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April 2009

1NG PLAN

The Foundations for Growth: Workstream 1 Draft report

CONTENTS1. INTRODUCTION....................................................................................3

The Economic Masterplan – 1NG Plan.....................................................................3Cities and economic growth....................................................................................3Overview: NewcastleGateshead – a decade of change...........................................3Role and function....................................................................................................3The recession and the 1NG Plan.............................................................................3A Competitiveness Framework for NewcastleGateshead........................................3Spatial geographies................................................................................................3Structure of the report............................................................................................3

2. POLICY CONTEXT..................................................................................3The Regional Economic and Spatial Strategies.......................................................3City Region Strategies............................................................................................3OECD Territorial Review of Newcastle.....................................................................3Local Strategies......................................................................................................3Implications for the Economic Masterplan..............................................................3

3. THE NEWCASTLEGATESHEAD ECONOMY................................................3Introduction............................................................................................................3Recent growth trends.............................................................................................3Conclusions – recent growth...................................................................................3The company base..................................................................................................3Density...................................................................................................................3Growth in business stock........................................................................................3New firm formation.................................................................................................3Conclusions – business stock..................................................................................3Employment structure............................................................................................3Conclusions – employment structure......................................................................3Innovation and R&D................................................................................................3A regional perspective............................................................................................3Conclusions – innovation.........................................................................................3Diversity or specialism?..........................................................................................3

4. THE NEWCASTLEGATESHEAD LABOUR MARKET......................................3Population and demographic change......................................................................3Deprivation.............................................................................................................3Employment, Self-Employment, Unemployment and Inactivity..............................3Occupational structure, educational attainment and skills.....................................3

5. PROPERTY MARKET..............................................................................3Introduction............................................................................................................3Office Market..........................................................................................................3Industrial market....................................................................................................3Retail market..........................................................................................................3Housing market......................................................................................................3Conclusions.............................................................................................................3

6. THE RECESSION – AND BEYOND 2011....................................................3Impact on the UK economy.....................................................................................3

7. CONCLUSIONS AND KEY ISSUES AND CHALLENGES................................3Workstream 1.........................................................................................................3Key findings............................................................................................................3Diversity vs. specialism..........................................................................................3Key issues and challenges......................................................................................3

1. INTRODUCTION

1.1. A team of consultants, led by Shared Intelligence, has been commissioned by Newcastle and Gateshead Councils and One NorthEast to prepare an Economic Masterplan (EM) for NewcastleGateshead (NG). The NewcastleGateshead City Development Company (CDC) – to be launched in March 2009 as 1NG - is managing the preparation of the EM on behalf of the study sponsors.1.2. This is the draft report of Workstream 1 – the economic baseline study. This introduction: reviews the overall brief for the EM, and for the economic baseline

study; presents a preamble to the baseline study, setting it in a context which

includes the role of cities in driving economic growth; an overview of the urban renaissance from which both Newcastle and Gateshead have benefited since the early 1990s and the implications of the current global recession; and,

sets out a framework around which to structure the evidence of Newcastle Gateshead’s economic role and performance.

The EM – 1NG Plan

1.1. The brief for the EM identified two critical questions about the future of NG to be addressed through the EM: how will NG earn its living over the next 20 years? what will (or could) this look like on the ground?1.2. The EM – or 1NG Plan, which has been agreed as its title - will, for the first time, develop a long-term economic strategy for the whole of Newcastle and Gateshead as the core of the Tyneside conurbation. Also for the first time, the 1NG Plan will consider how the two urban centres can become a coherent place, connected by a world class waterfront, focusing on the urban core. The 1NG Plan will set out a compelling spatial vision and priorities for place investment which will support the delivery of the economic strategy – and in some cases will drive it forward. 1.3. Thus the economic strategy for NG as a whole will drive the spatial strategy for the urban core. The 1NG Plan will build consensus on an ambitious – but realistic – economic and spatial

vision/strategy for NG, which will drive a step change in its competitiveness and its contribution to city regional and regional economic growth; all of the subsequent projects/interventions will align with this objective;

SHARED INTELLIGENCE 1

have a strong focus on delivery and implementation, prioritising economic and spatial interventions on the basis of their impact on competitiveness and deliverability through a robust appraisal process;

enable the CDC, and its sponsors, to make hard choices about future investment in NG;

identify a small number of transformational projects which will catalyse public and private sector perceptions of and investment in NG; and,

secure the buy in of key opinion formers/shapers and other key public and private sector stakeholders to secure clear commitment to take forward the outcomes and priorities.

1.4. The 1NG Plan will set out a long-term vision/strategic direction for the NG economy and detail the actions required to implement the plan over the next five years, with a particular focus on the physical regeneration priorities for the CDC.1.5. The Si team was appointed in August 2008 although work did not commence on the plan until late November. It will be presented to the CDC Board for approval in summer 2009 and thereafter to the local authorities and One NorthEast. The 1NG Plan is to be developed through the synthesis of six separate workstreams, detailed below:


1.6. Workstream 1 – the economic baseline aims to identify the ‘foundations for growth’ for the NG economy, by: using the ‘competitiveness model’ set out in CLG’s ‘State of the Cities’

research to provide a framework for the research; providing a concise baseline analysis of how the NG economy has

evolved over the last fifteen years, in the context of city-regional/regional trends and, where appropriate, the performance of comparable Core Cities, offering a commentary on the significance of the data;

exploring the economic relationships between Newcastle and Gateshead and between NG and the rest of the City Region;

considering how the NG economy might be impacted by the recession, and how it might grow over the next 20 years;

identifying - based on evidence - those sectors which have been growing rapidly; those which have real prospects for growth post recession;

considering the spatial implications of these growth assumptions; and, proposing a series of issues and challenges for the future

competitiveness of the NG economy, which will be refined and tested through the next stages of the research.

Cities and economic growth

The 21st Century will be the century of cities. For the first time, over half the world will live in cities – in Europe the figure is already 75%...

Charles Landry, The Creative City, Comedia 2000

1.7. Cities and city-regions have become an increasing focus of the Government’s regional economic policies in recent years. ‘The State of English Cities1’ – a major CLG research programme exploring the economic competitiveness of English cities, led by Michael Parkinson, reviews the evidence of their recent economic performance. 1.8. The study notes that English cities are complex systems – with different economic, social and institutional structures which persist over time – creating a degree of ‘path dependence’ in the patterns of size, function and specialization. Cities also differ in their capacity to adapt to change. 1.9. The research develops the concept of ‘urban competitiveness’ as the City’s response to changes in its technological, competitive, market and regulatory environment – in which some industries and institutions survive and others are replaced by new ones – and cites a number of success factors which characterise ‘urban competitiveness’:

1 State of the Cities, The Competitive Economic Performance of English Cities, Simmie et al, Department of Communities and Local Government, 2006


“for example, the export base of a city has a key influence on the performance of its economy. Competitive advantage depends on creating and attracting a highly educated and skilled labour force. High rates of innovation and entrepreneurship help ensure high productivity, high wages and high employment and enable a city to adjust to economic and technological change. The socio-cultural assets of a city are an important source of urban competitive advantage, shaping its attractiveness to educated and creative people. The quality of the communications infrastructure – road, rail, air and telecommunications – and hence its internal and external connectivity, has a direct influence on a city’s economic performance. The strategic decision-making capacity of a city also affects its competitiveness, particularly through its mechanisms of economic governance.”

1.10. The State of the English Cities (SEC) research2 reinforces the fundamental hypothesis of Harvard economist Michael Porter and others: that nations, cities and indeed individual firms compete to attract investment and jobs in the new marketplace being forged by globalisation and ubiquitous information technology. This theory is not universally accepted - others argue3 that cities do not in fact compete with each other for investment, and that urban economies are fundamentally independent. 1.11. IPPR4 argue that cities should see economic interaction with each other as an opportunity rather than a threat; furthermore a pre-occupation with ‘competition’ “results in an undue level of attention being given to policies designed to attract investment, employment and skilled labour from elsewhere, when more attention should be focused on nurturing investment, employment growth and skill development locally.”

1.12. In reality, the truth lies somewhere between these contrasting viewpoints. NG is in competition with other cities to attract and retain skilled labour. Yet the days of competing for major foreign direct investment, or for large scale public sector relocations, are an increasingly distant memory. 1.13. Increasingly, its relationships with the rest of Tyne and Wear – and indeed other City Regions – may be more important to NG’s future prosperity than its ability to compete with them. Ongoing Northern Way research5 is exploring the potential to strengthen the economic relationships between the northern city regions – and in particular between Leeds and Manchester.1.14. The SEC6 report notes that the economic performance of the English cities is highly variable (see section 3 of this report). Almost all of the best performing cities were in the Greater South East or East of England and shared the following characteristics: networks of highly connected business services firms; 2 State of the Cities, The Competitive Economic Performance of English Cities, Simmie et al, Department of Communities and Local Government, 2006

3 Urban Myth: why cities don’t compete, ippr/centre for cities discussion paper no 5 February 2006

4 ibid

5 Making Connections to Boost Economic Growth in the North, Work Foundation/Centre for Cities for Northern Way



capacity for innovation and the diffusion of technology to drive up productivity;

access to highly flexible and skilled labour; and, good intra and inter-regional and international connectivity.1.15. Some cities – like Manchester and Derby – showed evidence of polarisation with strong economic growth alongside widespread deprivation.1.16. Other research reinforces the view that the economies of London and the wider South East have much stronger linkages and synergies than those between the Northern city regions7 and this complementarity has helped to widen the gap in their economic performance. 1.17. In overall terms the SEC8 research presents a very positive assessment of cities’ contribution to regional economic growth and to the achievement of wider social and economic objectives:“many English cities have the qualities, assets and leadership skills to make a growing contribution to national welfare and prosperity. More cities could contribute more in future….England’s cities are now better placed than at any time since the end of the nineteenth century to become motors of national advance.”

1.18. Alongside this optimistic view of the future, the SEC9 report nonetheless highlighted the need for Government to adopt more supportive, decentralised policies to help realise the latent economic and social potential of cities, arguing that this approach has been particularly successful in continental Europe. This view was strongly supported by the English Core Cities10 group, who proposed“increased freedoms and more effective partnerships; the streamlining of strategic planning and funding; and greater local empowerment. Core Cities want to achieve greater local financial control and the ability to plan in a more coordinated way over longer periods to grow their economies and those of the city-regions.”

1.19. There are some initial signs that this approach is beginning to be translated into regional and national policy making. In the early part of this decade, the Northern Way11, developed by the three northern Regional Development Agencies, CLG and HM Treasury, placed cities and city-regions at the core of efforts to reduce the gap in economic output and prosperity between the North of England and London and the South East.

7 City Links: integration and isolation; Paula Lucci and Paul Hildreth, Centre for Cities 2008


9 ibid

10 Cities Outlook, 2009, Centre for Cities, 2009

11 Moving Forward, The Northern Way Growth Strategy, 2005


1.20. The Government’s subsequent Sub-National Review of Economic Development and Regeneration12 (SNR) sought to strengthen the role and contribution of regions, city regions and individual local authorities, rather than replace the regional tier with sub/city-regional arrangements. The Local Democracy, Economic Development and Construction Bill13 invites proposals for the creation of statutory sub/city-regional bodies – Economic Improvement Boards – in return for the devolution of powers and resources.1.21. Thus the 1NG Plan is being prepared at a time when there is clear Government recognition of and support for the role of Cities as drivers of economic growth, social inclusion and social mobility. The Plan will explore how regional economic, planning, transport and other policies should be strengthened to allow NG to realise this potential.

Overview: NG – a decade of change

1.1. The 1NG Plan will set out an economic and spatial strategy over the period to 2030. Thus looking back at the key changes over the last fifteen years or so provides a useful frame of reference for considering what might happen over the next twenty. Although, of course, past performance is no guarantee of future results. 1.2. This timeframe neatly spans the economic cycle between the current and most recent recessions facing the UK; it also captures the time period during which NG’s cultural and economic renaissance has come to fruition. So, as an introduction to the detailed analysis which follows, how has NG changed, and has it changed for the better? 1.3. It is of course widely acknowledged that the physical – and perceptual transformation – of the area has been immense. Newcastle and Gateshead are on a shared journey - a journey which, early in 2009, sees both places making progress towards broad objectives of sustained economic growth, social inclusion and the creation of sustainable communities – but still with some way to go to achieve these long-term ambitions.1.4. Arguably, the journey began some twenty or twenty five years ago, in the mid 1980s, when both communities, suffering the impact of sustained economic restructuring and the decline of traditional industries, became a focus for Government regeneration initiatives including the Gateshead International Garden Festival and, in Newcastle, the establishment of the Tyne and Wear Development Corporation. Here, in the early regeneration of the Quayside, we might pinpoint the beginning of the journey. 1.5. Alongside the physical transformation of the Newcastle waterfront, the City Council, English Partnerships and English Heritage were coming together to develop a long-term plan for the historic, 12 Review of Sub-National Economic Development and Regeneration (SNR), Department of Communities and Local Government and the Department for Business, Enterprise and Regulatory Reform, 2006

