBSs); It has a particularly strong competitive advantage in Business Support Services, Finance and Insurance, but it is also well-placed in a number of other mainly service related sectors; Whilst its overall level of productivity is below that of the United Kingdom as a whole it is relatively high compared to other cities in the Northern Powerhouse and only slightly below that of Manchester; Whilst the productivity levels of some of its key sectors continue to lag behind the UK, there is evidence for relative improvement and it is essential that Leeds does all it can to enable its core businesses to access the labour, premises and finance they require to grow; The importance of investing in the skill base cannot be overestimated. But it is also necessary to invest in new transport infrastructure that will allow more commuting and business travel into the City from the surrounding region and from other cities in the North. Improving connectivity requires substantial investment in new road and rail infrastructure between the east and west in addition to the current proposals for HS2; Leeds as a city has powerful knowledge-based assets and economic activity associated with this will become an increasing part of what Leeds does. There is substantial investment in the regional innovation system and strong collaboration and networking between the main knowledge-based institutions. This is a strong and rapidly growing digital economy. The increasing concentration of KIBS in the Leeds economy reinforces the importance of a good access to quality floor-space in Leeds that will enable businesses to benefit from close proximity to one another. The increasing concentration of KIBS employment in the Leeds economy reinforces the importance of a good access to quality floor-space in Leeds that will enable businesses to benefit from close proximity to one another. The potential for future growth, key constraints and the agenda for policy On the baseline forecast the Leeds economy will grow over the period at a rate that is 69% above that which it achieved in the period However, building on forecasts made for the Northern Powerhouse, and assuming some enhanced productivity growth, GVA could grow substantially more, by some 140% on its historic performance. Employment growth would also be substantially improved in relation to the historic position at 26% above. The strength of the Leeds financial sector is such that it is entirely plausible that Leeds, and in particular its expanding City Centre area, could experience growth in office-based employment towards the top end of our growth forecasts. This would create 47,000 extra office jobs in the City Centre over and a corresponding requirement for 7.5 million sq ft of new floorspace. On the basis of historic provision this is likely to prove challenging, pointing to some key messages for those involved in land use planning and development; To ensure that the projected growth in jobs can be met it is essential that there is also an adequate supply of skilled labour. At the present time future recruitment need is greatest in the high skilled and services sectors. 5

6 1. The aims and scope of the study Aims 1.1 Leeds has undergone an economic transformation in recent years shaking, off the legacy of industrial decline and developing economic opportunities and thus jobs in new and growing sectors, most notably in financial services. The economic future for Leeds looks brighter than it has for many years but there is a shortage of evidence on what that economic future might hold and the key opportunities and challenges that exist as Leeds moves to consolidate its position as the leading centre of economic growth and vitality in the North of England in the years ahead. 1.2 Clearly, the economic future of Leeds and that of the United Kingdom cannot be known with certainty. The growth of Leeds and its surrounding region will depend on how quickly the United Kingdom can grow and in turn the prospects for the global economy, and how Leeds is able to adapt. It will also depend on the quality of the decisions taken by those in both the public and private sectors in the environment in which the United Kingdom now finds itself following the result of the EU membership referendum. 1.3 It is essential that businesses and the public sector in and around Leeds respond to the new opportunities that will emerge. At the present time central government in the United Kingdom is devolving more power to combined authorities and local government to manage local economic development and the provision of core public services. Following the decision to leave the European Union there is a strong chance that central government will accelerate this process and Leeds has to be ready to respond to the opportunities and challenges that arise. 1.4 It is possible to make informed judgements as to what might happen to the growth of Leeds on the basis of different assumptions about the pace of national growth. The resulting growth scenarios can be used to help develop an economic vision for Leeds to inform land use policy in Leeds and its city region. Doing this has a number of advantages. Firstly, the process requires us to consider how Leeds has grown relative to the UK economy in the past and the factors that have led to differences between them. Secondly, the approach enables the impact of different national and local policy scenarios on the growth of the city and its region to be quantified in terms of output (GVA), employment and population. Changes in these variables will influence the demand for commercial floorspace, housing 6

7 and the provision of public and private services. 1.5 To understand more about the growth of the Leeds economy this Report considers: How the Leeds economy has performed in the period since 1990 compared to the UK; How the pace of change has varied across different economic sectors and the sectors in which the Leeds economy tends to specialise; How the relative competitiveness of the Leeds economy compares with that of other cities with which it competes for investment, most notably Manchester and Birmingham and the growth potential associated with the development of interventions to unlock growth potential associated with the Northern Powerhouse, including HS2, HS3 and other transport improvements, and skills initiatives; The potential for the growth in the Leeds City Region; and The key policies/ investment initiatives that could help to unlock the growth potential and thus underpin the growth of the Leeds economy, particularly as they relate to land use and skills. Scope of the study Geography 1.6 The city of Leeds can be defined in a number of different ways, based upon various ways of considering the functional geography of the city. The narrowest definition of the city is based upon the local authority district of Leeds, which covers the area for which the metropolitan district council of the City of Leeds is responsible. This definition is also that used by Centre for Cities in their Primary Urban Areas (PUA) analysis. With a similar (but not identical) geographical footprint, the Travel to Work Area (TTWA) definition (calculated by Newcastle University and the ONS and based upon census data that identifies those areas where at least 50% of the working population both work and live in the same area) is only a slight alteration. More radically different is the larger footprint covered by the West Yorkshire Combined Authority (and which has agreed a devolution deal with the Government covering skills, transport, housing and business support). The Combined Authority includes the districts of Leeds, Bradford, Calderdale, Kirklees and Wakefield. A further (and even broader) definition is that of the Leeds City Region (covering the area of operation of the Leeds City Region Local Enterprise Partnership (LEP)), which includes all districts in the Combined Authority plus Barnsley, Craven, Harrogate, Selby and York. The different scales of these city definitions (in terms of area and total employment) are set out in Table 1.1 and 7

8 (except the TTWA) illustrated on the map below. Table 1.1 Total employments in Leeds and associated geographies Definition of Leeds Employment, 2015 City of Leeds Metropolitan district council / PUA 391,700 Leeds travel-to-work area 412,500 West Yorkshire Combined Authority 1,169,400 Leeds City Region LEP 1,435,200 Northern Powerhouse 7,787,100 Note: Geography as shown on Map 1 (except TTWA). 1.7 Leeds also sits within the area of the Northern Powerhouse. The area as a whole is too broad to be the core area for the study, but it is necessary to place Leeds in the context of the Northern Powerhouse (alongside comparison with other cities in the UK and beyond). To do this the analysis has concentrated on the Leeds PUA, which also reflects the area controlled by the City Council. The similarity between this definition and the travel-to-work area shows that the majority of those commuting into Leeds also live within this area. The table also highlights that a significant proportion of jobs in West Yorkshire are in Leeds district (33%). Methodology 1.8 The research has been undertaken in two stages. The first has involved an in-depth analysis of how employment and output has changed on a sector by sector basis in Leeds and its surrounding region relative to the United Kingdom as a whole since The quantitative analysis has been undertaken using CE s district data at a 45 sector level based on ONS data. The data has been analysed to establish those sectors in which Leeds appears to have something of a competitive advantage. 8

9 Map 1. Leeds and associated geographies Source: CE 1.9 The second stage has involved forecasting what might happen to the growth of the Leeds economy on the basis of different national assumptions. The national forecasts have been taken from the CE national forecasting model and reflect different national and local growth assumptions. A key objective has been to consider how the relative competitiveness of the Leeds economy might affect its ability to attract investment. In the second stage of analysis it has thus been possible to consider the potential for the Leeds economy if key constraints are addressed to unlock the growth potential of the city, including the impact of the policy initiatives associated with the Northern Powerhouse, delivery of HS2, and associated improvements to the local and regional transport networks. This transformation scenario is shared with the analysis underpinning the Northern Powerhouse Independent Economic Review. 9