13 Local Democracy, Economic Development and Construction Bill, 2008-09, Government Bill introduced by Baroness Andrews, Department for Communities and Local Government


http://www.communities.gov.uk/corporate/

http://www.communities.gov.uk/corporate/

Georgian core of Newcastle City Centre which had lost its way as both a retail and office location. Over a ten year period from the mid 1990s, Grainger Town – named after its leading proponent, Richard Grainger – became a focus first for the housing-led reclamation of vacant upper floor space, then for public realm enhancement and finally the rebirth of the area as a leisure and retail destination. Grey Street was voted the finest street in England – and it still is.1.6. Sometimes policy did not join up. The transformation of the Newcastle Quayside resulted in the displacement of some of the larger office occupiers from older, obsolete premises in Grainger Town and played its part in the city centre’s decline, although on balance the net effect was a positive one. 1.7. This was not unprecedented. Ten years earlier, the development of the Metro Centre started a process of steady decline in the retail role of many of the smaller town centres in Tyne and Wear – perhaps most noticeably Gateshead yet, paradoxically, served to drive up the quality and competitiveness of the City Centre’s retail offer. 1.8. Gateshead, building on the success of the Garden Festival, drove the next, pivotal stage of the area’s renaissance, demonstrating great vision in placing culture firmly at the heart its plans for regenerating the Gateshead Quays. The Council’s drive and ambition to create new, internationally important cultural assets during the 1990s (the Baltic, Angel of the North and SAGE) provided the platform upon which NG’s renaissance has been built. The transformation of the Gateshead waterfront is perhaps the most iconic symbol of UK urban regeneration in the 1990s.1.9. Perhaps the most significant (and certainly one of the most iconic) pieces of the jigsaw, the Millennium Bridge, was critical in creating not only a physical, but psychological link between the two communities. Suddenly the Tyne waterfront spanned both sides of the river – and the cultural icons on the south of the river were complemented by the bars and restaurants on the Quayside. The waterfront became a destination in its own right.1.10. Here, the first real signs of collaboration can be found in the establishment of the Newcastle Gateshead Initiative (NGI); the establishment of NGI was pivotal in NG’s ability to capitalise on public investment in iconic cultural facilities. NGI played a key role in the rapid development of NG as a major UK short break destination and conference centre on the back of both its cultural renaissance and its ‘party city’ persona, leveraging further private investment in hotels and other visitor infrastructure. 1.11. This built the confidence for NG to bid for – and came desperately close to winning – the 2008 European Capital of Culture programme – and put in place the ‘Culture 10’ legacy programme to ensure that the momentum was sustained.1.12. The Newcastle City Centre retail offer continued to evolve, with the development of new malls and the start of the still ongoing expansion of Eldon Square. The construction of the St James Boulevard to the west of the City Centre opened up a range of new office and leisure opportunities


in the area loosely known as the ‘Discovery Quarter ‘, including the Centre for Life. 1.13. Gallowgate has become a new focus for large floor space office development in the City Centre, and in Gateshead, the opening up of land behind the waterfront has created a major new office location in Baltic Business Quarter – one which is offering the market something different from the City Centre. At the same time, the North Tyneside Enterprise Zone sites along the A19 corridor have acted as significant competition for City Centre office investment. We return to this issue in section 5 of the baseline report.1.14. Also beyond the urban core, Team Valley Trading Estate began to evolve - with office and retail components to complement the traditional industrial users; this was kick started by Enterprise Zone status but has gone on to achieve commercial viability. Newburn Riverside has the potential to become a very similar, prestige employment site on the north bank of the river.1.15. In Gateshead, innovative new housing developments- whether the Wayne Hemingway-inspired Staithes South Bank (on the Garden Festival site) or the BoKLoK housing at St James Village – made an equally important impression.1.16. The regeneration of the waterfront continues – spreading eastwards to encompass Spillers Wharf and the Ouseburn valley where a cluster of creative industries businesses is emerging. 1.17. The long awaited regeneration of Gateshead town centre is to commence, including the demolition of Owen Luder’s hugely symbolic ‘Get Carter’ multi storey car park. The potential to achieve physical and functional linkage between Gateshead Quays and the town centre is now a real possibility.1.18. Similarly in Newcastle, the transformation of the Swan House roundabout through the ‘55 degrees north’ development and the revitalisation of the Manors area to the east of the urban motorway could merely be the precursor to a much more comprehensive regeneration of the southern part of the City Centre, through the ambitious East Pilgrim Street scheme. 1.19. It is clear that the impacts of Newcastle and Gateshead’s renaissance have been wider than merely physical transformation. NG’s reputation as a city in transformation has played an important role in building a significant visitor economy, and in attracting skilled people, and inward investment, in other sectors. We evidence these trends throughout this report.

Role and function

1.1. The accompanying Workstream 2 report argues that Newcastle and Gateshead are still (largely) separate places; this report considers the extent to which their economies are connected. Both also play distinct roles in the city region/region and these provide an important starting


point from which to explore their individual and collective competitiveness. Recent research14 by the Core Cities group is helpful here, noting that the English Core Cities: are leaders in the knowledge economy; are the source of much of England’s creativity and innovation; contain many of our top educational institutions; are important retail centres; contain a large share of high value employment; are the location of many of our most important businesses; are the location of many of our greatest cultural assets; and, have very diverse and vibrant communities,

yet despite all this, are still the setting for much of this country’s disadvantage.”

1.2. This is a helpful checklist. The Newcastle City Region (as defined by OECD15) functions as the growth centre of the North East – it contains 65.4% of total regional employment and 43% of its working age population. The City Region is also home to the greatest share (66.6%) of higher and middle professional and management jobs within the region16. 1.3. NG accounts for over 15% of the Region’s population but just over 25% of jobs. Over 100,000 individuals commute into NG every day for employment. Employment density in Newcastle is above 1 – greater than elsewhere in Tyne and Wear and also other Northern Cities such as Liverpool and Sheffield. According to IPPR, there are more economic migrants resident in Newcastle than in any other part of the North East.1.4. Newcastle is the administrative capital of the Region – housing the Government Office for the North East, the Regional Development Agency and a wide range of other Government Agencies. The North East’s only company in the national top 100 is also located in Newcastle which is a regional hub for both knowledge intensive business services (it contains 30% of regional employment in these sectors) and financial services (43%)17.

14 Cities Outlook, 2009, Centre for Cities

15 OECD Territorial Review of Newcastle in the North East, Organisation for European Co-operation and Development (OECD), 2006

16 ibid

17 Annual Business Inquiry, 2007


1.5. Newcastle is acknowledged in the Regional Spatial Strategy as the regional shopping centre – and, according to Experian18, is ranked as the UK’s 12th most important retail centre (see section 5). The Metro Centre is also ranked within the UK’s top 25 shopping centres. 1.6. NG is also recognised as the leading cultural destination in the Region. Gateshead’s Baltic Centre for Contemporary Art and the SAGE Gateshead are both internationally significant cultural facilities. The Theatre Royal is the most important touring theatre in the North East, and the regional home of the Royal Shakespeare Company, the National Theatre, Opera North and Rambert Dance Company. The Hancock – soon to be re-opened as the Great North Museum: Hancock – is the North’s only natural history museum and incorporates the most significant interpretation of Hadrian’s Wall.1.7. There are four universities in the Newcastle City Region (University of Newcastle, University of Northumbria at Newcastle, University of Durham and University of Sunderland). NG is also home to the regional office of the Open University. All are important and growing employers and sources of wealth creation. The University of Northumbria at Newcastle has more than 30,000 students – making it the largest in the North East and one of the largest in the UK. Together both universities host around 50,000 students at any one time, many of which come from outside the region (30% more students come from outside the region than locally19.) 1.8. The Higher Education Institutions are the main source of Research and Development (R&D) investment in the Region. Newcastle University improved its position from 32nd to 27th of the UK HEI in the 2008 Research Assessment Exercise20, with 14% of its research classed as ‘world leading’ or 4*. Durham University slipped from 12th to 14th although 20% of its research is classed as 4* - yet neither were placed in the Times Higher Education’s ‘top 100’ world universities in 2008.

The recession and the 1NG Plan

1.1. The Workstream 1 report has been written at the start of a recession – the first to hit the UK since the early 1990s – which is likely to last for at least two years but the effects (on investment, unemployment etc) are likely to impact for several more. The recession is worsening and HM Treasury, and other forecasters, are continually revising their estimates of its impact. The impact and implications of the recession for NG are considered in detail in section 6.1.2. In this challenging context, it is very difficult for the public sector to ‘pick winners’ and even more so where it is required to make long-term investment decisions on the basis of imperfect market information. The success of the 1NG Plan will rest on the sponsors’ ability to create the conditions – business infrastructure, labour market flexibility, quality of place – for the private sector to invest.

18 Experian’s Retail Ranking, 2008

19 HEFCE, 2007.

20 Times Higher Education RAE Table of Excellence, December 2008


1.3. The current recession brings the validity of some long-term economic forecasts into question – and as a result, we have not placed great reliance on economic forecasting as a tool in the development of the 1NG Plan. New economic forecasts were not commissioned as part of this research. Where appropriate, and with suitable caveats, we have made reference to existing forecasts including those which underpinned the most recent iterations of the Regional Spatial and Economic Strategies and upon which much of recent regional economic/ spatial policies have been based.

A Competitiveness Framework for NG

1.49 The Workstream 1 report is based on a clear research framework – around which baseline data can be structured, and to provide a basis for comparison to allow the significance of the data to be assessed. To enable a degree of comparison with the earlier State of English Cities21

research, we have chosen to model our approach on the research framework set out in that report and in particular the ‘performance pyramid’ (see overleaf) which creates a hierarchy of key drivers and measures of performance. From the bottom up, the pyramid captures -

the basic determinants or building blocks of city performance - a city’s business environment, educational base, urban, social and cultural infrastructure and governance structures and organisation, which provide a platform for….

the key drivers of urban competitive performance –innovation, investment, human capital, economic structure, connectivity, quality of life and the structures of decision making….which are measured through productivity (GVA per worker), employment rates and wage levels….

and which in turn combine to inform a City’s standard of living, measured through GDP per capita.



1.1. Thus the initial phase of the 1NG Plan is about understanding the ‘fundamentals’ set out in the above diagram – the business environment; educational base (the labour market) and the property market – to assess the extent to which the key drivers of competitive economic performance are present, or can be developed, in NG. In doing so we explore some of the underpinning economic and spatial theories cited in the competitiveness framework. We have not considered social/cultural infrastructure or governance in detail as part of the WS1 report. 1.2. In some circumstances this research has a wider focus than the SEC framework. For example, this report has a stronger emphasis on understanding the changing sectoral composition of the NG economy and on enterprise and new firm formation. Where this divergence occurs it is noted in the report and the rationale for moving beyond the framework is explored.1.3. Whilst the SEC provides the framework for Workstream 1, the Work Foundation’s Ideopolis22 research also provides a useful context for considering NG’s economic competitiveness. The Work Foundation consider the factor conditions which drive growth in the knowledge based industries, including place – defining an Ideopolis as:

“a sustainable knowledge city region, with a core city which drives economic growth in the wider city region.”

and developing a framework which sets out the relationship between the ‘nine drivers of success’ of an Ideopolis:

22 How can cities thrive in the changing economy? Ideopolis II final report, Work Foundation July 2008


1.4. The Ideopolis research is wide ranging and considers the performance of UK cities under each of these measures. It suggests that the growth of the ‘knowledge economy’ and cities are inextricably linked and the drivers identified in the above diagram resonate with many of the attributes – existing or desired – sought by the 1NG partners. Thus appropriate reference is made to the Ideopolis research throughout this report.

Spatial geographies

1.1. The Workstream 1 report presents data and analysis at various different spatial levels for the purposes of comparison. However, it is neither possible nor helpful to present a wholly consistent data set throughout as some comparisons are much more relevant/significant than others. 1.2. First and foremost the report is concerned with understanding the drivers of economic and demographic change. NG - both local authority areas combined– is the primary spatial geography used for the purposes of the report although no official data is collected by ONS or others at this level. In other circumstances the synergies – and differences – between Newcastle and Gateshead are explored but only where they are of real significance. For example, the basic sectoral structure of both economies is very different and worthy of more detailed exploration; so too are rates of new firm formation. Newcastle and Gateshead have commuting relationships with adjoining districts which are as strong as those with each other.


1.3. Some data – primarily Gross Value Added (GVA) – is only statistically robust at a higher spatial level, in this case the NUTS3 geography of Tyneside (i.e. the Newcastle, Gateshead and North and South Tyneside local authority areas). This is the primary spatial geography for OECD’s Territorial Review of the ‘Newcastle City Region’23

which is coterminous with the NUTS3 definition. Some GVA data for NG and for individual sectors of the NG economy is produced but this has more limited reliability for comparative purposes.1.4. Placing the data for NG in its proper context and understanding its true significance requires comparison with other spatial levels. The spatial geographies chosen for comparative purposes vary dependent on the data; in some circumstances it is appropriate to demonstrate NG’s significance at city-regional or regional level – for example in exploring differing growth patterns of GVA and NG’s role in driving up regional GVA. In others comparison with some or all of the English Core Cities (and, where appropriate, London and the other major UK cities) demonstrates that NG shares a particular socio-economic characteristic with its peers, or that it has a distinctive attribute worthy of note. On occasion data for NG is compared to the England or GB average but only where there is a stark contrast in performance which justifies such comparison.

Structure of the report

1.1. Section 2 sets out the policy context for the EM. Section 3 - ‘The NewcastleGateshead Economy’ considers the question ‘how will NG earn its living in the future.’ Within the framework of the CLG urban competitiveness model it presents our initial analysis of NG’s economic structure and business base; considers its likely economic resilience in the short term and identifies those sectors or economic activities with the potential for longer-term economic growth.1.2. Section 4 – ‘The NewcastleGateshead Labour Market’ – considers the very significant challenges facing NG’s labour market in detail, highlighting the skills and participation challenges which are likely to have the greatest impact on NG’s economy in future, again firmly within the CLG urban competitiveness framework. Section 5 considers the performance of NG’s office, industrial, retail and housing markets. Quality of place remains a key determinant of successful cities and this material complements the analysis of urban design and transportation matters in Workstream 2.1.3. Section 6 considers ‘the recession…and beyond 2011’ when the economic upturn is expected. Section 7 draws together the research, setting out the conclusions from the baseline analysis and formulating some economic propositions which will be integrated with the spatial and urban design propositions emerging from Workstream 2 and tested as part of the next stage of the development of the EM.