10 2. The growth of the Leeds economy since 1990 Population growth in much of the North of England including Leeds was relatively weak compared to the South until the turn of the century. However, since then the position has strengthened considerably. In Leeds, Birmingham, Manchester and Sheffield there is now quite rapid growth; Leeds has demonstrated an ability to grow faster than other leading centres with which it is often compared; most notably Manchester and Birmingham. However, its momentum has varied, falling back somewhat in recent years; The Leeds economy has undergone significant economic restructuring. It been successfully repositioning from a past industrial base and begun to build its position as probably the leading financial and business services centre after London. It also has seen growth in education, health, IT services and other professional services. Introduction 2.1 This section examines how the Leeds economy has performed over the last twentyfive years. It considers its growth in terms of Gross Value Added (GVA), employment, population and GDP per head relative to the Yorkshire and Humber region as a whole and the United Kingdom. Its performance is also considered relative to the Manchester and Birmingham PUAs which are two cities with which it is frequently compared. 2.2 The section also assesses how the economic structure of the economy has changed, seeking to identify those sectors which have either declined or expanded rapidly. It considers whether the changes observed have been in line with that elsewhere. Gross Value Added (Output) 2.3 Leeds grew relatively rapidly over the period It has been in the top third of British cities in terms of economic growth with a growth rate that has been quite close to that of London and significantly higher than the other former industrial northern cities with which it has traditionally been grouped (Figure 2.1). This reflects, in part, its particular strengths in financial services but there have also been other factors that have meant it has been performing somewhat better than many other British cities of similar size. However, analysis presented in this Report shows that in recent years the relative growth performance of the Leeds economy has been falling back somewhat compared to that of the United Kingdom as a whole and in particular relative to that of Manchester, which is a city with which it is frequently compared. 10

11 Figure 2.1 Growth across British Cities (PUAs), Average Annual Growth Rate (%pa) Plymouth Liverpool Telford Swansea Chatham Dundee Hull Glasgow Birmingham Grimsby Burnley Birkenhead Blackburn Middlesbrough Blackpool Coventry Sheffield Newcastle Wigan Hastings Oxford Bristol Gloucester Portsmouth Manchester Newport Leicester Luton Preston Warrington Ipswich Edinburgh Bradford Bolton Brighton Huddersfield Doncaster Nottingham Sunderland Barnsley Rochdale York Southampton Southend Norwich Stoke Leeds Wakefield Peterborough London Mansfield Derby Bournemouth Aldershot Cardiff Worthing Reading Crawley Cambridge Swindon Northampton Aberdeen Milton Keynes GVA Employment 2.4 Leeds experienced particularly rapid economic growth during the 1990s and early 2000s; growing faster in terms of GVA than both the wider Yorkshire and Humber Region and the UK as a whole. However, in the past decade Leeds has grown more slowly than the UK average (Figure 2.2). Figure 2.3 shows how the Leeds economy has grown relative to that of both Birmingham and Manchester. Over the whole of the last twenty-five years, its economy grew at a faster rate than both Manchester and Birmingham. However, in the last decade it has tended to grow relatively more slowly than Manchester and at about the same rate as Birmingham. 11

12 Figure 2.2. GVA Growth of Leeds between 1990 and 2015 shown in comparison to the UK and the Yorkshire and Humber Region GVA (1990 = 1) UK Leeds Yorkshire and Humber Source: CE Figure 2.3. The growth of GVA in Leeds since 1990 compared to Birmingham and Manchester GVA (1990 = 1) Manchester Birmingham Leeds 12

13 Employment 2.5 Figure 2.4 examines how employment has changed in Leeds. Leeds outperformed the UK as a whole between 1990 and 2005, but then fell back relatively in the last decade. It did, however, outperform the Yorkshire and the Humber region as a whole over the 25-year period. Figure 2.4. Employment Growth of Leeds between 1990 and 2015 shown in comparison to the UK and the Yorkshire and Humber Region Employment (1990 = 1) UK Leeds Yorkshire and Humber 2.6 The growth of employment in Leeds and Manchester over the last twenty-five years has been fairly similar; both have grown by about 18% (Figure 2.5). Birmingham s employment declined quite severely up until 2010 when it has tended to recover somewhat but still ended the period with less employment than it had in Manchester s performance was initially relatively weak compared to Leeds but has been performing relatively more strongly in recent years. 13

14 Figure 2.5. The growth of employment in Leeds since 1990 compared to Birmingham and Manchester Employment (1990 = 1) Manchester Birmingham Leeds Population 2.7 Population growth in the North of England was in general flat or declining up until This was quite different to that of the South of England. However, the position has changed somewhat since then as Figure 2.6 shows. Since the turn of the century, the population in Leeds, Manchester, Birmingham and Sheffield has begun to grow quite rapidly. Figure 2.7 shows the population growth in Leeds, the wider region and the United Kingdom. Leeds and its region began to experience rapid population growth from 2000 onwards. Figure 2.8 compares population growth in Leeds with that of Birmingham and Manchester. Over the last 25 years population has tended to grow at a somewhat faster rate in Leeds than both Birmingham and Manchester. In fact, population actually declined in Birmingham and in Manchester up until 2000, when it then turned around. 14

15 Figure 2.6. Population Growth across Sub-Regions Figure 2.7. Population Growth of Leeds between 1990 and 2015 shown in comparison to the UK and the Yorkshire and Humber Region Index Population (1990 = 1) UK Leeds Yorkshire and Humber Source: CE 15

16 Figure 2.8. The growth of population in Leeds since 1991 compared to Birmingham and Manchester 1.1 Indexed Population (1990-1) Manchester Birmingham Leeds GDP per capita 2.8 Leeds currently has a GDP/capita that is higher than the national average reflecting more favourable growth in the early part of the 2000s (Figure 2.9). It has a GDP per capita that is substantially above the regional Yorkshire and Humber average. Figure GDP/capita ( 000) GDP/capita of Leeds between 1990 and 2015 shown in comparison to the UK and the Yorkshire and Humber Region UK Leeds Yorkshire and Humber 2.9 Leeds GDP/capita improved relative to its competitors between 1990 and 2005 (Figure 16

17 2.10) and still maintains a gap of about 3000 per person. Manchester and Birmingham were in lockstep until 2005, since when Manchester has pulled ahead by approx per person as Birmingham was hit harder by the recession. However, this difference is partly explained by the tighter spatial definition applied to Leeds PUA. Both Manchester and Birmingham PUA cover a wider area and a larger population. Figure The growth of GDP per capita in Leeds since 1991 compared to Birmingham and Manchester GDP/capita Manchester Birmingham Leeds Sectoral growth 2.10 Figure 2.11 provides a decomposition of the Leeds economy into 6 macro-sectors for the years 1990 and Whereas manufacturing output has fallen, this has been outstripped by significant growth across the service sectors. Leeds has experienced rapid growth in output from the service sectors over the past 25 years. The reduction in manufacturing output has been more than offset by a substantial increase in economic activity in its Knowledge Intensive Business Services (KIBS) and other private services, although there was also an increase in the contribution of public services, which includes the health and university sectors. 17

18 Figure GVA levels in six macro-sectors in Leeds; GVA ( 000, 2010 prices) Primary Manufacturing Construction and Utilities KIBS Other Private Services Public Services Figure 2.12 compares the sectoral changes in Leeds with wider national trends. The Leeds economy has largely followed the same growth pattern of the wider UK, with falls in the contribution of Primary Industries and Manufacturing, and growth in the Services Sector and particularly KIBS and Public Services. Figure % GVA growth between ; six macro-sectors in Leeds and UK GVA (% change, ) Primary Manufacturing Construction and Utilities KIBS Other Private Services Public Services UK Leeds 18