2. POLICY CONTEXT

2.1. The Government is committed to making sustainable improvements in the economic performance of all regions and reducing the gap in growth rates between them. It has also set out its commitment to granting greater devolution to local areas to take forward these improvements in economic performance. 2.2. The Government’s Sub National Review of Economic Development and Regeneration24 (SNR) seeks to refocus powers and responsibilities for economic development and spatial planning at the regional, sub/city-regional and local levels. The Bill currently progressing through the Commons sets out a range of measures. Local authorities will have a new duty to provide a clear economic vision and leadership, informed by comprehensive analysis of economic circumstances and challenges.2.3. Groups of local authorities will also be supported to work together more permanently, through voluntary Multi-Area Agreements (MAAs) and/or through statutory Economic Improvement Boards which will need to meet various governance criteria in return for the devolution of some powers and resources.2.4. RDAs will be tasked with producing a new single Integrated Regional Strategy for coordinating jobs, economic growth, housing, planning and environmental objectives. Key national agencies must ensure that their activities complement and contribute to the priorities agreed in regional strategies. RDAs will also be given a new’ tasking framework’, which will be simpler and focused on regional growth objectives. 2.5. As part of these changes, RDAs will be expected to delegate funding, where possible, to local authorities and sub-regions and there will be a new duty on local authorities to “promote the economic well-being of an area.” This will provide a statutory underpinning to new and existing financial levers and incentives. Further financing arrangements promoted include Regional Infrastructure Funds, Local Asset-Based Vehicles and City Development Companies. 2.6. This emphasis on promoting growth and eliminating regional disparities together with moves to increased devolution of responsibility for the economic development agenda is underpinned by the recognition that regions and the sub-regions and local areas within them have a better understanding and ability to respond to the economic challenges faced within their localities.2.7. In the North East the challenges facing the region and impacting on its ability to achieve its growth potential are well rehearsed. Headline challenges identified from the range of policy documents are: based on GDP per head, the North-East performs below the UK and

many of its constituent regions, performance is even poorer when compared to European average levels;

24 Review of Sub-National Economic Development and Regeneration (SNR), Department of Communities and Local Government and the Department for Business, Enterprise and Regulatory Reform, 2006


the region has nearly half of its jobs in manufacturing and around one third in the public sector: yet manufacturing jobs are steadily disappearing, and public sector jobs are vulnerable to forthcoming cuts in public spending across the UK;

the North-East has too few businesses, and low levels of entrepreneurial activity;

the region’s trade is small, and it is predominantly closed to the world economy;

there are too few economic clusters/specialisms which can truly generate agglomeration economies;

promotion of science, creativity and innovation need to be enhanced to generate improved growth;

there is significant out-migration of key working age groups and families and a forecast stagnation of the working age population;

economic under-performance is exacerbated by lower employment, weaker productivity, a high proportion of workless households, a smaller proportion of highly qualified workers, and skill shortages; and,

there is a lack of clarity about the role of different places in the Region and some disconnect between economic and spatial objectives.

2.8. In providing a solution to the challenges the suite of policies highlight the need to increase the number of businesses and business growth; promote and develop key sector specialism; increase investment in science, innovation and creativity; enhance linkages between the Region’s universities and businesses; increase productivity and participation via efforts to tackle worklessness and improve skills; attract and retain talent; and invest in the quality of place of the Region for residents, businesses and visitors. The way in which these challenges are outlined in the suite of regional, sub-regional and local policies and reviews is outlined below.

The Regional Economic and Spatial Strategies

2.1. The RES25 provides a blueprint to 2016 to achieve a “vibrant, self-reliant, ambitious and outward looking region, featuring a dynamic economy, a healthy environment and a distinctive culture.” It also identifies the key challenges that will need to be overcome for the North East to meet these objectives. 2.2. Challenges identified include the relatively low rate of business formation in the North East and low levels of self-employment. Productivity levels are also below average in most sectors. This is mostly attributed to the region’s industrial mix and relatively high proportion of businesses towards the lower end of the value chain. 2.3. These sectors are more vulnerable to competition in the global economy because they face competition from low cost low wage overseas economies. The region has more branch plants and fewer company headquarters compared to other UK regions and less R&D spend. Lower

25 Leading the Way, Regional Economic Strategy, One NorthEast, July 2006


levels of economic activity and fewer highly skilled individuals are also identified by the RES as a further reason for lower levels of productivity in the Region.2.4. To address these challenges the RES: sets a headline aim of increasing regional output to 90% of the national

average by 2016, to be achieved through a rise in the number of firms (18,500-22,000) and gains in productivity and employment (61,000-73,000);

identifies a range of activities implemented primarily at the regional level, including an image strategy, enterprise and business support functions and an employability framework; and

sets out a series of sub-regional and local activities the delivery of which One North East will support and which in turn will support the delivery of RES targets.

2.5. Priorities for investment are identified across the themes of business, people and place. Central to all these themes is the importance of innovation in growing the Region. The RES identifies the Three Pillars of energy and the environment; healthcare and health sciences and process industries as being those areas where there is likely to be the greatest return on investment. The RES also promotes what it refers to as a “Triple Helix” partnership of business, universities and the public sector as being essential to achieving the potential of these Three Pillars. Each of the Pillars will be supported by physical developments termed Innovation Connectors. The Innovation Connectors which fall within the NG area are Science City, Baltic Business Quarter and Design Centre for the North.2.6. The RES also promotes the City Regions of Tyne and Wear and Tees Valley as the drivers of regional growth. In NG priority areas for investment are identified as Science City, Central Gateshead, Discovery Quarter and Design Centre for the North. The RES also prioritises investment in the housing stock via the Bridging NG Housing Market Renewal Pathfinder and states the importance of Newcastle Airport and Central Station as Gateways to the Region.2.7. Priority activities, regional, sub-regional and local are outlined in more detail in the Regional Economic Strategy Action Plan. One of the challenges set out in the Action Plan is to Local Authorities and other stakeholders to develop proposals for fewer, bigger transformational interventions that will add genuine economic value. 2.8. Again the RES Action Plan26 sets out priority activities across the themes of Business, People and Place. Improving regional leadership is also a central theme of the RES Action Plan and within this the desire to promote new ways of working – including the City Development Company model – is prioritised. 2.9. In terms of the Business theme priority activities range from the desire to invest in generating a more entrepreneurial culture and pursuit of an “enterprise surge” to boost the number of businesses in the region to investments to support productivity enhancements, supply chain

26 Leading the Way, Regional Economic Strategy Action Plan, 2006-2011, One NorthEast, 2007


development and export potential. Efforts will be focused on identified priority sectors of: process industries, healthcare and health science, energy and environmental technologies, digital and creative industries, automotive, knowledge intensive business services, defence and marine, tourism and hospitality, and food and drink. Again science, innovation and creativity are identified as central to the business agenda with efforts being focused on the Three Pillars and Innovation Connectors. 2.10. The People agenda is focused on improving productivity and participation. Again supporting the needs of priority sectors is prioritised as is meeting the skills needs of the Three Pillars and Innovation Connectors. While much of the activity within this theme is focused within a regional framework for employment and skills, sub-regional priorities for investment are identified. For example, in terms of addressing economic inclusion and boosting participation the Tyne and Wear City Strategy initiative is identified as a priority for investment, Newcastle is also identified as a potential pilot area for initiatives which support talent attraction and retention. 2.11. In terms of Place the Action Plan states that investment in the economic hearts of the region will focus on accelerating the regeneration of the centres of Newcastle and Gateshead with specific priorities including: driving forward the delivery of Discovery Quarter and Science Central; the further development of Newcastle International Airport; the comprehensive redevelopment of Gateshead Town Centre and the Baltic Business Quarter. It also sets out the desire to explore options for the development of a convention centre in NG. The Place theme of activity also highlights as priorities the need to invest in the general quality of place of the region and its constituent parts encompassing investment in business premises; culture and leisure facilities; ensuring the housing stock which will support growth aspirations and efforts to attract and retain talent; and improving connectivity and infrastructure. 2.12. Work has commenced on the development of an Integrated Regional Strategy (IRS) which will bring spatial and economic priorities for the Region together in a much more co-ordinated way. It is envisaged that within this City Regions will continue to be a key building block. In the face of future cuts in public spending it is also expected that this Strategy will continue the theme of the need to invest in fewer, bigger, more strategic projects that will bring maximum value to the region.2.13. The Regional Spatial Strategy (RSS)27 for the North East to 2021 sets out the regional planning context and promotes an overarching vision for a Renaissance of the North East. It splits the North East into two city regions – Tyne and Wear and Tees Valley – and the rural areas. 2.14. The RSS highlights the importance of the Tyne and Wear City Region as a driver of regional GVA and as home to four of the North East’s five universities. The RSS also emphasises the importance of Newcastle for the Region’s economy and identifies it as a public transport hub as well as the most significant shopping, leisure and administrative centre within the city region and the region as a whole.

27 The North East of England Plan: Regional Spatial Strategy to 2021, Government Office for the North East, July 2008


2.15. Policy 9 of the RSS outlines the main goals for regeneration; within NG these are stated as the central parts of the Tyne River including BNG, Newcastle City Centre, Gateshead Quays, and Gateshead City Centre. Economic development priority locations are states as central Newcastle, Newburn Riverside and Baltic Business Quarter. Policy 9 also supports the Science City initiative and encourages development of complementary nodes e.g. Baltic Business Quarter, it also encourages development of the universities and promotes enhancement of university and business links. A new conference and exhibition centre is also identified as a priority.2.16. BNG is identified as a priority, housing targets 2004-2021 are identified for Newcastle at 880 net per annum and 589 net per annum for Gateshead. Enhancing connectivity between the regional centres and between Newcastle City Centre and the airport are identified as priorities. Central Station is identified as a key transport node and Gateway. Policy 18 of the RSS outlines the provision of general employment land of up to 200 hectares in Newcastle and 130 hectares in Gateshead and identifies key employment locations of Newcastle Great Park, Newcastle and Baltic Business Quarter. 2.17. Much of this ambition outlined in these regional strategies cannot be achieved without a major contribution from NG. Tyne and Wear is recognised as a key driver for growth but to fully realise its potential it needs to punch above its weight. A key question for the EM is the extent to which strengthening the role and economy of NG can drive this growth in much the same way as Leeds and Manchester have led the transformation of their regions.

City Region Strategies

2.1. Under the auspices of the Northern Way the Tyne and Wear City Region partners have been working to identify the actions that are best taken at City Region level. This work identifies that the City Region economy needs to expand to build stronger critical mass and that greater spatial concentration and key sector strengths are needed to drive accelerated growth – in response strategy is set around the themes of human capital; infrastructure; innovation; and quality places.2.2. The Tyne and Wear Business Case28 submitted to Government in 2006 has a focus on 4 areas: improvements in connectivity and infrastructure to support sustainable

economic growth objectives; addressing labour market issues such as low participation and skill

levels, including a successful bid and designation as a DWP City Strategy Pathfinder;

the need to better manage assets and release surpluses for reinvestment in economic infrastructure, possibly through a property regeneration partnership; and,

improving economic analysis to ensure that the City Region develops the capacity to think collectively and thus to make the best possible

28 Building the Prosperity of the Tyne and Wear City Region: A Business Case, June 2006.


policy choices2.3. City Regional working has been further reinforced by the recent development of the Tyne and Wear Multi-Area Agreement (MAA). The MAA sets out how the City Region will raise its game in tackling economic underperformance and strengthening key assets and drivers of the economy. The MAA states that all available evidence suggests that if the City Region is to grow in a sustainable economic manner it needs to: expand the number of people in employment; equip more of the current and future workforce with the higher level

skills that will drive innovation, business creation and competitiveness; attract and retain talented people – including graduates; and ensure the transport infrastructure to support sustainable economic

growth, to contribute towards stronger integration between places in CR and to enhance connection with external markets.

2.4. The MAA seeks to enable the City Region Employment and Skills Board to become the statutory body for skills provision, extend its influence over higher level skills provision and have greater flexibility to fund higher levels skills provision. It also seeks that the City Region secures flexibility around the length of stay of visas for international graduates. A further request is for flexibility around statutory provision of transport funding to give the City Region greater opportunities to support sustainable transport investment.2.5. Newcastle and Gateshead are recognised by the City Region, together with the other Tyneside districts as a key driver of growth. However, it is recognised that City Regional policy needs to be clearer about the role, function and contribution of each part of the City region, and to develop policies which reinforce these strengths.2.6. A new strand of policy and analytical activity is currently being developed at a City Region level by a co-ordinated team working with key partners. Early activities of the new team will focus on: undertaking an economic audit of the City Region and commencing a study to examine the spatial and economic linkages between communities across the City Region, the interaction between urban and rural settlements, labour markets and trends in the location and needs of businesses. The results of this study will inform further stages of the EM development.

OECD Territorial Review of Newcastle

2.1. In 2006, the OECD29 prepared a Territorial Review of the ‘Newcastle City Region’30. The Territorial Review found that whilst NG (and the wider Tyne and Wear city region) were displaying signs of both a growing economy and population, growth rates still lagged those of the UK as a whole. It argued that the City region had only achieved partial


30 in essence Newcastle City Region is defined as per the Northern Way definition of Tyne and Wear City Region which is based on commuting flows and includes the five municipalities in the former Tyne and Wear county (Newcastle, Gateshead, North and South Tyneside and Sunderland) together with adjacent parts in Northumberland and Durham. At times, the report presents data using the narrower, NUTS 3 definition of Tyneside (excluding Sunderland and the adjoining parts of Northumberland and Durham) or just for Newcastle.


success in shifting towards knowledge based economy and still retained a strong dependence on public sector employment and manufacturing. 2.2. While the review quoted some diversification into high value added manufacturing in areas such as the offshore industry, pharmaceuticals and biotechnology and automotive assembly this was not as extensive as in other parts of the UK, for example the North West. The report also argued that the City Region’s economic output is constrained by a lack of skills and investment within the existing workforce and stubbornly high levels of worklessness. 2.3. OECD present the City Region as a “medium sized metropolitan area” and as such quote it as facing greater challenges in exploiting agglomeration – the labour pool is smaller and less skilled, the sectoral base both less diverse and less specialised and the rate of innovation lower than in competing City Regions. This, they argue – a point reinforced in the SEC research – highlights the need for the City Region to develop an economic strategy that is both differentiated and relatively narrowly focused. 2.4. However, despite these challenges OECD also reports a number of untapped assets including: the region’s strength in Higher Education and University based R&D

and the potential if business collaboration and graduate retention could be increased;

The rich natural and cultural amenities which provide a base for attracting mobile businesses and people; and,

good connectivity in terms of national and international transport links and ICT infrastructure.