19 Figures 2.13 and 2.14 identify the top 10 more finely disaggregated sectors that have experienced particularly strong GVA and employment growth over the period. Seven sectors appear in both growth charts. These are: Financial and Insurance Education Business Support Services Health IT services Other Professional Services Legal and Accounting All of these are knowledge intensive service sectors, whether privately or publicly funded. These seven sectors have clearly been the strongest drivers of both employment and output growth over the time period It is also worth noting at this point that despite its considerable % growth, Head Offices and Management Consultancies does not appear in the top 10 due to its low starting point. Figure Top 10 GVA growth sectors in Leeds by total additional output GVA ( 000, 2010 prices)

20 Figure Top 10 Sectors for Employment Growth from 1990 to Employment (1000 jobs) Figures 2.15 and 2.16 show the sectors that have experienced negative GVA and Employment growth over the period 1990 to There are five manufacturing sectors that appear in both lists: The fall in manufacturing employment in recent years reflects wider trends within both the Leeds City Region and the wider UK. Metals Printing and Recording Wood and Paper Textiles Other manufacturing and Repair 2.14 Other interesting points of note are the reduction in employment in retail trade occurring simultaneously with a significant increase in GVA. This may represent a rationalisation of the business model of the retail industry to be less labour intensive. 20

21 Figure Bottom 10 GVA negative-growth sectors in Leeds; total decrease in output GVA ( 000, 2010 prices) Figure Bottom 10 Employment GVA negative-growth sectors in Leeds by total decrease in workers Employment (1000 jobs) Note PAD refers to Public Administration and Defence Leeds sectors compared with Manchester and Birmingham 2.15 Figure 2.17 shows that Birmingham has strengths in Manufacturing and Public Services, whereas Leeds tends to specialise more in KIBS. The Manchester economy sits between the two. 21

22 Figure Comparison Sectors; Manchester, Birmingham and Leeds, % of employment, Manchester Birmingham Leeds 2.16 When looking at employment growth from 1990 to 2015, we see that Primary and Manufacturing have tended to fall, Construction, Utilities, Wholesale, Retail and transport have remained flat and Private and Public Services have shown growth. Leeds and Manchester have both seen significant growth in the KIBS sector. Whereas Birmingham has lost manufacturing jobs at a rate similar to that in Leeds, it hasn t been as successful at replacing them with jobs in the KIBS sector. 22

23 Figure Changes in Sectoral Composition; Manchester, Birmingham and Leeds year % change in employment Manchester Birmingham Leeds 2.17 Looking at the KIBS sectors in more detail, Leeds has a greater concentration than the other two PUAs in IT services, Finance and Insurance, Other Professional Services, and Business Services, which is by far the biggest KIBS sector in each city. Manchester s strengths appear to lie in Media, Real Estate, Legal and Accounting, and Architectural Services. Birmingham lags behind the other two cities in all KIBS sectors. 23

24 Figure Comparison of Manchester, Birmingham and Leeds KIBS employment, Axis % of total employment Manchester Birmingham Leeds 2.18 Over the last twenty-five years the biggest % gains in employment growth in Leeds have been in the Head Offices and Management Consultancies and Other Professional Services. These are clearly the two subsectors that have been driving KIBS growth in the area. Employment in both finance and business services increased by 15% between 2009 and 2014, although over the longer time period its growth was more modest; this suggests that the competitiveness of the sector (relative to the UK and comparator cities such as Manchester and Birmingham) has improved in recent years Employment growth in Leeds has thus been concentrated in the service sectors, which accounted for 363,000 jobs in % of total employment. Conclusions 2.20 The evidence presented in this section shows that the Leeds economy has undergone significant economic restructuring over the last 25 years. It has transitioned from an industrial base and is now defending its position as the second leading centre of financial and business services next to London. It has shown an ability to out-perform other leading centres with which it is often compared; most notably Manchester and Birmingham. However, throughout the period its relative growth has tended to vary quite considerably. If Leeds is to maintain its forward momentum it is essential that it continues to enhance its economic competitiveness and it is to the determinants of this that we now turn. 24

25 3. The relative competitiveness of the Leeds economy The Leeds economy is restructuring its economy away from its traditional manufacturing sectors and increasingly towards Knowledge Intensive Business Services (KIBSs); It has a particularly strong competitive advantage in Business Support Services, Finance and Insurance, but it is also well-placed in a number of other mainly service related sectors; Whilst its overall level of productivity is below that of the United Kingdom as a whole it is relatively high compared to other cities in the Northern Powerhouse and only slightly below that of Manchester; Whilst the productivity levels of some of its key sectors continue to lag behind the UK, there is evidence for relative improvement and it is essential that Leeds does all it can to enable its core businesses to access the labour, premises and finance they require to grow; The importance of investing in the skill base cannot be overestimated. But it is also necessary to invest in new transport infrastructure that will allow more commuting and business travel into the City from the surrounding region and from other cities in the North. Improving connectivity requires substantial investment in new road and rail infrastructure between the east and west in addition to the current proposals for HS2; Leeds as a city has powerful knowledge-based assets and economic activity associated with this will become an increasing part of what Leeds does. There is substantial investment in the regional innovation system and strong collaboration and networking between the main knowledge-based institutions. This is a strong and rapidly growing digital economy. The increasing concentration of KIBS in the Leeds economy reinforces the importance of a good access to quality floor-space in Leeds that will enable businesses to benefit from close proximity to one another; The increasing concentration of KIBS employment in the Leeds economy reinforces the importance of a good access to quality floor-space in Leeds that will enable businesses to benefit from close proximity to one another. 25

26 Introduction 3.1 The previous section examined the growth of the Leeds economy over the last twentyfive years. The evidence suggests that it has been one of the relatively faster growing Northern cities, although the pace has varied throughout the period. An analysis by sector points to it being able to expand its presence in financial services to overcome relative decline in its traditional manufacturing base. The sectors that have shown fast or moderate growth (> 0.5%pa) between 1990 and 2015 in Leeds are: Business Support Services Education Health Finance and Insurance Residential and Social Head Offices and Management Consultancies IT Services Other Professional Services Legal and Accounting Recreational Services Warehousing and Postal Architecture and Related 3.2 An interesting observation, is that all of these sectors, with the possible exception of warehousing and postal, are in the non-routine occupation sectors, meaning that they are the least likely to be affected by automation in the next years. Future growth depends on the relative competitiveness of Leeds as a location for investment and it is to examine the determinants of this that this section now turns. 3.3 There are a number of different ways in which competiveness can be measured. The findings from recent research by Martin, Gardiner and Tyler (2015) are shown in Figure 3.1. This shows employment growth in the period across the British cities relative to the nation as a whole. The difference between the national growth and that actually recorded by the city is broken down into two components. The economic structure effect is the contribution to the city s growth that can be attributed to the difference in industrial structure as between the city and the national economy; it reflects how far the city s share of faster and slower growing industries and activities differs from the nation as a whole, that is how far a region or city specializes in more and less dynamic industries. The competitiveness effect is often assumed to indicate the extent to which locally-unique factors have caused growth or decline in a city s industries: that is, it is assumed to point to some local competitive or comparative advantage (or disadvantage). For this reason it is often referred to as the regional or city competitiveness component, though it does not identify the causes of that competitive advantage (or disadvantage). Martin, Tyler and Gardiner found that on the basis of this measure of competitiveness Leeds was in the top one third of British cities. 26