Local Strategies

2.1. Many of the challenges and priorities outlined in the regional and City Regional strategies and policies flow through to local policy – both planning and economic development.

Planning

2.1. In terms of planning the key policy document covering Newcastle is the Local Plan which was adopted in 1998, this is due to be replaced by a Local Development Framework (LDF). The Core Strategy was to be subject to an examination in public but this has been postponed to enable further development of the supporting evidence base. In addition an Area Action Plan for Newcastle City Centre and Options for East Pilgrim Street have been progressed but these are also now in abeyance until the Core Strategy moves forward. 2.2. The Unitary Development Plan (adopted in July 2007) for Gateshead forms part of the statutory development plan for Gateshead. Neighbourhood Plans have also been drawn up for the areas of Bensham and Saltwell, Deckham, Felling, Sunderland Road and Teams. It is intended that these plans will be replaced by a Local Development Framework


which is currently in development. These documents and policies outline the importance of investment in the urban core as a driver of growth together with complementary investments in the wider area.2.3. Given the issues around the Newcastle core strategy both authorities are currently in discussions to examine the potential for producing a single Core Strategy and joint central area action plan. This provides a key opportunity to enshrine in the planning system the joint working which has been commenced via the creation of the NG City Development Company. It also provides the opportunity for the proposals outlined in the EM to be fully aligned with the statutory development plan.

Economic Development

2.1. Newcastle City Council has published a Regeneration Strategy for the period to 2021 in which it aims to show how various aspects of regeneration activity fit together to create a comprehensive approach to creating opportunity and sustaining quality of life. It recognises two key underlying factors on which sustained regeneration in Newcastle will depend: the future growth of the city’s population; and improvement of the long-term performance of the city’s economy. 2.2. To address these factors it promotes action to encourage skilled workers to come and live in the City; to enhance the business base, diversify employment, promote and support sector specialisms and improve skills levels among the population. The Strategy also places considerable emphasis on enhancing the quality of place via investment in transport, housing, culture and leisure facilities and green spaces.2.3. Gateshead’s Sustainable Community Strategy Vision 2030 promotes an outwardly focused stance on economic and employment issues and outlines an objective to place increasing emphasis on Gateshead’s national and international profile, seeking City status by 2012. 2.4. Gateshead is also in the process of approving the Gateshead Regeneration Delivery Strategy. This sets out the long term vision which will guide the regeneration and delivery of Gateshead Centre over the next 15-20 years, addressing key issues such as the poor retail offer, leakage of spend and accessibility constraints by investing not only in the physical fabric of the centre but also on efforts to attract and support investment, businesses and people. 2.5. The Gateshead Regeneration Delivery Strategy also defines a strongly complementary relationship with Newcastle and promotes the role of the two areas as the heart of the City Region. The ultimately unsuccessful bid to the Local Enterprise Growth Initiative in September 2006, argued that “Areas like Newcastle and Gateshead, which perform an “urban core” function on behalf of the region, face challenges that are not common to all areas. Essentially if the region is to prosper, it needs Newcastle and Gateshead to develop a strong “city” economy, which uses urban assets such as universities, good transport links, attractive business locations and proximity to retail and leisure activities to develop high-value, knowledge-based industries.”


2.6. There are also a range of other local strategies and public sector initiatives which are of importance to the development of the EM, which are informed by the same underlying challenges and priorities identified elsewhere in this chapter. This includes the Bridging NG Housing Market Renewal Initiative and associated Growth Point programme. We do not describe these in detail here as in part they are covered in the Workstream 2 report.

CDC Proposal Document

2.1. The proposal document “Setting up a City Development Company in NewcastleGateshead” by Professor Stuart Gulliver (prepared in 2007), went somewhat further in outlining the challenges facing Newcastle Gateshead. The document characterises the NG economy as a “low equilibrium economy about 10-15 percentage points off the pace” on a number of key indicators, and outlines 2 key structural problems facing NG: the modest scale and dynamism of the private sector in terms of

business base, employment levels and investment rates; and, human capital – NG has a highly polarised population in terms of skills,

this is coupled with high levels of inactivity and high vacancies which act together to constrain economic growth.

2.2. The report does note, however, a number of more positive signs of economic and population growth. Against this backdrop it argues that there is a need to radically improve the cities competitiveness and that these improvements should be secured through what Gulliver calls “city building sectors” – some of which are clearly brought into question by current economic events: Professional and business services – generally regional in scale; Company Headquarters; Visitor economy – city-breaks and potentially growth in business

tourism; and, Education and research-related commercial activity.

Implications for the EM

2.1. The range of policy documents reviewed outline the same core challenges facing the region, sub-region and constituent local areas and make, to a greater or lesser extent, the argument for investment in NG, or Tyne and Wear as the driver for long-term economic growth. Few of them, however, provide compelling evidence to justify this approach – and some come with a high risk of failure attached because they do not translate vision into a realistic framework for delivery or prioritise resources to achieve their goals. 2.2. In addition, OECD in particular are critical of existing regional, city regional and local governance arrangements and capacity, advocating that economic policy should place greater emphasis on the urban core and


that there should be a “de-cluttering” of the existing institutional landscape to facilitate a more coherent approach. 2.3. The establishment of the CDC should be viewed as an important next step in achieving a more streamlined and focused approach to economic development and physical regeneration in the urban core. However, the EM must provide more compelling evidence to support a greater focus of policy and resources on NG.


3. THE NEWCASTLEGATESHEAD ECONOMY

Introduction

3.1. This section of the baseline analysis is concerned with NG’s business base and, in terms of the SEC model, the key drivers of economic diversity and specialism; levels of innovation and creativity; and investment. In line with the CLG research, we consider: recent trends in output (GVA), productivity and employment growth; the structure of the company base, including new firm formation; structural trends in employment; the knowledge base – trends in innovation, exports and R&D; and, the performance of key sectors of the NG economy – and those with

post-recession growth potential.3.2. Two cross-cutting themes are explored throughout section 3: the extent to which NG is driving regional economic growth and can do

so in future, the linkages – and indeed differences - between the economies of

Newcastle and Gateshead.3.3. Section 4 of the baseline report addresses those other key elements of the urban competitiveness model more closely associated with the labour market including employment rates, skills and earnings.

Recent growth trends

Regional growth

3.1. Any analysis of the performance and prospects of the NG economy must take account of the regional context and the historic performance of the North East’s economy. Disparities in regional economic growth and the establishment of a regional ‘economic hierarchy’ can be traced back to the inter-war period31. 3.2. On GVA per head32– a widely accepted and comparative measure – the North East has consistently lagged the performance of UK economy by between 10 and 20%33 since the 1970s. In 2007 GVA per head in the North East was just 78.6% of the UK average – placing it ninth out of nine English regions. The North East contributed just 3% of UK GVA in 2007 but housed 4.2% of its population34. In UK terms, only Wales performed worse than the North East.

31 Productivity in the UK3 – the regional dimension, HM Treasury 2001

32 Regional, sub-regional and local Gross Value Added, First Release, Office for National Statistics December 2008

33 Professor John Tomaney, CURDS in The Future of the North East, ed Tomaney, The Smith Institute March 2009

34 Release of Regional and Sub-Regional GVA estimates: North East England, December 2008 Office for National Statistics


3.3. Although the North East’s relative economic performance has worsened over the last two years, GVA per head has fluctuated quite dramatically over the last twenty five years. Between 1985 and 1992, the annual growth rate exceeded the UK average for five of those seven years – yet from 1992-2002 the performance gap widened significantly35. This is a familiar story, but it is not “somebody’s fault”; the North East has been faced with huge structural challenges: the decline of traditional industries, the dominant role of London in the UK economy, a low base in terms of knowledge-based industries and a small labour pool.3.4. The OECD Territorial Review36 reviewed GVA growth from 1995-2001, noting the importance of ‘knowledge intensive business services’ (explored in detail in later paragraphs) in driving national growth and that“a relative emphasis on declining or low growth sectors within Tyneside, the city region and the North East, combined with an under-representation of high growth sectors in each account for the continued ‘poor performance’.”

3.5. From 2002-2006, the North East once again narrowed the gap in GVA, exceeding UK growth rates each year as a result of the shift towards higher value added sectors such as finance and

business services; a consistent rise in employment and economic activity rates37 – the

latter increased by 7% from 2000-2007; and, an increase in labour productivity, before falling behind the UK rate (+6%) once again in 200738.

United Kingdom, North East and Tyne & Wear (nominal) gross value added annual growth rates, 1990-2007

3.7 Despite its mid-decade ‘spike’ in performance, the output gap with the rest of the UK in 2007 was wider than at the beginning of the decade and in fact since the mid 1970s. In research for the Smith Institute39, Professor John Tomaney argues that the improvements in regional economic 35 ibid


37 Source: Annual Population Survey

38 Release of Regional and Sub-Regional GVA estimates: North East England, December 2008 Office for National Statistics

39 The Future of the North East, Prof John Tomaney Ed, The Smith Institute, 2009,


performance, productivity, and employment rates were short lived, and have eroded rapidly over the last two years. He poses an important question:

“did these improvements…signal the first signs of the successful restructuring of the regional economy, or do we need to re-assess them in light of what we now know about the nature of the ‘growth’ occurring during this period, which created an economy based upon debt-fuelled speculative property development, leisure and shopping?”

whilst IPEG40 simply reflect on the distributional geography of the economic cycle:

does it reflect a national investment cycle that sees money and activity move from the core to the periphery over time as returns on speculation decline, in which case the policy implications would be more about capturing the benefits of temporary investment booms most effectively.

Tyneside/NG

3.8 So in the context of long-term regional under-performance, how has Tyneside and NG fared? Actually, quite well. Before the recession began to bite there were some promising signs of recovery with GVA per capita (in Tyneside) and employment (Newcastle Gateshead) both growing faster than in the rest of the UK. Tyneside – the smallest economic geography (NUTS 3) at which we can make accurate assessments of GVA – significantly increased its contribution to regional GVA between 1995-2006, along with Sunderland:

between 1996 and 2006 GVA in Tyneside increased from 86% to 93% of the national average,

between 1995 and 2007, employment in NG increased by 16% (GB 9%), although half of this growth was in the public sector41.

40 The Northern Connection: assessing the comparative economic performance and prospects of Northern England, Institute for Political and Economic Governance/Centre for Policy Studies, University of Manchester January 2008

41 Office for National Statistics, Regional Accounts


Sub-regional GVA per head in the North East (UK=100)Sub-regional GVA per head in the North East (UK=100)

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 1.1

Hartlepool and Stockton-on-Tees

South Teesside

Darlington

Durham CC

Northumberland

Tyneside

Sunderland

Source: Office for National Statistics

% of UK GVA 1995 % of UK GVA 2006

UK = 100%

3.1. The evidence suggests that the North East has become increasingly dependent on the contribution of Tyneside and Sunderland towards regional economic output; the remaining NUTS 3 areas reduced their share of UK GVA between 1995-2006, some quite dramatically. OECD argue thatNewcastle is the dominant centre within the North East for services and in particular knowledge intensive business services and this has helped to drive Tyneside’s relative success within the North East region.

3.2. The SEC research42 considers the performance of 56 English cities – characterised by the degree of self-containment of their travel to work areas – on GVA per head over the period from 1995-2002. It reinforces the strong divergence in economic output performance between the best and worst performing of the 56 cities/travel to work areas studied.3.3. Ten of the 56 cities studied demonstrated growth of more than 10% above the England average – but 15 others lagged the English average by more than 10%. The bottom five – in reverse order Grimsby, Telford, Stoke, Middlesbrough and Blackburn – achieved 50% or less of average growth. Of the Northern cities only Manchester substantially out-performed the English average in GVA growth per capita over this period, with Leeds and Newcastle marginally outperforming the England average of 42.7% and separated by just 1%, closely followed by Liverpool.



Source: State of the Cities, The Competitive Economic Performance of English Cities, Simmie et al, Department of Communities and Local Government, 2006

3.4. Thus, whilst the North East economy was in the middle of a strong dip in performance, Tyneside/NG continued to perform relatively strongly. More recent research from the Northern Way43 (see above) clearly shows Tyneside’s distinct contribution to absolute GVA and GVA growth from 1995-2004 – in marked contrast to the rest of the North East with the exception of Sunderland, where performance has been driven by the automotive sector.3.5. The table below shows that NG generated GVA of over £9.8 billion in 2006 – 25.7% of the regional total of some £38.24 billion -while housing just 18% of the North East’s population. Public administration, education and health accounted for more than one quarter (25%) of NG’s GVA in 2006, followed by business services (22%), manufacturing (14%), distribution and retail (11%) and financial intermediation (7%).

43The Northern Connection: assessing the comparative economic performance and prospects of Northern England, Institute for Political and Economic Governance/Centre for Policy Studies, University of Manchester January 2008


NG GVA by broad sector, 2006Sector GVA (%) GVA (£)Agriculture, fishing, energy and water 1 101,659 Manufacturing 14 1,351,085 Construction 6 59,755 Retail and Distribution 11 1,066,505 Hotels and restaurants 2 36,694 Transport and communications 7 660,596 Financial intermediation 7 733,783 Business Services 22 2,188,175 Public administration and defence; compulsory social security 9 843,403 Education 8 806,627 Health and social work 9 843,831 Other services 5 458,152 TOTAL 100 9,850,264

4. Source: Office for National Statistics (cebr)

4.1. Tyneside, of which NG forms a substantive part, has ‘punched above its weight’ from a regional perspective. However, placing this in the context of the UK geography of GVA growth shows that Tyneside has been outperformed by parts of London and the M4 Corridor; much of the Greater South East; Cornwall; small pockets of the West Midlands; Nottingham and Derby; in the North of England by Leeds, Manchester, York, Sheffield and in Scotland by Glasgow, Edinburgh and the large NUTS3 area centred on Inverness. 4.2. Recent research by Centre for Cities44 presents a less positive view; placing Newcastle, Middlesbrough and Sunderland 45th, 53rd and 62nd

out of 64 cities in their Economic Prosperity Index (only Warrington of the Northern Cities makes the top 10, with Leeds 17th, Manchester 19th and York 21st). Of the Core Cities, only Liverpool performs worse than Newcastle.4.3. The Centre for Cities Outlook45 tracks a series of ‘snapshot’ indicators – including public sector employment, skills levels, employment rates and GVA per capita – so provides a more rounded, if short-term perspective on city economic performance. Thus, whilst Newcastle (in effect the Tyneside NUTS3 area for the purposes of the Centre for Cities report) performs well on GVA per capita its performance trails off when the other measures are factored in. Liverpool – which demonstrated comparable GVA growth to Tyneside – suffers a similar fate.

44 Cities Outlook, 2009, Centre for Cities

45 ibid


Conclusions – recent growth

4.1. There is compelling evidence to suggest that Tyneside’s/NG’s performance on the key measure of GVA per head has held up over the long-term – and continued to demonstrate strong growth when the region as a whole was performing less well.

4.2. There is an increasing body of evidence suggesting that knowledge intensive firms tend to prefer urban locations. Cities offer ‘agglomeration benefits’ - greater interaction with suppliers and customers, a critical mass of the specialised, skilled labour and enhanced opportunities for knowledge exchange. In cities, infrastructure – and knowledge – can be shared by different users, generating economies of scale; businesses can specialise in the knowledge that they will find a market for their products or services and workers will be incentivised to invest in higher level skills where there is competition for labour.4.3. Moving forward, the relationship between Tyneside/NG and the Region as a whole remains a key determinant of future growth. Can Core Cities drive city regional or even regional growth? London demonstrates very strong ‘spillover’ effects on the wider economy of the Greater South East and the UK GVA maps overleaf also demonstrate this to a lesser extent in the Bristol, Leeds and Manchester City Regions. 4.4. In the North East, the spillover from Tyneside/NG appears much less pronounced. Arguably Tyneside/NG is still not wealthy enough or large enough to create significant spillover or agglomeration benefits46 or indeed to truly impact on the economic performance of the region as a whole. Recent research by Overmans and Rice47 (2008) suggests that, based on international comparisons, even the larger second tier cities in the UK (including Leeds, Manchester, and Birmingham) may be too small to generate large scale agglomeration benefits, based on a simple rank size rule model. 4.5. This notwithstanding, both Leeds and Manchester have much larger labour markets and higher business densities than Newcastle Gateshead and these are the critical factors in creating agglomeration and spillover benefits within and between City Regions. Recent research for the Northern Way48 reinforces the importance of these links:

46 Agglomeration benefits are effectively the economies of scale derived by businesses by locating close to their key markets; having access to large or ‘thick’ labour markets (where workers are willing to invest in upskilling if there is a wider range of employment opportunities that will utilise their skills) and ‘knowledge spillovers between proximate firms.

47 Resurgent Cities and Regional Economic Performance, Overman, H & Rice, P SERC Policy Paper 1, June 2008



“more mileage is likely to accrue from greater investment in understanding the interconnectedness between urban economic fortunes and those of other areas, and how they might be encouraged more effectively.”

4.6. It is important to encourage the conditions where agglomeration benefits will flow to NG – by creating much thicker labour markets and driving up business density – but conventional economic theory suggests that these effects may not be significant enough to drive up the economic performance of the North East as a whole. The EM will explore whether, and how, NG can realise a further step change in its economic performance to create the conditions for much greater levels of agglomeration – and to realise significant economic spillover benefits for the rest of the City Region.

The company base

4.1. The size and structure of NG’s business base are important indicators of its dynamism. Firstly, high growth economies are also those which demonstrate high levels of business start-ups with few barriers to enterprise and a high level of churn with new market entrants displacing others. There is a body of evidence to suggest that new firms make a significant contribution to employment generation, innovation and productivity49. 4.2. In addition, the density of the business stock provides an indication of the strength of the city regional and regional market place; the larger/more diverse the business stock, the greater the scope to procure goods and services from other firms within the region. As we highlight earlier in this chapter, size also matters in that the economies of scale created by cities and city regions offer opportunities for agglomeration. Finally, the average size of firms is an important indicator of the degree of local ownership/control of the company base. A predominance of larger firms, alongside an absence of headquarters, points to a branch plant economy where key investment decisions are taken elsewhere.

Basic structure

4.1. The NG business base (i.e. both VAT registered and non-VAT registered businesses comprises around 15,400 firms, the majority of which (9,100) are located in Newcastle. 64% of the stock is VAT registered. In 2007, more than 50% of firms were in just two sectors - business services (29%) and a further 23% in wholesale and retail; the next largest private sector grouping was hotels and restaurants with just 8% of firms50.

49 Ashcroft, B & Love (1996). Employment change and new firm formation in UK counties – M.W Danson Small firm formation and regional economic development London: Routledge



Firms by broad industrial structure, 2007

Wholesale, retail trade and repair23%

Business services29%

Other services8%

Health and social work

Manufacturing6%

Primary industries0%

Construction7%

Financial services3%

Transport, storage and communication

4%

Hotels and restaurants8%

Public administration1%

Education3%

5. Source: Annual Business Enquiry, 2007

5.1. This notwithstanding, both business services and wholesale/retail firms are still under-represented compared to the England average – as this graph, drawn from the evidence base for the NG LEGI bid shows; only predominantly public sector employers were over-represented in the business stock in 2004.

Elec

tric

ity

Gas

and

Wat

er

Min

ing

Fish

ing

Agri

cult

ure

Hun

ting

& F

ores

try

Educ

atio

n

Oth

er C

omm

unit

y &

Per

sona

l Se

rvic

es

Tran

spor

t St

orag

e &

Co

mm

unic

atio

ns

Who

lesa

le &

Ret

ail

Man

ufac

ture

Cons

truc

tion

Busi

ness

Ser

vice

s

Hot

els

& R

esta

uran

ts

Fina

ncia

l Int

erm

edia

ries

Publ

ic A

dmin

istr

atio

n

Hea

lth

& S

ocia

l Wor

k

-600

-500

-400

-300

-200

-100

0

100

200

FIRMS MISSING

Source: Annual Business Inquiry 2004 TBR ref(W2/C2a)

6. Source: Newcastle Upon Tyne LEGI Evidence Base, TBR Economics, 2006

6.1. Like some other post-industrial cities, NG continues to depend heavily on medium and large firms employing 200+ people. There are almost twice the number of larger employers, compared to the GB average (1.2% of firms, compared to 0.7%) and they account for 41% of employment51.

51 Annual Business Enquiry, 2007


Workplaces by Sizeband, 2007

7.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

NewcastleGateshead

Tyne and Wear City Region

North East

Great Britain

1- 10 employees 11- 49 employees 50- 199 employees 200 or more employees


8.1. At face value the structure of NG’s company base52 is almost the exact opposite of the GB norm, with fewer micro-businesses (employing 1-10 staff), and more small SMEs (11-49 employees) and larger firms. However, just under half (48%) of the ‘large firms’ identified through the Annual Business Inquiry data are in fact public sector employers; almost 60% of public sector employees work in large public sector organisations with more than 200 employees. With these employers stripped out, the structure of the company base is much less skewed towards larger firms.8.2. 20% of NG’s firms with more than 200 staff are in banking, finance and insurance (employing 38% of all those working in these sectors) and 11% are in manufacturing (employing 47% of all manufacturing employees). The NG economy therefore remains particularly vulnerable to the investment decisions of larger firms and to those of larger public sector employers.



Businesses by Industry and Size band

0

5

10

15

20

25

30

35

40

Industry

Perc

enta

ge o

f Bus

ines

ses

1-10 employees11-49 employees50-199 employees200+ employees


Density9.1. Low business density53 (the number of businesses per 10,000 adult population), as we have already highlighted, is a significant challenge for NG. Although above the regional average, Newcastle (318 per 10,000 adults) and Gateshead (327) have lower business densities than any of the other Core Cities with the exception of Liverpool (327). Leeds (375) and Manchester (392) have higher densities and Bristol (434) is the best performing Core City on this measure; all are dwarfed by London with a density of 628 – almost double that of NG.9.2. Interestingly, both the OECD Review54 and the SEC55 research are silent on this issue although there is some discussion in Overmans and Rice56 linking business density with agglomeration. In some ways the business density challenge can be viewed as a self-fulfilling prophecy – the comparatively small North East market place simply constrains business opportunities for new firms, the majority of which are likely to trade locally and regionally, and in turn acts as a disincentive for new firm formation. The Regional Economic Strategy57 recognises the importance of breaking this cycle – through its efforts to transform the rate of new firm formation (discussed in subsequent paragraphs) – but recognises that this will be a long-term challenge.

Growth in business stock9.1. Gateshead experienced a higher absolute and percentage rate of growth in the number of firms (+840 firms, or +15%) compared to

53 Annual Business Inquiry, 2007/ ONS Mid-year population estimates, 2007



56 Resurgent Cities and Regional Economic Performance, Overman, H & Rice, P SERC Policy Paper 1, June 2008



Newcastle (+710 firms, or +8%) from 1998-200758. The vast majority of growth came in the business services sector – with 1,600 new or relocating firms over this period. Business services are considered in more detail later in this chapter.

Businesses by broad sector, 1998-2007

-300 -200 -100 0 100 200 300 400 500 600 700 800 900

Other services

Hotels and restaurants

Manufacturing


Public administration

Utilities

Primary industries

Financial services

Education

Wholesale, retail trade and repair


Construction

Business services

Source: Annual Business Inquiry

GatesheadNewcastle


10.1. Growth has been skewed towards larger employers - which grew by 40% between 1998-200759. Newcastle in particular has had a degree of success in attracting/retaining major headquarters operations including of SAGE, BT Sytegra and TSG (software/e-commerce), although the loss of others including Barratt, Proctor and Gamble (from adjoining North Tyneside) and the downsizing of both Northern Rock and Newcastle Building Society suggests a fundamentally mixed picture. London continues to dominate this sector (76% of major UK firms are headquartered in the city)60 and anecdotal evidence suggests that other locations (for example Leeds and Edinburgh in the financial services sector) have been more successful than NG.10.2. However, whilst growth in micro-businesses is just below the GB average (15% and 18% respectively), most significantly, the number of small SMEs in NG fell by 3% over this period compared to a 5% increase for GB.10.3. Conventional economic theory61 suggests that NG’s reliance on larger employers – including those in the public sector – and lack of micro-businesses and small SMEs is likely to constrain the growth and dynamism of the NG economy. Typically, small firms drive innovation and productivity. However, recent research62 commissioned through the Manchester Independent Economic Review (MIER) on both domestic and overseas investment by large firms stresses the importance of these

58 Annual Business Inquiry 1998-2007

59 ibid


61 Baumol, W, J The Free Market Innovation Machine: analysisng the growth miracle of capitalism. Princeton University Press, 2002

62 Manchester Independent Economic Review – Growing Inward and Indigenous Investment, 2009.


embedded large local companies in driving up employment and productivity. The research showed that the greatest impacts resulted from investment by large domestic firms rather than overseas inward investors.10.4. The OECD Review63 considered the impact of foreign direct investment on the North East over the period from 1998-2001 during which time the region was a considerable beneficiary of Foreign Direct Investment (FDI). Since 2001 the scale of FDI has fallen significantly with waves of investment redirected from the UK to Eastern Europe and the Far East. The study notes that“although UK investment is more significant at the national level, the foreign owned component in the North East is sometimes almost as significant, and in 2001 the foreign element accounted for 54% of manufacturing investment in the region.”

10.5. In NG, arguably the productivity and employment benefits flowing from investment by larger firms will be less than those identified in the MIER study, diluted by the predominance of public sector employers. Nonetheless, the evidence base for the NG LEGI64 base does suggest that, at least in 2004, four major Newcastle employers had a disproportionate effect on GVA. Including the ‘big four’ (Northern Rock, SAGE, Barratt and Northern Electric) Newcastle’s GVA per employee was £39,400 in 2004 – but excluding them, GVA per employee fell to just £29,000 – some way below the regional average. These effects will be further complicated by the recession which has had a significant impact on financial services and construction.10.6. The MIER65 research suggests that business support agencies should have a much stronger focus on facilitating investment by larger firms, including both domestic and overseas businesses. The EM should consider whether this should be a core element of the economic development programme for NG.

New firm formation

10.1. The North East lacks a strong enterprise culture; it has the lowest number nationally of people considering whether or not to start a business66. The RES highlights the need to rebuild an entrepreneurial culture in the North East and to create a larger pool of people considering starting up a business as a pre-requisite to increasing the business birth rate – the ‘enterprise surge’. Interestingly both the OECD Review and the SEC research are silent on the role of enterprise in driving employment and productivity growth and to date analysis of this issue in a regional/city regional context has been limited.10.2. Data from the Global Entrepreneurship Monitor67, which draws on research on entrepreneurship in 43 countries - shows that total entrepreneurial activity (TEA) in the UK – a survey-based measure of those 63 OECD Territorial Review of Newcastle in the North East, Organisation for European Co-operation and Development (OECD), 2006

64 Newcastle Upon Tyne, LEGI Evidence Base, TBR Economics, 2006

65 Manchester Independent Economic Review – Growing Inward and Indigenous Investment, 2009.

66 SBS (2003). Household Survey of Entrepreneurship. http://www.sbs.gov.uk/ content/analytical/ household-survey-2003.pdf

67Global Entrepreneurship Monitor United Kingdom 2007.


individuals engaged in the pre-start and early post-start up phases of running a business – remained around 6% between 2002-2007, tracking the average for the G7 Countries, but much lower than in China (16%) and India (12.5%).