27 Figure. 3.1 The role of competiveness in the growth of employment across British Cities, Source: Martin, Gardiner and Tyler (2014) 3.4 Many factors have been identified as important determinants of urban competitiveness. A relatively recent addition has been from the Economist Intelligence Unit- Hot Spots 2025: the Future Competitiveness of Cities 1. The emphasis is: Competitiveness is a holistic concept. While economic size and growth matter, several other factors determine a city s competitiveness, including its business and regulatory environment, its institutions, the quality of human capital, cultural aspects and the quality of environmental governance. These cities not only help a city sustain high economic growth, but also secure its future competitiveness (Economists Intelligence Unit, 2013). 3.5 On this basis in its City Competiveness Index the Economist Intelligence Unit benchmarked the competitiveness of 120 cities using 32 different indicators for each city. The eight, distinct, thematic categories covered are economic strength (30%), Physical capital (10%) and financial maturity (10%), institutional character (15%) and human capital (15%), global appeal (`10%), social and cultural character (5%) and environmental and natural hazards (5%). 3.6 One way to understand more about the relative competitiveness of the Leeds economy is to adopt the pyramid approach shown in Figure Hot Spots 2025: benchmarking the Future Competitiveness of Cities. 27

28 Figure The Pyramid Approach to Understanding the Determinants of City Competitiveness Source: Martin etc. adapted from Kitson, Martin and Tyler (2004) 3.7 Figure 3.2 shows that the economy of a city can increase its GDP per capita 2 by increasing their productivity, expanding their productive labour force (as indicated by its employment rate) and the amount of wages and profits it can generate. The growth of productivity in particular is affected by a number of factors including innovation, investment, human capital, economic diversity/ specialization, the degree of connectivity and quality of life and decision making. These, in turn, are influenced by the basic attributes of the city like its business environment, its educational base, the quality of its physical infrastructure including the degree of flexibility in its land and property markets, its socio-culture networks and the quality of its institutional and governance structure. 3.8 Recently, an extensive body of research has been undertaken to examine the factors responsible for the economic performance of the cities in the Northern Powerhouse 3. This research examined the relative contribution of the growth of productivity and the employment rate to the growth of GDP per capita in the North of England. Table 3.1 shows that although the contribution varied by sub-period, over the whole period the most important factor contributing to the growth of GVA was the growth of productivity. 2 It is necessary to consider the contribution made by Productivity (GDP/ Employee (sectoral hours worked), Total hours worked / employment (Work-Leisure Trade off), The Employment Rate (Employment/ Working Age Population) and Dependency Rate (Working Age Population/ Population). 3 Northern Powerhouse Independent Economic Review. Workstream 1: Analysis of the pan-northern Performance Gap-Final report. March Cambridge Econometrics and SQW. 28

29 Table 3.1. The factors that contribute to growth in GVA per capita in the North of England average growth rate per annum (%) 1992/ / / /2013 GVA per capita Productivity Jobs per worker Employment share WAP share Source: Northern Powerhouse Independent Economic Review, March 2016 How Leeds compares with other Northern Cities in relation to the factors contributing to the growth of GVA per capita 3.9 Table 3.2 provides a detailed exposition by sub-region in the North of how the level of productivity, the employment rate and the dependency rate (share of working age in total population) varied. It should be emphasized that the analysis is for the Leeds City Region taken as a whole (the LEP area). In 2004, GVA per capita was 7% above that of the North as a whole. Its productivity was very close to the Northern average but its employment rate was 3% higher and its dependency rate 3% lower than the North as a whole. Table 3.2. Sub-Regional Performance Relative to the Northern Economy in 2004 Cheshire and Warrington GVA per capita Labour productivity Employment rate Working-age share Greater Manchester Leeds City Region Liverpool City Region York, North Yorkshire and East Riding Cumbria Humber Lancashire Tees Valley North Eastern Sheffield City Region Table 3.3 shows how the key components that contribute to GVA performance compare across the sub-regions of the Northern economy by The position of the Leeds City Region had remained much the same as in However, it is noticeable that the relative position of Greater Manchester has improved substantially. Table 3.4 shows that Manchester has tended to increase its size relative to its city-region somewhat more quickly than that of Leeds over the period 2010 to 2015 (just over 6% compared to 2.2%). 29

30 Table 3.3. Sub-Regional Performance Relative to the Northern Economy in 2013 Cheshire and Warrington GVA per capita Labour productivity Employment rate Working-age share Greater Manchester Leeds City Region Liverpool City Region York, North Yorkshire and East Riding Cumbria Humber Lancashire Tees Valley North Eastern Sheffield City Region Table 3.4. Employment 2010 Employment 2015 Growth in Employment % Growth in Employment The growth of Leeds and Greater Manchester in relation to their respective sub-regional economies West Yorkshire Greater Manchester Leeds LAD (% City region) 958, , ,000 (41.3) 1,019,000 1,008, ,000 (42.2) Manchester LAD (% City region) 309,000 (32.5) 349,000 (34.6) 61,000 59,000 34,000 40, % 6.2% 8.6% 12.9% 3.11 Figure 3.3 picks up on the productivity issue further and shows how the level of productivity in Leeds City (the PUA area in this case) compares with other cities across the UK Great Britain in 2013 compared to It is encouraging that Leeds appears to have been increasing its relative productivity over the last 25 years and at a slightly faster rate than Manchester. 30

31 Figure 3.3. How Productivity Varies across Cities, 1990 and 2014 Productivity Level in 2014 (relative to GB = 100) Improving in Relative Productivity Swindon Leeds Birmingham Manchester Sheffield York Milton Keynes Slough London Declining in Relative Productivity Productivity Level in 1990 (relative to GB = 100) 3.12 However, as Figure 3.4 shows, it is important to recognise that Leeds has an overall level of productivity that is still below that of the United Kingdom as a whole. The position for the Yorkshire and Humber region is worse. 31

32 Figure 3.4. Productivity of Leeds compared to UK and Yorkshire and Humber, 1990 to Productivity ( 000 per worker) UK Leeds Yorkshire and Humber Growth in productivity by sector 3.13 Productivity growth in the largest sectors in Leeds (Figure 3.5) has not been particularly strong (and in many cases slower than the UK average). This reflects the fact that many of these sectors have seen substantial (and faster than UK) growth in employment over the past 25 years, and more moderate increases in GVA. The IT and Financial and Insurance sectors have seen some of the fastest growth Outside the top twenty largest sectors, GVA per employee in Textiles is above the national average, reflecting a sector that has managed to achieve stronger growth in GVA than employment (and, in more recent years, a more rapid decline in employment than output). 32

33 Figure 3.5 % Productivity Change in Leeds largest 20 sectors by employment between 1990 and 2015 Productivity % Chnage (1990 to 2015) The Drivers of productivity 3.15 The main drivers of productivity highlighted by HM Treasury 4 are: sectoral specialism; skills; connectivity; agglomeration knowledge and innovation; governance In the rest of this Section we provide a brief review of what is known about the relative strength of the Leeds economy in relation to the first five of these. Sectoral specialisation 3.17 One way to assess the degree to which a city has a relatively greater concentration of economic activity is through location quotients. Figure 3.6 shows employment location quotients for Leeds in A Location Quotient of greater than one signifies that that sector represents a larger proportion of employment within the Leeds economy than the total sector 4 HM Treasury (2006). Prosperity for All in the Global Economy-world Class Skills. Final Report of the Leitch Review of Skills, TSO, London. 33