Total Entrepreneurial Activity (TEA)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

NE NW YH EM WM E L SE SW GSE NMW Eng

Region/Country

% o

f adu

lt po

pula

tion

'

2002

2003

2004

2005

2006

2007

11. Source: Global Entrepreneurship Monitor, 2007


11.1. Total Entrepreneurial Activity (TEA) for the North East was 4.7% in 2007, having increased from 2.9% in 2002 and peaked at 5% in 2004. There is a convergence in the performance of London and the Greater South East and the other English regions although the North East continues to demonstrate the lowest levels of TEA68.

Business demography: births and deaths per 10,000 working age adults 2007

0

20

40

60

80

100

120

140

160

180

200

Birt

hs/d

eath

s

Deaths per 10,000Births per 10,000

12. Source: ONS - Business Demography, Mid-year Population Estimates, 2007

12.1. Within this context, the performance of both Newcastle and Gateshead on business start ups remains disappointing although Gateshead has generally achieved higher rates of new firm formation than its near neighbour in recent years. Firstly, dealing with the new ‘business demography’ data from ONS69 (which essentially includes VAT and PAYE registrations to capture self employment activity below the VAT threshold), both Newcastle and Gateshead have lower rates of business births and deaths than any of the other English Core Cities, Edinburgh or Glasgow. Gateshead has a higher birth rate (49 per 10,000 working age adults) and a lower death rate (31) than Newcastle (41 and 33 respectively). 12.2. However, only Manchester (64) has a birth rate that is higher than the England average. The performance of all of the Core Cities is dwarfed by that of London, which generated 104 births per 10,000 working age adults in 2007 and 74 deaths. The business demography data70 suggests a degree of correlation between the size of the existing business stock and the rate of new births/deaths. It would seem reasonable to assume that the size and maturity of the market place are important factors in determining the number of new starts. 12.3. Newcastle, with the lowest business density of the core cities, also had the lowest number of new starts in 2007 – at 12.9% of the total

68 ibid

69 Business Demography, ONS, 2007

70 ibid


business stock. Most of the Core Cities have an annual start up rate of between 13-14% of the total stock. London has a much higher business density and correspondingly higher rate of new starts – but new starts still only represented just 16.5% of the total stock in 2007 – suggesting that this relationship is not an exponential one71.12.4. Put another way, it might be wholly unrealistic to expect start up rates in NG to more than double to match London’s – but a more realistic aspiration might be for NG to match the ratio of new starts to business stock achieved in London. This would involve the generation of around 300 additional start ups per annum in NG – an increase of 20%.12.5. The graph overleaf also highlights that London has much greater levels of churn – the totality of business births and deaths – than the other Core Cities. Research by NIESR72 considers the significance of churn on productivity and growth:“There are two reasons why churn is thought to raise productivity. Firstly, through the competitive effect whereby entrants create an environment in which incumbent businesses must ‘raise their game’ in order to remain in the industry. The second positive impact on productivity is through the introduction of new technology…(relating) to the Schumpeterian concept of ‘creative destruction’, by which new firms enter markets introducing new technologies and then displace older, less efficient firms.”

12.6. The NIESR research broadly supports the theory that stimulating churn has a positive effect on productivity and employment. It is significant that both Newcastle and Gateshead have the lowest rates of churn of all of the Core Cities, suggesting that the dynamic market conditions implied in the theory are not present to the same extent in NG.12.7. Furthermore, NIESR suggest that, to date, Government enterprise policy has been overly concentrated on increasing the overall volume of business births and that a more sophisticated approach is required to optimise the wider impacts of new entrants on productivity and employment.12.8. VAT registration data73 – which is now being replaced by the new business demography statistics – provides a more historic if incomplete perspective on start up activity. VAT registration rates (per 10,000 adult population) for Newcastle and Gateshead have generally outperformed the North East average but have remained broadly static since the mid 1990s. Registrations per 10,000 adult residents increased from 24 to 28 between 1994 and 2007 for Newcastle Gateshead – but still lag behind the UK average of 41.

71 ibid

72 Business start ups, closures and economic churn: a review of the literature, NIESR for Small Business Service, 2006

73 ONS, VAT Statistics


VAT registration per 10,000 working age adults 1994-2007

0

10

20

30

40

50

60

70

80

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

VAT

regi

stra

tions England

North EastLondon NewcastleGatesheadLeedsManchesterBristol

Source: ONS, VAT Statistics, Mid-Year Population Estimates 2007

12.9. The rate in many of NG’s comparator cities is significantly higher – 44 in Bristol, 42 in Manchester, 40 in Edinburgh, and 38 in Leeds74 – and has this remained so since the late 1990s. Generally VAT registration rates for the English Core Cities – and Edinburgh/Glasgow – are converging but whilst NG has narrowed the gap in enterprise performance, this has remained constant since 2002.12.10. Between 2003 and 200775 (when the sharp increase in VAT registration rates across the board may be a result of an anomaly), the data shows a downwards trend. This is at a time when GVA, both regionally and at Tyneside level, was growing rapidly – suggesting that in this case, GVA growth was not the result of a significant increase in start ups and/or a broader ‘churn’ effect.

Conclusions – business stock

12.1. It is clear that the North East and Newcastle Gateshead continue to demonstrate a substantial ‘enterprise deficit’ compared with the other Core Cities and London. However, the limited scale of the regional market – in terms of both population and business density – constrain opportunities for start up activity. The next stages of our research will explore whether achieving a significant increase in business start up rates – and market churn – should be a priority for the EM.

12.2. NG’s apparent dependence on larger employers is also a key issue for the EM. Half of the ‘large firms’ which are so over-represented in the NG economy are in fact public sector employers; nonetheless, the remaining half in the private sector represent both an opportunity and a threat. On the one hand, the economic downturn has highlighted the vulnerability of larger firms across a spectrum 74 ONS VAT Statistics, Mid-year population estimates, 2007

75 ONS, VAT Statistics


of sectors ranging from financial services, through construction, retail and manufacturing and also some of the business services firms which serve them. On the other hand, they remain an under-utilised asset – with the weight and critical mass to achieve significant impacts on productivity and employment.

Employment structure

12.1. The OECD Review76 highlights the scale of the industrial restructuring which has taken place across the City Region over the last 50 years, with the ‘virtual elimination’ of mining and heavy industry and a major decline in agricultural employment offset by growth in public sector, financial and business services jobs. OECD note the ongoing importance of the manufacturing sector – with chemicals and metals both demonstrating relatively high productivity – and that“Inward investment has contributed to a considerable diversification of the economic base into new areas such as microelectronics, the offshore industry, pharmaceuticals and biotechnology, and automotive assembly. The recent growth in foreign owned branch plants has, however, failed to compensate for the closure of UK-owned branch plants over the same period.”

12.2. The SEC77 does not present a broad analysis of the changing employment structure of the English cities; instead the research is primarily concerned with exploring the concentration and spatial distribution of employment in Knowledge Intensive Business Services (KIBS). Indeed Tyneside shows strong growth in business and financial services jobs, and the defining features of change in the employment structure of NG have been continuing growth in the public sector (which accounts for a third of all jobs) and the rapid shift towards a post-industrial, services-based economy. These trends have been particularly marked in Newcastle; Gateshead has moved in the same directions, but more slowly, and it retains a significant manufacturing base. 12.3. In 2007 there were just over 265,000 people (excluding the self-employed) working in NG78. Together, public administration, health and education accounted for 33% of all jobs of which the majority are in the public sector.





Employment Structure for Newcastle, Gateshead and NG: 2007

No. jobs % No. jobs % No. jobs %Manufacturing 14,703 16 11,582 7 26,284 10Construction 6,273 7 4,594 3 10,867 4Distribution and Retail 19,663 22 20,605 12 40,268 15Hotels and restaurants 4,736 5 10,283 6 15,019 6Transport and Communications 5,175 6 9,739 6 14,914 6Financial intermediation 1,461 2 10,800 6 12,261 5Business Services 13,019 14 31,820 18 44,838 17Public Administration 6,010 7 22,403 13 28,413 11Education 6,611 7 19,284 11 25,895 10Health and social work 9,294 10 23,792 14 33,086 12Personal Services 3,912 4 9,359 5 13,271 5Total 90,857 100 174,261 100% 265,116 100%

SectorGateshead Newcastle Newcastle Gateshead

Source: Annual Business Enquiry, 2007

12.4. Business services (defined in SIC terms as real estate, renting and business activities) now accounts for 17% of all employment, overtaking distribution and retail as the largest wholly private sector employer in 2005. Manufacturing accounts for 10% of employment in NG.

Structural comparisons

12.1. There are some significant differences in broad economic structure in comparison with the other Core Cities, based on 2007 data79. NG has a similar proportion of manufacturing jobs to Leeds (9.5%) and Birmingham (10.6%) but a lower one than Sheffield (12.1%). This figure would be just 7% if Newcastle is considered in isolation. Just 4.5% of employee jobs in Manchester remain in manufacturing.12.2. NG retains a much higher proportion of jobs (33%) in public services than either Manchester (29.4%) or Leeds (26.4). Conversely, both Manchester (30%) and Leeds (27.1%) have more employment in financial and business services than NG (22%). In all three cities around 20% of jobs are in retail distribution and hotels.12.3. There are also some very significant differences in the economic structure of Newcastle and Gateshead. The first significant difference is one of scale – 65% of total employee jobs are in Newcastle, reflecting the role of the city centre as a high density location for retail, office and leisure employment. 12.4. Distribution and retail is the largest sector in Gateshead in absolute and percentage terms – and accounts for a much higher proportion of employment in Gateshead than Newcastle. Gateshead is an important location for distribution/warehousing activity which has tended to colonise edge/out of centre locations with good access to the highway network.12.5. Newcastle has four times the number of public sector jobs than Gateshead, reflecting its role as a regional administrative centre. Similarly, although small compared to other Core Cities, Newcastle’s financial services sector is seven times larger than Gateshead’s.

79 ibid


12.6. Although manufacturing employment is distributed comparatively evenly – 55% Gateshead and 45% in Newcastle – it comprises a much higher proportion of total employment in Gateshead at just over 16%. Construction employment is also higher in Gateshead than Newcastle.12.7. To some extent, the distribution of employment (and land uses) does support a view of Newcastle and Gateshead as a coherent ‘city’. Their roles are different but complementary – with Newcastle City Centre serving as the dominant retail and office location and transport node, and Gateshead providing a strong industrial and residential base with, of course, its iconic cultural facilities complementing the leisure focus of Newcastle Quayside. 12.8. In some respects, viewed together, it could even be argued that Newcastle and Gateshead demonstrate aspects of the classic ‘concentric ring’ model of urban development which evolved in the 1920s – with a central business district (the City Centre) surrounded by lower value industrial land uses and a zone of transition (East Gateshead Industrial Estate and parts of the Discovery Quarter) adjoining inner residential neighbourhoods (Newcastle’s West End and Felling/High Felling/Bensham). This suggests that the ‘decade of change’ described in the introduction paragraphs has not fundamentally altered NG’s urban structure.

Employment Growth

12.1. Employment in NG increased by 34,200 jobs (or 16%) between 1995-2007, above the North East (13%) figure but below the England average (17.2%). Over the same period, employment grew in the Tyneside NUTS3 area (OECD’s ‘Newcastle City Region’) by 49,240 jobs – thus 70% of the employment growth in the area took place in NG. Newcastle (+17%) witnessed higher levels of employment growth than Gateshead (+14%) over this period80.12.2. NG sits at the top of the ‘second division’ of UK Cities for employment growth, well behind London (+627,500) Glasgow (+63,190), Manchester (+ 51,600) and Leeds (+47,790) but comparable with Edinburgh (38,800) Sheffield (+35,800) and Cardiff (+31,150) and ahead of some of the other major UK cities including Bristol (+17,100), Birmingham (+15,200) and Nottingham (+14,000). 12.3. In percentage rather than absolute terms, Manchester out-performed all of the major UK cities for employment growth, achieving 20% growth over this period and closely followed by Liverpool (+19.6%) Cardiff (+19.2%) and Glasgow (+19%). Sheffield (16.8%) and NG (16%) are also closely matched. At the other end of the spectrum the under-bounded Nottingham (8%) and Birmingham (3.2%) significantly under-performed the England average.12.4. The shift towards a post-industrial economy accelerated rapidly during the 1990s – but much more rapidly in Newcastle than Gateshead. In 1995, 86.5% of employment in Newcastle was already in services (compared to 69% for Gateshead and 76% for GB). By 2007, service

80 AES 1995-1997, ABI 1998-2007


sector employment in Newcastle had increased to 90% of all jobs but still lagged in Gateshead (76.8%) which had reduced the gap to the GB average only marginally. Newcastle has a higher proportion of jobs in services than Leeds (84.5%) but a lower proportion than Manchester (93.4%).

Change in Employment by broad sector (%) 1995-2007

- 0.8 - 0.6 - 0.4 - 0.2 0 0.2 0.4 0.6 0.8

Utilities

Manufacturing

Primary industries


Other services

Construction

Wholesale, retail trade and repair

Public administration


Hotels and restaurants

Financial intermediation

Real estate, renting and business activities

Education

NewcastleGateshead

North East

GB

13. Source: AES 1995-1997, ABI 1998-2007

13.1. Public sector employment – which increased by 23% over this period – accounted for 47% of total net growth in jobs. The education sector in particular grew more in NG than the regional or GB average and the only other sector to outperform the NE or GB average was financial services.13.2. Some of the Core Cities have witnessed a steep decline in manufacturing employment between 1995-2007. NG had the lowest absolute or percentage decline in manufacturing employment of any of the Core Cities over this period – losing just under 5,900 jobs or 18% of the workforce. 13.3. Sheffield (-28%) and Leeds (-35%) had the next ‘best’ performing manufacturing sectors. Birmingham lost a staggering 55,900 jobs – 52% of the workforce in 1995 and Nottingham, whilst witnessing a much smaller absolute decline (-18,600 jobs) lost an even higher proportion of its manufacturing employment (-59%).13.4. In some Cities the loss of traditional employment has been cushioned by growth in other sectors. ‘The Northern Connection81’ research for the Northern Way shows how the shift from industrial to post-industrial economy has been manifest in different parts of the North – identifying Tyneside as a ‘hotspot’ for growth in financial and business services alongside Leeds, Manchester and Liverpool.