34 employment within the total UK economy. When a local area has a relatively greater concentration than the national average in a specific sector it can reflect that the area has some form of competitive advantage in the sector, particularly if the sector is experiencing relative growth over the study period examined Table 3.5 adds a further dimension by showing the location quotient by sector in 2015 alongside the growth of the sector over the period in Leeds compared to the UK. It can be seen that there was particularly rapid economic growth in business support services, education, head office and management consultancies in Leeds, which were all sectors in which Leeds had a relatively greater concentration by 2015 compared to the UK The main sectors in which Leeds appears to have a relatively higher concentration than the national average are: Electricity and gas; Electrical equipment; Air transport; Printing and recording; Financial and insurance; Wood and paper; Other professional services; Legal and accounting; Business output services. Table 3.5. Leeds sectoral analysis; An analysis of the sectoral composition of employment in Leeds is shown below Sector Leeds LAD Employment 2015 Growth, % pa, UK Growth % pa, Location Quotient, 2015 Business support services 48, Education 44, Retail trade 34, Health 30, Construction 23, Financial & insurance 22, Residential & social 21, Public administration and defence (PAD) 21, Wholesale trade 18, Food & beverage services 18, Head offices & management consultancies 14, IT services 14, Other professional services 12, Legal & accounting 12,

35 Sector Leeds LAD Employment 2015 Growth, % pa, UK Growth % pa, Location Quotient, 2015 Recreational services 10, Warehousing & postal 9, Other services 9, Architectural & related 8, Land transport 8, Motor vehicles trade 8, Note: Only the top 20 sectors (with employment > 8,000 employees) are shown Figure 3.7 adds a further dimension to the analysis by considering if the sectors that are relatively specialised in the Leeds economy have been increasing their relative share over the period It appears that the sectors in which Leeds has been increasing its relative degree of specialism are Business Support Services, Education, Health, Finance and Insurance and the Residential and Social sector. This suggests that the City has strength across a wide range of office-based activities The analysis is extended further to add an analysis of how the Manchester economy has performed to enable comparison (Figure 3.8). It is interesting to note that Manchester like Leeds has been increasing its degree of specialisation in Business Support Services, education, health and the Residential and Social sector. 35

36 Figure 3.6 Leeds LAD Location Quotient (Employment) Electricity & gas Electrical equipment Air transport Printing & recording Financial & insurance Wood & paper Other professional servi Legal & accounting Business support service Recreational services Machinery, etc Head offices & manag co Chemicals, etc Education Wholesale trade PAD IT services Coke & petroleum Other manuf. & repair Motor vehicles trade Architectural & related Arts Real estate Health Land transport Textiles etc Metals Residential & social Warehousing & postal Retail trade Construction Food & beverage services Water, sewerage & waste Non-metallic Other services Accomodation Food, drink & tobacco Pharmaceuticals Media Agriculture etc Mining & quarrying Computers, etc Motor vehicles, etc Water transport Other trans. equipment

37 Figure 3.7. Sectoral concentration of employment in the Leeds economy in relation to growth over the period Change in Employment Share (pp), Leeds: Employment Change x Share Finance & Insurance Health Residential & Social Education Retail Wholesale Business Support Services Employment Share (2014) Figure Sectoral concentration of employment in the Manchester economy in relation to growth over the period Manchester: Employment Change x Share Change in Employment Share (pp), Business Support Services Health Education Residential & Social Construction Retail PAD Employment Share (2014) 37

38 3.22 It is clear from the evidence that the Leeds economy is increasing its relative presence in KIBS and its ability to do this reflects its relative strength in this key area of economic activity. Because of the importance of this sector in the Leeds economy an analysis was undertaken to assess how productivity in this sector in Leeds compared with other British cities with which it is competing for investment. Figure 3.9 shows that productivity in this sector in Leeds has been increasing since Moreover, Leeds has a higher level of productivity than cities like Manchester, Sheffield and Birmingham and appears to be moving away from them to some degree. Figure 3.9. Changes in Productivity in the Knowledge Intensive Business Services sector across British Cities KIBS Productivity Level in 2014 (relative to GB = 100) Improving in Relative Productivity Slough Milton Keynes Swindon Leeds Birmingham Manchester York Sheffield London Declining in Relative Productivity KIBS Productivity Level in 1990 (relative to GB = 100) Skills 3.23 The ability of the Leeds economy to increase its productivity and grow is strongly influenced by its ability to obtain skilled labour. Figure 3.10 shows the relationship between skills (as proxied by the percentage of the areas workforce with NVQ4+) and the level of productivity (as proxied by GVA per hour worked) for English Local Enterprise Partnerships. There is a fairly positive relationship between the two variables as would be expected. Leeds is bunched close to Manchester in its relative position and better placed than cities like Sheffield and Liverpool. However, most Northern cities have a skill deficit compared to their 38

39 Southern counterparts. The cities with the highest levels of productivity have the highest proportion of better skilled workers and it is thus essential that Leeds seeks to increase the level of skills in its workforce as it moves forward. Figure The relationship between GVA per hour worked and levels of skill in English Local Enterprise Partnership areas. Source: BIS (2015). Agglomeration 3.24 In recent years there has been much attention given to the role of agglomeration as a factor that enhances the economic competitiveness of cities. The argument is that the spatial concentration of people and firms in cities leads to positive externalities that provide increasing returns and thus falling average costs to the businesses located there. Three main sources of the types of externalities are identified. These are input externalities whereby there is a concentration of companies that produce specialised services and products, lower transport costs and procurement economies. The second embrace labour market externalities that arise from the geographic concentration of workers with specialised skills of relevance to an industry. The third relate to knowledge externalities that reflect the benefits of close proximity in sharing and exchanging knowledge of relevance to an industry. (BIS. 2009) 5.The benefits of agglomeration are particularly strong for the financial services sector. Some idea of the relative size of the potential agglomeration benefits available to Leeds compared to other cities in the North of England can be gauged by considering Figure This shows that Leeds City has the second highest concentration of jobs in the North next to Manchester. Figure BIS Occasional Paper No 1. Research to improve the assessment of additionality. October

40 shows that private business services sector (KIBS, Real Estate and Business Support Services) tends to dominate the demand for city centre office space and it is highly concentrated in two centres in Manchester and Leeds having over 100,000 employees. This reinforces the increasing agglomeration benefits to KIBS employers of locating in Leeds City Centre Leeds is thus well positioned to continue to exploit its substantial agglomeration benefits as they relate to the KIBS that are becoming an increasing part of its economic landscape. It is thus very important for Leeds that it ensures that there is a strong supply of high quality of offices in and around its centre core. 6 Figure Distribution of jobs across and within the cities of the North of England (Source: Centre for Cities, 2015) 6 Recent research undertaken by the Centre for Cities shows that jobs growth, and particularly in KIBS, is concentrating in Leeds City Centre ( ). 40

41 Figure The concentration of the private business services sector (KIBS, Real Estate and Business Support Services) in the North of England. Total Employment The importance of connectivity 3.26 In recent years HM Treasury has been highlighting the need to increase the degree of connectivity between northern cities. They argue that better connectivity would be good for the labour market in the North since it would allow KIBS employers in cities like Leeds to realise the benefits of agglomeration whilst enabling some part of their workforce to commute from their homes elsewhere in the city-region. Businesses in the North could obtain labour from a wider labour pool, in the way that businesses in London are able to do because of very good rail infrastructure to surrounding cities in the South East of England. At the present time connectivity is relatively poor and there are very weak levels of commuting flow between cities in the North. HM Treasury comments: it is currently quicker to travel the 283 miles from London to Paris by train than it is to travel less than half that distance between the two Northern cities of Liverpool and Hull 7. The British Treasury stated that increased connectivity would enable more trade to occur and enable businesses to interact and collaborate more effectively. Figure 3.13 shows recent evidence assembled by HS2 that illustrates just how disadvantaged the cities are on the basis of rail connections. There is much evidence to reinforce the view that the motorway system is also heavily compromised and for Leeds a key area remains the need for it to increase its relative connectivity to the East, West and North of England. HS2 clearly offers major opportunities with respect to the 7 HM Treasury (2015). Fixing the Foundations: Creating a More Prosperous Nation. Cm

42 South of England although even here there is an urgent need for more research and insight into how even investment in this major infrastructure project can be developed so as to maximise the economic benefits for Leeds and other northern cities. Figure East West and North South Connectivity in the United Kingdom. Source: Rebalancing Britain, HS2, 2014 Enhancing the knowledge and innovation system 3.27 An increasingly important factor in the growth of cities is their ability to develop their knowledge-based assets including their universities and major research institutions. Leeds and the other major cities in the North have extensive knowledge-based assets. Recognising the significant benefits that arise from collaboration and interaction across their regional innovation system the universities have formed the N8 Research Partnership which is a collaboration of the eight most research intensive universities in the North of England: Durham, Lancaster, Leeds, Liverpool, Manchester, Newcastle, Sheffield and York. Working with industry, N8 aims to maximise the impact of this research base by identifying and coordinating powerful research collaborations across the North of England and beyond ( The N8 universities have an extensive combined research capability and argue that they represent a significant cluster of research power among the 130 universities in the UK. Their website shows that they have almost 15,000 academic staff 12% of UK total, over 38,000 postgraduate students 11% of UK total (taught and research) and a total research income in 2010/11 of 747m 17% of UK total. They received 42

43 almost 500m of Government research funding-18% of UK total, 72m of UK industrial research funding 16% of UK total and 120m from overseas research partners. All eight universities are in the top 1% of institutions in the world The importance to Leeds of developing its knowledge based assets and the enterprise associated with it cannot be overemphasised. If it is to be successful in this respect then it will have to re-orientate its land uses, resource bases and institutions accordingly (Tyler, 2015). Recent support by HM Government to technology incubators in Leeds is reflective of the investment that has to be attracted It should also be mentioned that Leeds has performed well in recent years in developing its presence in the digital economy as the growth of the Leeds Digital Festival illustrates. In 2016 over 6,000 people attended 56 events across 28 venues featuring over 175 speakers; over 10,000 attendees are expected in The local authority in partnership with business, universities and education providers has developed a Leeds Digital Skills Action Plan 8. Conclusion 3.30 The Leeds economy has been restructuring its economy away from its traditional manufacturing sectors and increasingly towards KIBS. It has a particular strong competitive advantage in Business Support Services, Finance and Insurance where it is now probably the second leading centre of such activity in England. However, it is also well-placed in a number of other mainly service-related sectors like tourism, retail and leisure. Continued growth in these sectors will provide jobs for those who may have lower skill levels than KIBS workers and may be having difficulties in finding employment elsewhere in Leeds The ability of the Leeds economy to continue to attract new investment in KIBS sectors depends increasingly on the strength of its offer compared to cities like Manchester and Birmingham with which it competes for this type of activity. Whilst its overall productivity levels are behind that of the United Kingdom it is relatively high compared to other cities in the Northern Powerhouse and only slightly below that of Manchester Whilst the productivity levels of some of its key sectors continue to lag behind the UK, there is evidence for relative improvement and it is essential that Leeds does all it can to enable its core businesses to access the labour, premises and finance they require to grow The importance of investing in the skill base cannot be overestimated. But it is also necessary to invest in new transport infrastructure that will allow more commuting into the City from the surrounding region and from other cities in the North. Improving connectivity requires substantial investment in new road and rail infrastructure between the east and west in addition to the south as envisaged in the current proposals for HS2. 8 see: 43

44 3.34 Leeds as a city has powerful knowledge-based assets and economic activity associated with this will become an increasing part of what Leeds does. There is substantial investment in the regional innovation system and strong collaboration and networking between the main knowledge-based institutions The increasing concentration of KIBS employment in the Leeds economy reinforces the importance of a good supply of quality floor-space in and near Leeds to enable businesses to benefit from close proximity to one another. 44

45 4. The potential for future growth, key constraints and the agenda for policy On the baseline forecast the Leeds economy will grow over the period at a rate that is 69% above that which it achieved in the period However, building on forecasts made for the Northern Powerhouse and assuming some enhanced productivity growth, GVA could grow substantially more, by some 140% on its historic performance. Employment growth would also be substantially improved in relation to the historic position at 26% above; The strength of the Leeds financial sector is such that it is entirely plausible that Leeds, and in particular its expanding City Centre area, could experience growth in office-based employment towards the top end of our growth forecasts. This would create 47,000 extra office jobs in the City Centre over and a corresponding requirement for 7.5 million sq ft of new floorspace. On the basis of historic provision this is likely to prove challenging, pointing to some key messages for those involved in land use planning and development; To ensure that the projected growth in jobs can be met it is essential that there is an adequate supply of skilled labour. At the present time future recruitment needs are greatest in the high skilled and services sectors. Forecasts of Growth in the Leeds economy 4.1 Over the last twenty five years the Leeds economy has grown by around 75% and employment by some 18%. The growth of output and employment was in excess of the nation as a whole, reflecting the relative success of the Leeds economy in moving its resources into KIBS and other key growth sectors. One of the core objectives of this Report is to assess the potential of the Leeds economy to grow in the period up to 2030 and the implications for the provision of office floorspace and labour, particularly in the central business area. 4.2 To make informed judgements as to what might happen to the growth of the Leeds economy in the future we have used the CE modelling capability. Annex A provides further insight into the CE Local Forecasting Model. It is to state the obvious that we do not know the future but economic models allow us to produce plausible forecasts on the basis of informed assumptions. The modelling approach builds on the historic relationship that the Leeds economy has had with the national economy. Forecasts can be made on the basis that this relationship is maintained but, crucially, the forecasts can reflect different assumptions as to what might happen to the growth of the nation as a whole. Besides 45

46 reflecting different scenarios about the growth of the national economy the modelling assumptions can also reflect different assumptions on the stance of local land use policy. The modelling exercise has been undertaken in a post-eu membership referendum environment and reflects assumptions around the likely impact of that on economic growth. Leeds Growth Projections for CE s forecasts are baseline economic projections based on historical growth in the local area relative to the region or UK (depending on which area it has the strongest relationship with) on an industry-by-industry basis. They assume that relationships that held in the past between growth in the local and wider area will continue into the future. Thus, if an industry in the local area outperformed the industry in the region (or UK) as a whole in the past, then it will be assumed to do so in the future. Similarly, if it underperformed the region (or UK) in the past then it will be assumed to underperform the region (or UK) in the future. The baseline projections are consistent with Cambridge Econometrics UK Regional Economic Forecast produced in November The measure of employment is workplace based jobs, which includes full-time, parttime and self-employment. The data on employees in employment by industry, which distinguish full-time and part-time as well as gender for the local area, are taken from the Business Register and Employment Survey (BRES) and the earlier Annual Business Inquiry (ABI). The agricultural employment data also include agricultural labour force data from the Department for Environment, Food & Rural Affairs (DEFRA). Estimates of self-employment are taken from the Annual Population Survey (APS) from 2004 onwards. For earlier years, estimates are generated under the assumption that the ratios of self-employed to employees at local level, by industry and gender, are the same as those at the corresponding regional level. The figures are made consistent with more recently-published estimates of jobs at a regional level (quarterly workforce jobs, June figures) published by ONS, which include people in the armed forces but do not include people on government training schemes. The GVA data are consistent with sectoral productivity at NUTS 2 level from the ONS Regional Accounts. 4.5 Our baseline projection (Figure 4.1) for Leeds LAD is calculated using the Local Economy Forecasting Model, and based on a UK wide economy model (MDM-E3). This model has been updated following the EU membership referendum result. One such assumption is a lower level of inward migration into the UK between 2020 and 2030, which acts as a brake on employment growth across the country. As a result of this, we expect the %pa employment growth rate in Leeds to dip slightly from 0.5% pa ( ) to 0.38% pa (2015 to 2030). However, productivity levels will continue to improve, leading to a GVA growth rate above that of the past 15 years (2.36% pa compared to 1.40% pa) 4.6 The projection is also able to disaggregate the economy into a number of broad sectoral aggregations, with national sectoral projections translated to regional and district level based around relative specialisations. The most relevant aggregation for the Leeds 46