81 The Northern Connection, Assessing the Comparative Economic Performance and Prospects of Northern England, Institute for Political and Economic Governance, University of Manchester, January 2008


Employment change in business, professional and financial services for northern NUTS 3 areas, 1998-2005

Source: The Northern Connection, Assessing the Comparative Economic Performance and Prospects of Northern England, Institute for Political and Economic Governance, University of Manchester, January 2008

13.5. Over the period from 1995-2007, Leeds achieved the highest absolute growth in banking, finance and insurance services (+36,632 jobs, an increase of 49.5%) followed by Manchester (+34,466 or a 59.1% increase). Employment in these sectors in NG increased by 18,257 jobs (48.1%) – placing NG 5th of the 8 Core Cities both in terms of absolute and percentage growth. Nottingham achieved the largest percentage (+66.1%) from a relatively low base of employment; Bristol ranked 8th with the lowest absolute (+12,542) and percentage (+20.6%) growth.13.6. The Work Foundation82 express particular concern about what, until recently, has been the almost exponential growth of financial services in UK Cities – with places like Norwich, Leeds and of course London having between 7-10% of total employment in core financial services (explored in more detail later in this section). The research highlights two important phenomena; firstly the rapid decentralisation of those UK financial services jobs which can be outsourced to reduce costs and secondly evidence that other major European cities have diversified away from financial services into other high value knowledge activities - Stockholm, Helsinki, Oslo and Paris have seen much higher levels of growth in high technology services than London or any of the English Core Cities.13.7. The Work Foundation83 further argues that places with a higher level of private sector knowledge intensive industries are more productive than those with a predominance of public sector organisations in this field; however, in practice employment in public sector ‘knowledge services’


83 ibid


outgrew private sector knowledge jobs by a ratio of six to one over the period from 1998-2006.13.8. Growth in public sector employment has also been characteristic of the growth of the Core Cities. Much of the jobs growth in NG since 1995 has been driven by public sector employment – which increased by 23% but accounted for 47% of total net employment growth over this period.13.9. However, five of the other Core Cities had higher levels of public sector jobs growth between 1995-2007, including Bristol (+27%), Manchester (+29%), Birmingham (+32%), Liverpool (+36%) and Sheffield (+44%). More pertinently, in Nottingham (69%), Bristol (81%) and Birmingham, where the shift towards financial and business services employment has been much less pronounced, the public sector makes an even more marked contribution to overall net jobs growth. In Birmingham, a substantial increase in public sector employment has been insufficient to compensate for the loss of almost 56,000 manufacturing jobs and thus net employment growth has been negligible84.

Conclusions – employment structure

13.1. Returning to the question posed by Professor John Tomaney85 at the start of this section of the report, has the growth of the NG economy been driven by “debt-fuelled speculative property development, leisure and shopping?” 13.2. Certainly NG’s retail and leisure sectors have not witnessed major employment growth since 199586, and section 5 will show that its housing and commercial property markets remain in equilibrium. 13.3. NewcastleGateshead has achieved a middle ranking performance in employment growth when compared to the other English Core Cities, but has achieved higher levels of jobs growth than OECD’s ‘Newcastle City Region’ or indeed the Region as a whole. Unlike some other cities, most notably Birmingham, the NG economy has diversified rapidly to replace the jobs lost through the decline of manufacturing and other traditional industries during the 1980s and 1990s. 13.4. NG ranks 5th of the 8 Core Cities on the growth of financial, banking and insurance services. Like many of the Core Cities, jobs growth in NG has been driven by the expansion of the public sector, with the education sector in particular expanding rapidly, rather than exponential growth in business and financial services. Its manufacturing sector has demonstrated notable resilience, losing far fewer jobs in this sector than its peers.

84 AES 1995-1997, ABI 1998-2007

85 Professor John Tomaney, CURDS in The Future of the North East, ed Tomaney, The Smith Institute March 2009

86 AES 1995-1997, ABI 1998-2007


Innovation and R&D

13.1. In today's global, information-driven society, economic success is increasingly based upon the effective utilisation of intangible assets such as knowledge, skills and innovative potential. The concept of the ‘knowledge economy’ has its roots in the research of Peter Drucker87 in the late 1950s; growth has been driven by demand for higher value-added goods and services from increasingly discerning and sophisticated consumers.13.2. Thus innovation is one of the key measures of urban competitiveness identified in CLG’s State of the English Cities research88, and is also given prominence in OECD’s Territorial Review89. The CLG research90 asserts that“The most significant driving forces of knowledge driven economies are ideas, innovation, highly educated people and risk investment…..Innovative capacity is the most significant basis of productivity and competitiveness – the critical factor in the ability of an urban economy to compete is its adaptive capacity and how easily innovations are diffused around the relevant firms and sectors in the locality. The evidence suggests that innovation diffusion is a key requirement for overall competitiveness rather than major breakthroughs.”

A European perspective

13.1. The European Union’s Innovation Scoreboard91 suggests that the UK’s position is declining as a world leader in innovation. Based on a series of Eurostat measures including the proportion of firms receiving public funding for innovation; private sector investment; collaborating and networking and sales of new to market products, the UK is placed alongside the US, France and Ireland in a group of ‘innovation followers’ behind Sweden, Finland, Denmark, Germany, Switzerland and Japan.13.2. At regional (NUTS2) level, the EU’s Community Innovation Survey92 benchmarks the performance of just over 200 European regions. The top 5 regions were Stockholm, Vastswerige (Sweden) Oberbayern (Germany); Etela-Suomi (Finland) and Karlsruhe (Germany) and eight of the top ten were Swedish or German. The South East ranked 12th and the North East, North West and Yorkshire and the Humber all placed outside the top 50.

87 Drucker, P, The Age of Discontinuity: Guidelines to our Changing Society, 1968


89 OECD Territorial Review of Newcastle and the North East, CURDS 2006


91 European Innovation Scorecard, 2008, Maastricht Economic and social Research and training centre on Innovation and Technology (MERIT), January 2009

92 Community Innovation Survey, in European Innovation Scorecard, 2008, Maastricht Economic and social Research and training centre on Innovation and Technology (MERIT), January 2009.


A regional perspective

13.1. The North East continues to under-perform on innovation and R&D, and the regional picture is fairly well rehearsed: 16.1% of North East businesses fell into the OECD definition of

‘knowledge based’ in 2005, compared to 20.5% for the UK and 28.4% for London;

using the same definition, only Wales (12%) had a lower proportion of employment in knowledge based firms than the North East (12.3%) against a GB average of 17.2%;

expenditure by businesses on R&D as a % of GDP fell from 0.9% in 2004 to just 0.5% in 2005 – making the North East, with Yorkshire and the Humber, the poorest performing region in the UK;

however, R&D expenditure by North East Higher Education institutions (at 0.5% of GDP) gives the region a mid ranking performance; Scotland led the way in 2005 with Universities spending the equivalent of 0.7% of GDP;

8.6% of the designs registered by the UK Intellectual Property Office in 2007 originated from the North East; the region ranked 6 th of the 9 English regions on this measure; and,

in contrast, the region’s recent export performance has been very promising; although only around 3% of NE firms are exporters, the value of exports increased by 28% in the year to September 2008 from £9 billion to £11.5 billion; the process industries, offshore and renewables sectors are the region’s key exporters and the US, Russia and the Netherlands its key markets.

13.2. The OECD review93 explores the CLG report’s second key measure of innovation/investment in some detail but much of the data suffers from a time lag, covering the late 1990s and very early part of this decade.



Whilst noting a significant widening of the gap in private investment in R&D, the report states that ‘almost complete absence of Government R&D (funded) outside of the University sector’ which distinguishes the North East. 13.3. In this context, OECD highlight the role of the Higher Education Institutions as the region’s key knowledge resource – whilst noting that its academic research base is much smaller than in other English regions. They also point to a “relative weakness in the research base in North East business” which limits the scope for collaboration, whilst acknowledging the potential for the regional Centres of Excellence emerging at that time in biotechnology, nanotechnology etc to address this in sectors “for which there are no industrial precursors within the region.”13.4. The Work Foundation94 further highlight the critical importance of ‘public sector knowledge intensive institutions and workers’ in the economic downturn:“during the credit crunch, both thriving and struggling cities should do more to work with their education and healthcare institutions in order to enable economic growth.”

Innovation in NG

13.1. In practice, the SEC95 research is not especially helpful as a framework to benchmark NG’s innovation performance; it is concerned only with two specific measures of innovation; applications to the European Patents Office (EPO) and investment, considered in terms of venture capital flows and Higher Education Funding Council (HEFCE) investment in research grants. The OECD also explores historical patenting data.13.2. The EPO argues that the volume of patent applications is no indication of their quality, recognising a trend in both the semi-conductor and mobile phone industries for manufacturers to protect very modest product innovations. The number of applications to the EPO almost doubled over the period from 1997-2005.13.3. The SEC research96 provides data from the late 1990s which suggests, at that time, Cambridge generated 6 times more patents than the England average on a per capita basis. It provides no meaningful comparators for NG. However data for the period 1995-2005 from the then UK Patents Office suggested that the UK average was 6 patent applications per 100 firms whilst the corresponding figure for Newcastle was just 1.43.13.4. Turning to CLG’s second key measure – investment - the SEC97

notes that the UK venture capital industry is centred on London and the South East – with 92% of the members of the British Venture Capital




97 ibid


Association (BVCA) located there. The BVCA’s latest annual review98 notes that private equity investments by UK firms topped £31 billion in 2007 - having almost tripled since the start of this decade - of which £12 bn was invested in the UK. 13.5. 64% (by value) of UK investments supported management buyouts or buy-ins and just 4% was for start up or other early stage support. Nonetheless, the average start up investment was just over £900,000. 13.6. Consumer services is the largest sector for private equity investment; investment in technology firms fell by 9%, to £820m in 2007. Most significantly, however, the BVCA report indicates that around 70% of UK private equity investment was focused on firms in London and the Greater South East.13.7. The first report of the Northern Way’s Private Investment Commission99 highlighted the ‘equity gap’ – a market failure which limits opportunities for finance at particular stages of business development, particularly in the provision of equity finance in the £500,000-£2.5m range. It also recognises the apparent inequity of the geography of private sector investment in the UK, suggesting two alternative explanations:“a demand-side explanation: that northern businesses are different, more averse to equity, less growth-orientated and entrepreneurial. The ‘equity gap’ is a rational market response to this relative lack of demand.A supply-side explanation: that institutions focused in the South East are too remote from the business base and don’t recognise the opportunities there are.”

whilst acknowledging that neither is entirely satisfactory. The report notes that whilst strong personal links are important – the venture capital market in the ‘Oxford Cambridge’ Arc clearly reflects this – the underlying reason may be one of market coordination; no single investor is able to fill the ‘investment gap’ on their own. In addition, whilst a number of regional funds have been created by the public sector, most are comparatively small in comparison and have not leveraged private equity investment.

13.8. The North East secured just 1% - or £156m – of private equity investment in 2007 although BVCA100 argue that, based on its share of VAT registered businesses, the North East outperformed all of the English regions bar London. There is no comparable data for NG. In practice this is largely a result of the region’s low business density; between 1998-2007 the North East was the worst performing of the English regions, attracting 1.5% (by value) of investment over this period; the next worst performer – the South West – attracted almost 3 times the level of investment than the NE. London – the best performing region – secured almost twenty four times as much investment.

98 British Venture Capital Association (BVCA), Annual Review 2008

99 The Northern Way Private Investment Commission, Financing the Long-term future of the Region’s, Issues Paper, Dec 2008

100 British Venture Capital Association (BVCA), Annual Review 2008


13.9. The CLG research101 also emphasises the role of investment in Higher Education research and development, citing evidence from 2005/6 HECFE investments which shows that both Cambridge and Oxford received twice the level of research grants, on a per capita basis, than third placed York University. Newcastle ranked just outside the top 15.13.10. Updated (to 2007) by the Centre for Cities102, this data shows that the gap in research funding per capita between Cambridge and Oxford has narrowed – but that it has widened with the other UK Universities. Newcastle comfortably exceeds the England average for HEFCE funding – but is outperformed by four other Core Cities, and also some of the smaller University cities including Southampton, York and Brighton.

Research Funding per head of Population, 2007


102 Innovation, Science and the City, Centre for Cities, 2008


14. Source: Innovation, Science and the City, Centre for Cities, 2008

Conclusions – innovation

14.1. The North East continues to under-perform other regions on many of the traditional measures of innovation – and this must be set in the context of the UK’s declining position; we are no longer a global innovator. The low level of R&D spend in the private sector has been a longstanding drag on the regional economy but the position has not improved. 14.2. The lack of Government spending, outside its support for University research (for example through Government research institutions like York’s Central Science Laboratory), was highlighted as a major concern by OECD103. Thus the Universities remain the major source of research spend and activity – and the region has a middle ranking performance in terms of R&D spend by its Universities, and its ability to attract HEFCE research grant. 14.3. This notwithstanding, NG’s Universities and Colleges are vital assets for its long-term economic growth and its ability to attract and retain skilled, entrepreneurial knowledge workers. It’s further and higher education institutions need a vibrant, successful place to support the attraction and retention of students and investment. The EM should explore how the 1NG partners can further support the long-term growth of NG’s Universities and Colleges.

14.4. The North East appears to perform well on only one key measure of innovation. Recent export performance – to September 2008 – was very strong, driven by a small number of manufacturing exporters in the process industries, offshore and renewables sectors. Whilst this performance is unlikely to be sustained as the global recession deepens the export market could offer real opportunities in these and other manufacturing activities in the medium-term. The EM should explore whether export activity should play a more explicit role in the Science City programme as part of efforts to connect the research/knowledge base with NG export businesses.