47 economy is the KIBS sector, which was highlighted in chapter 2 as the key strength and increasing specialisation of the Leeds economy, representing a source of both historic and future projected employment and output growth. KIBS employers are attracted to city centre locations due to the advantages they provide in terms of proximity to clients and suppliers, profile, image and lifestyle; Leeds City Centre is well placed in this respect. Here, our projections show that this degree of specialisation is set to continue, with the KIBS sector in Leeds growing at a rate twice that of the total economy, at 0.75% pa, and an output growth rate of 2.89% pa. 4.7 Our augmented scenarios are based around work done for the Northern Powerhouse Independent Review, which identified key sectors that could see a boost in demand from enhanced levels of connectivity across the North of England. This additional demand results in an increase in GVA of 4.37% pa in the KIBS sectors and 3.35% pa across the wider economy. This demand is likely to manifest itself as a combination of enhanced productivity per worker and also an increase in sectoral employment, but the balance of this distribution will depend on the nature of the industry. Under our enhanced productivity scenario, we see employment growth of 1.15% pa in KIBS and 0.63% pa economy wide. Under our enhanced employment scenario, we project an employment growth of 2.86% pa in KIBS, and 1.44% pa overall. 4.8 The strength of the Leeds financial sector is such that it is entirely plausible that Leeds, and in particular its city centre area, could experience growth in office-based employment towards the top end of our growth forecasts. However, if this rate of growth is to be achieved it is essential that there be a good supply of quality office floorspace in Leeds City Centre and there is sufficient skilled labour available to meet the growth of jobs. We examine each in turn. Table 4.1. Projections of GVA and Employment for Leeds PUA (equivalent to Leeds LAD) from 2015 to 2030 Growth Rates (%pa) Baseline Enhanced Productivity Enhanced Employment Total GVA Total Employment KIBS GVA KIBS Employment Source: Consultants forecast 47

48 Figure 4.1. Projections of GVA and Employment for Leeds PUA (equivalent to Leeds LAD) from 2015 to 2030 (KIBS shown separately). Source: Consultants forecast Translating employment growth into demand for floorspace 4.9 The forecasts of employment growth have been translated into forecasts of increased demand for office floorspace using the most recent evidence on floorspace employment densities from HCA 9 In 2015 service based employment made up 63% of total employment in the Leeds economy. Our forecasts suggest it will represent 64.5% in Since our forecasts are for the Leeds economy as a whole and our interest is in sectors that will predominately demand office premises we have identified how much of the growth in employment will be in office-related sectors. We have also assumed that approximately two 9 The density table suggests a density per sq ft of between 130 sq ft NIA for Corporate general office floorspace. The HCA Guidance indicates that for office floorspace the gross figure (GIA) is around 15-20% above that of NIA. The GIA figure is thus assumed to be around 160 sq ft GIA per job. It is, of course, quite possible that other use classes might form some part of the development and if there was more B1b R&D space then this would be more in the region of 480 sq ft GIA depending on the extent of communal area provision. 48

49 thirds of the growth of GVA and employment and thus increased demand for office floorspace will occur in the Central Leeds Office market. This proportion can be adjusted as a sensitivity test. We have adopted the two thirds ratio by considering recent evidence on the Leeds property market produced by Leeds City Council 10. Table 4.2. Growth of employment over on the basis of the growth forecasts for the Leeds and its city centre (figures in brackets relate to KIBS) Forecast (LAD) City Centre Office-based activity (City Centre) Baseline 450, ,000 30,000 20,000 12,800 (90,000) (100,000) (10,000) (6,700) Northern Powerhouse enhanced productivity 450,000 (90,000) 500,000 (104,000) 50,000 (14,000) (9,330) 21,331 Northern Powerhouse enhanced employment 450,000 (90,000) 560,000 (134,000) 110,000 (44,000) 73,330 (29,330) 46,931 Source: Consultants forecast Table 4.3. Increase in floorspace requirement on the basis of the growth forecasts for Leeds City centre. Sq ft (assuming 160sq ft per employee) Forecast All Sectors KIBS Baseline 2,048,000 1,072,000 Northern Powerhouse enhanced productivity Northern Powerhouse enhanced employment 3,412,992 1,492,800 7,508,992 3,519,600 Source: Consultants forecast Accommodating the growth of office employment in the Central Leeds Office Market 4.10 The increased requirement for new commercial floorspace in the Central Leeds Office market can only be accommodated if the supply of new commercial floorspace adjusts accordingly. Although the estimates are based on 2015 commercial floorspace employment densities they can be regarded as a realistic representation. Increased demand could be met 10 In 2015 some 31% of all employment, and 44% of KIBS Employment, is within the Leeds LAD is in the City and Holbeck ward, followed by 8% total employment (6% KIBS) in University and 6% total employment (8% KIBS) in Hunslet. These three wards we have considered as representative of the City Centre area and in total contain some 60% of KIBS employment and we consider the relative position is likely to increase as reflected in our two thirds assumption.(cambridge Econometrics). 49

50 either from new build or refurbishment of the existing stock where this is possible. There could also be change in the use of buildings that are currently not used to provide commercial office floorspace at present. To provide some insight into the range of possible adjustment mechanisms we examined evidence on the state of the Central Leeds Office market provided by Leeds City Council. The Leeds property market in Leeds City Council produce an extensive and detailed overview of the state of the Leeds property market 11.There has also been a substantial amount of research undertaken by property companies in the North to investigate the impact on the Leeds property market of the Northern Powerhouse and more recently the EU membership referendum result Marketed office space 4.12 Figure 4.2 shows the property on the market in Leeds since The total amount of office space available each year has been much the same since 2009 averaging around 4 million sq ft although since 2014 the volume has fallen off somewhat. The Leeds City Report provides information on the City Centre. The amount of office space marketed in the CBD area has been falling and is currently at 1.5 million sq ft whilst in the Core it was around 500, 000 sq ft in Lettings 4.13 Leeds City Council report states: The traditional prime office core has historically been regarded as an area bounded by Park Row, Wellington Street and Westgate/The Headrow. However, much of this stock is dated and listed and, as a consequence, has had difficulty in providing large scale office developments (50,000 ft²) with 10,000+ ft² floorplates. As a result, the office core has migrated in a south and westerly direction along Wellington Street and Aire Street, beyond Leeds City Station and south of the River Aire, where sites have been available. Indeed, in view of the substantial growth of Leeds over the last 25 years this migration now encompasses sites that were once regarded as being fringe and which have now seen significant office development activity (Leeds City Council, 2016). 11 Leeds Property Market. Leeds Economy Handbook. August Colliers International ( 2016). 13 Lambert Smith Hampton (2015).The Northern Powerhouse. Office Market Report 2015/

51 4.14 Over the last decade office lettings in Leeds have been averaging 502,500 sq ft in the City Centre and 317,400 sq ft out of town per annum (Leeds City Council, 2016). If the Leeds economy achieves the higher growth forecasts presented in this Report then it will require at least 500,000 sq ft of new office floorspace in its City Centre per annum. This is at the top end of what has been achievable in recent years and it will thus need to increase substantially the amount of quality office floorspace available. This view would not seem to be out of line with what is being suggested by local property agents. Thus: A new found confidence is sweeping across most sectors and there are some really exciting opportunities if you know where to look Outlook for Leeds is very positive. However, we believe that there is a real danger of a significant under supply of available accommodation post 2016, so development opportunities are excellent. (Colliers Briefing, 2016). Figure 4.2. Property on the market in Leeds Source: Leeds City Council 51

52 Figure 4.3. Office premises on the market in Leeds City Centre (000 sq ft). Source: Leeds City Council (2016) Ensuring a good supply of skilled workers 4.15 To ensure that the projected growth in jobs can be met requires an adequate supply of skilled labour. At the present time there are some significant challenges that will have to be overcome. There has been an extensive amount of research undertaken into the Leeds City Region labour market with a recent report from the LEP 14 highlighting the following key points: 15, 16 Although the Leeds City Region labour force has been getting better qualified it is still behind the England average; In the period up until 2024 the working age population is expected to grow more slowly than in the period and the number of young people aged is actually expected to decline; Recruitment need is likely to be greatest in high skilled and service roles. Recent research 17 points to successful City Centres attracting relatively high proportions of highly qualified graduates attracted by proximity to workplace but also a high quality offer of restaurants, leisure and cultural facilities. 14 Leeds City Region Labour Market and Skills Report, Regional economic Intelligence Unit. Leeds City Region Local Enterprise Partnership. ty_region_labour_market_and_skills_report_2016.pdf 15 Leeds City Region Labour Market and Skills report, Kumi-Ampofo, F and Spakovica, T (2013/14). Leeds City Region. Labour Market Analysis. 17 Centre for Cities (2015). 52

53 An agenda for policy 4.16 On the baseline forecast the Leeds economy will grow over the period at a rate that is 69% above that which it achieved in the period However, building on forecasts made for the Northern Powerhouse and assuming some enhanced productivity growth, GVA could grow substantially more, by some 140% on its historic performance. Employment growth would also be substantially improved in relation to the historic position at 26% above The strength of the Leeds financial sector is such that it is entirely plausible that Leeds, and in particular its city centre area, could experience growth in office-based employment towards the top-end of our growth forecasts. This would create 47,000 extra office jobs in the city centre over and a corresponding requirement for 7.5 million sq ft of new floorspace. However, on the basis of historic provision this is likely to prove challenging in a competitive market for the attraction of KIBS and other service sector investment. This highlights the importance of coherent and strategic initiatives relating to planning, transport and skill policies in the years ahead to help to realise this potential. 53

54 Annex A. The Cambridge Econometrics Local Economy Forecasting Model. LEFM has been developed by CE in collaboration with the Institute for Employment Research at the University of Warwick. It is, to our knowledge, the only software package in Europe tailored to model regional and local economies and designed to conventional commercial software standards. It has been commercially available since the early 1990s (since when it has been continually developed) and is designed to empower organisations to undertake detailed economic analysis in-house. It is used extensively by local agencies, including local authorities, and by CE for more specialised analysis often commissioned by development agencies. LEFM has been designed to project economic indicators for a local area by explaining the output of local industries through an explicit representation of expenditure flows in the area and their links with the world outside the local area. In this it differs from other methods of local economy modelling which typically link local output or employment (by sector) directly to national or regional output or employment. econometrically estimated equations. Such methods include shift-share or While these methods allow a user to derive projections for local output or employment growth from national or regional projections, they offer little scope for introducing an explanation of local performance relative to these higher levels, and they are typically not suitable for analysing the indirect effects on the local economy arising from the opening of a new enterprise or the closure of an existing one. LEFM is also distinguished from other approaches by its sectoral detail. It identifies 45 sectors (defined on SIC07), allowing (for example) electronics to be distinguished from electrical equipment, and IT services from other business support services. Detailed disaggregation by sector is usually valuable because different sectors have different prospects (e.g. technological change is driving much faster growth in electronics and computing than in the other sectors with which they are commonly combined), because they have different employment characteristics, and also because it allows local knowledge about specific firms to be more easily incorporated in the forecast. There is, however, a cost to working in such detail: most variables in the model have to be disaggregated by sector (or a similar classification: see below for more details). LEFM s structure draws heavily on that of MDM, Cambridge Econometrics multi-sectoral model of the UK economy and its regions, and it shares the same software. 54

55 LEFM s Main Inputs and Outputs The main input assumptions used in LEFM are: forecasts for the UK and region in which the local economy lies for selected variables, including o the components of domestic final expenditure, disaggregated into spending by function as published in the UK National Accounts o components of personal incomes o gross output, value-added and employment by 45 sectors o matrices to convert the components of domestic final expenditure into commodity demand for 45 sectors o input-output coefficients and projected changes o projected changes in occupational structure and gender forecasts for the local economy o population by 5-year age band and gender o participation rate by gender for a constant level of unemployment (these are then adjusted by the model in response to actual changes in unemployment) Outputs for the local economy include: o value-added and employment by sector (45) o employment by gender and status (full-time, part-time, self-employed) o employment by occupation (25 occupations, SOC2010) o disposable income and consumer spending o population and labour force by age (7 age bands) and gender o net commuting o implications for qualifications LEFM s Main Relationships Accounting structure Figure 1 summarises the model s accounting structure, which follows the social accounting matrix approach adopted in MDM. In most cases, the variables shown in the diagram are disaggregated (e.g. by sector for output and employment). Each industry s gross output is determined as the difference between commodity demand (the sum of demand coming from the final expenditure components together with intermediate demand coming from production in the local economy) and imports to the local 55

56 area. Each industry s value-added is assumed to be in the same proportion to its gross output as is the case for the region as a whole. How the main variables are determined Employment in the local area generates incomes. Assumptions are made for net commuting, which determines the extent to which incomes from local employment accrue to non-residents. Similarly, some incomes in the local area are derived from employment outside the area, or from non-employment sources (e.g. unemployment benefit). Aggregate household expenditure by residents in the local area is determined by real household disposable incomes (deflated by the national household expenditure deflator) and projections for the household saving ratio (derived from changes in the regional household saving ratio). Household expenditure is then disaggregated into spending by function according to the proportions forecast for the region. Government final expenditure (disaggregated by type) in the local economy is projected on the basis of changes in the local area s share of the region s population. Investment by sector is determined by a simple relationship with output. Projections for social investment (e.g. education, health) and investment in social services (e.g. roads), which are treated as assumptions at the UK level in MDM, are allocated to the local area according to population changes. Intermediate expenditure by sector and commodity is determined by applying the national input-output coefficients to local economy gross output by sector. Exports by sector from the local economy are linked to national gross commodity output in each sector. In effect, local firms are treated as competing in the national pool. Export projections then depend upon UK gross commodity output in each sector, and on assumptions for trends in the local economy s share of this output. In some cases, simple methods have been tried to model these export shares (e.g. to represent the effects of policies to promote inward investment). Imports by sector to the local economy depend on the demand for commodities in the local economy and on assumptions for import shares. Employment by sector is determined by gross output and trends in productivity per person employed derived from regional projections (which in turn are derived from econometric estimates). Employment by gender and type is determined by the sectoral composition of employment and local information on the representation of genders and types of employment in each industry. The default projections for trends in this representation are based on historical data for the local area, with the user given the option to change these default values. A similar procedure is followed for employment by occupation. 56

57 Projections for the resident workforce are derived from assumptions for the population for working age (by gender) and projected participation rates which vary with the unemployment rate. Unemployment is the difference between the workforce, local employment and net commuting. 57