14.5. Overall, the North East attracts a very low level of private equity investment compared to London and the South East, and compared to any of its regional neighbours (Scotland attracted 2.5 times more investment than the North East between 1998-2007, Yorkshire and the Humber 3.5 times and the North West more than 5 times)104. 14.6. Whilst current market conditions are challenging, the Northern Way’s Private Investment Commission is exploring how the North can be more competitive in leveraging private equity investment. The EM should consider whether – and then how – to promote NG as the


104 The Northern Way Private Investment Commission, Financing the Long-term future of the Region’s, Issues Paper, Dec 2008


centre for private equity investment in the North, linked to the Science City programme.

Diversity or specialism?

14.1. The relative merits of economic diversity and specialism as drivers of economic growth is a recurring theme of much of the research that has informed this section of the Workstream 1 report. The SEC report105

suggests that the right question to ask in this context is: which is more conducive to the external economies associated with the localised spill-over of technology and the promotion of local innovation?

14.2. Porter’s competitiveness theories106 suggest that competitive economies are those with clearly identifiable specialisms or clusters of economic activity which stimulate productivity growth through the spillover of technology and innovation. The SEC107 research supports this view, on balance, stating:“our analysis suggests that localised industrial specialization possibly makes a greater contribution to economic performance than diversity. This reflects the need for highly sophisticated knowledge and competence in modern goods and services. However…highly specialised urban economies can become stuck in particular structural and technological trajectories that make them very vulnerable to shifts in competition, trade and technology….this has certainly happened to some English cities that continued to specialise in such industries as ship building and steel making long after those industries were in decline. The best combination is specialisation and diversity, ‘clustered diversity’, combined with adaptive capacity.

14.3. The Work Foundation108 also support the concept of ‘diverse specialisms’ in knowledge intensive industries as a means of addressing their concerns surrounding over-specialisation in financial services:“For cities such as London, Leeds and Manchester, who have a more diverse economic base, a reduction in highly skilled roles may be challenging in the short-term but these...workers are flexible and able to seek employment in other industries…for cities that have specialised even more heavily or are reliant on employment in intermediate level financial services jobs…financial cutbacks may impact on productivity and employment levels without there being alternative industries for those workers to move into.”

14.4. So whilst there is a degree of consensus about the importance of ‘diverse specialisms’ or ‘clustered diversity’, the fact that London and its networked satellite towns and cities in the Greater South East are much better at achieving this equilibrium is also a fundamental point. IPEG, in its Northern Connections research109, considers how – and even whether – the economy of the North can delineate itself for the purposes of competitive advantage and identifies two clear scenarios:


106 Competitive Advantage of Nations, Porter, M, 1990





The first (assumes) there is no longer anything particularly distinctive about the northern economy’ vis a vis that of the south….rather, the future of the North… should be seen as significantly influenced by (its) relationship with London; the …issues that flow…from this…are how, and which parts of, the North can feasibly derive most benefit from the development in the London superregion? What sort of firms or economic activities…are most likely to relocate?... what is it that triggers or prevents such movements….and what might change to make such spill-overs from London increase?”

14.5. IPEG110 also propose a second, and more positive economic future for the North which characterises its relationship with the ‘London super region’ very differently:an alternative, or perhaps additional, position on North-South economic relationships, consistent with the general thrust of the Northern Way…is that there continue to be aspects of the northern economy that are relatively independent of what happens in the South…the clearest differentiation between London and the North rests in the manufacturing sector… (which) generates only a very small proportion of value-added in London…this would in turn focus on familiar debates about innovation and ‘smart’ manufacturing….the emergence of attractive, low-cost production capacity in Eastern Europe emphasise(s) the need to carve out a high specification northern manufacturing offer.”

14.6. In the context of developing an approach to ‘diverse specialisms’ the EM will explore the relative merits of both these approaches. Whilst the second scenario is consistent with the general tenet of regional economic policy making – and is certainly more politically acceptable than the first – this approach has been only partially successful to date. This was recognised by OECD111, who suggest that the Tyne and Wear City Region have only two ‘traditional’ industry clusters remaining – the marine/offshore sector and automotives – and that:“since the decline of traditional industrial clusters in the region the trend to diversification through foreign direct investment has resulted in an economy without strong specialism…claims are made for environmental industries, creative industries, call centres and life sciences, although evidence of cluster-based competitive advantage is difficult to identify”.

14.7. One NorthEast, through the Regional Economic Strategy112, has adopted a variety of different approaches to the prioritisation of economic sectors or clusters since its establishment in 1999. The RDA has moved from an approach based on support for inclusive clusters to one based on a narrower set of sectoral priorities, some (but not all) of which are linked to the ‘three pillars’ - areas in which the region has an acknowledged research or technological competitiveness: Energy and the environment Healthcare Process industriesand around which five specialist Centres of Excellence (e.g. the Centre for Process Industries, CELS (healthcare) and the New and Renewable Energy 110 ibid




Centre) have been established to drive commercialisation of research etc. Research by Arthur D. Little113 underpinned the agency’s Strategy for Success programme which launched the Centres of Excellence and NorthStar, a commercialisation fund subsequently reconfigured as North East Finance.14.8. The shift in the policy framework is set out in the table below:

1999 RES Clusters 2002 RES Clusters 2006 RES SectorsHigh Volume Manufacturing

Automotive AutomotiveFood and Drink Food and Drink

Process Industries Base Chemicals Process IndustriesPharma/Speciality ChemicalsNanotechnology

Low Volume Manufacturing

Defence and Precision Engineering

Defence and Marine

Environmental Industries Energy/OffshoreOffshoreBioscience Health and Social Care

Tourism, Heritage, Leisure, Culture and Sport

Tourism Tourism and Hospitality

Creative Industries Creative CommercialDigital

Transnational Services Knowledge Intensive Business Services (KIBS)Bespoke Services

Public ServicesVoluntary sector

Electronics Clothing and Textiles

14.9. By making explicit links with the Three Pillars, ‘Leading the Way’ identifies the process industries, energy and environmental industries and the life science industries as the region’s implicit key sectoral priorities. 14.10. Further research by Cardiff Business School114 sought to review the sectoral strengths of the North East using a multi-sectoral qualitative approach to identify those sectors in which the North East has acknowledged competencies, with clear growth opportunities and acceptable levels of risk. The study – which was underpinned by a business survey which generated a comparatively small response – reinforced some of the RDA’s sectoral priorities but questioned others.

113 Realising the potential of the North East research base, Arthur D. Little, 2001

114 Identifying and Assessing Sectoral Strengths in the North East”, One North East, 2005


14.11. Chemicals/pharmaceuticals, healthcare, higher education, knowledge intensive business and commercial creative were identified as sectors with low risk and high levels of competency – with strong growth potential identified for health and social care, chemicals/pharma and higher education. Tourism and hospitality was identified as the only high competency/high growth/high risk sector – which does not entirely sit with its current, comparatively modest contribution to regional GVA and employment.14.12. More controversially, the study identified four key manufacturing sectors (food and drink, automotive, machinery, iron and steel) together with energy, renewables and waste/recycling which had high levels of risk


and a below average level of competency. The Cardiff Business School research suggests that the growth potential of the North East’s energy and renewables sector will be modest.14.13. It is clear that One NorthEast did not wholly endorse the findings of this research. A ‘policy statement’ prepared by the RDA to accompany the report notes that the agency chose not to change its sector strategy as a result of the research:

“This work was a mix of hard and soft data and tried to bring a significant amount of previous knowledge together in one report. However, while this proved a strong starting point, good practice is to …..ensure a balanced view is taken….. in arriving at the RES sectors we therefore augmented this report with existing work around the region’s three pillars strategy, previous regional and national sector reports, business views….(which)together pointed strongly to the list of key sectors identified in the latest RES.”

One NorthEast

Specialism in NG

14.1. Does the NG economy have any of the characteristics of ‘diverse specialisms’ which are acknowledged as critical for sustainable economic growth in the future? There is a strong fit between the ‘three pillars’ strategy and associated sector priorities and some of NG’s acknowledged economic assets: the healthcare and life sciences pillar is underpinned by NG’s research

and knowledge base, through the internationally recognised work of the Institute for Ageing and Health, based at Newcastle General Hospital; the North East England Stem Cell Institute, which brings together Newcastle and Durham Universities and the NHS; Newcastle Biomedicine; CELs and the International Centre for Life;

Newcastle University makes a significant contribution to the energy and environment pillar through the work of the Sir Joseph Swan Institute which has a particular focus on low carbon energy; and,

NG has a strong representation in the following regional sector priorities: tourism and hospitality, KIBS, culture and creative, marine/offshore and higher education.

14.2. Whilst there is a ‘fit’ in policy terms between some of these sectors and the NG economy, how have they been performing in practice? The final part of section 3 presents a detailed consideration of sectoral growth trends in GVA and employment and explores some sectors in more detail.14.3. The starting point for consideration of this issue was to explore data – initially at SIC 2 digit level115 – on sectoral employment and GVA growth in NG. There are some issues associated with accurate measurement of GVA data below NUTS3 level and as such the data below should be viewed as indicative of ‘order of magnitude’.

115 AES 1995-1997, ABI 1998-2007


14.4. The sectors demonstrating the highest absolute and percentage growth are identified in the table below (all of the identified sectors contribute a minimum of 1% of NG’s total jobs and GVA). Data covering the period 1998-2006 is used (more recent GVA data is not available).14.5. Interestingly the same 10 (2 digit) SIC codes which demonstrated the highest compound annual growth rate (cagr) in employment also displayed the highest cagr in GVA – although in a different order116: computer and related activities was the fastest growing sector for

employment and the second fastest in terms of GVA; financial intermediation was the fastest growing sector for GVA,

generated the second highest absolute increase in GVA and was second only to computer and related activities for employment growth; and,

‘other business activities’ (one of the key KIBS SIC codes) generated the highest absolute increase in GVA (£530 m) and the highest absolute increase in private sector employment.

Highest employment and GVA growth divisions for NG: 1998-2006 (at 2 digit SIC code)SIC Description Change in

employment 1998-2006

Change in GVA 1998-2006

cagr Net increase

Cagr Net increase (£m)

72 Computer and related activities 10.2% 3,037 12.8% 17665 Financial intermediation, except insurance and

pension funding8.8% 4,698 14.3% 389

70 Real estate activities 6.7% 2,234 9.2% 14160 Land transport; transport via pipelines 6.1% 1,884 5.8% 14292 Recreational, cultural and sporting activities 3.7% 2,151 7.5% 10985 Health and social work 3.5% 8,577 6.7% 34280 Education 3.4% 6,128 7.5% 35474 Other business activities 3.1% 6,473 5.5% 53075 Public administration and defence; compulsory

social security2.9% 5,868 5.8% 305

45 Construction 1.4% 1,225 5.5% 267

Source: cebr analysis- Annual Business Enquiry, 1009-2006, National Accounts

1996-2008

14.6. No manufacturing activities appear within the top 10 for employment of GVA growth (perhaps unsurprisingly) and predominantly public sector activities (health and social work, education, public administration and defence) occupy three of the top 10 slots.14.7. Analysing the employment growth data (to 2007) at 3 digit SIC level, the picture is very similar to that at 2 digit level; the public sector

116 Source: Office for National Statistics, Annual Business Enquiry 1998-2007 (cebr)


dominates, accounting for four of the top 10 sectoral increases at this level; five if Higher Education is considered as public sector employment.Highest employment growth divisions for NG: 1998-2007 (at 3 digit SIC code)

Sector 1998 2007 Increase %Increase LQ (GB =100)

751 : Administration of the State and the economic and social policy of the community

7,554 19,92612372 164% 225

651 : Monetary intermediation 4,369 9,314 4945 113% 195851 : Human health activities 17,635 22,093 4458 25% 107741 : Legal, accounting, book-keeping and auditing activities; tax consultancy; market research and public opinion polling; business and management consultancy; holdings

5,486 9,631

4145 76% 94524 : Other retail sale of new goods in specialized stores 11,594 14,667 3073 27% 127748 : Miscellaneous business activities not elsewhere classified 1,944 4,971 3027 156% 93803 : Higher education 9,139 11,634 2495 27% 216722 : Software consultancy and supply 1,699 4,133 2434 143% 120801 : Primary education 6,222 7,979 1757 28% 78853 : Social work activities 9,038 10,754 1716 19% 93

Source: Annual Business Enquiry, 1998-2007

14.8. Public sector employment, financial (or monetary) intermediation and accounting/management consultancy each achieved very significant increases, along with ‘miscellaneous business services’ (which includes an eclectic mix of activities including photography, packaging, secretarial and translation services, specialist design and credit collection). 14.9. Software consultancy and supply also demonstrated strong growth over the period from 1998-2007. SAGE account for around 1,500 jobs – more than one-third of the sector in NG.14.10. Other retail also demonstrated strong growth. This is in effect non-food or comparison retailing and includes clothing, footwear, furniture, electrical goods etc.14.11. At the other end of the spectrum, those 3 digit sectors with the greatest decline in employment over the period 1998-2007 were: compulsory social security activities (-6,000 jobs or -49%) – which has

an LQ of 605; this is the only significant public sector activity to have witnessed a reduction in employment;

insurance and pension funding (-1,500 or - 75%); there are now only 500 people working in this sector in NG, highlighting the apparent lack of diversity within the financial services sector;

retail sale of food, tobacco and beverages in specialist stores (-1,200 or


-42%); and, manufacture of machinery for the production and use of mechanical

power (not engines) (-1,100/-39%). 14.12. Analysis of employment location quotients at 3 digit SIC level117 is particularly instructive; not only is NG under-represented in employment a number of key knowledge business sectors (e.g. legal/accounting) – but nine of the top 10 location quotients (i.e. in which NG is most over-represented in employment terms) are in manufacturing: manufacture of tubes (1,053 employees in 2007, +416% growth 98-07,

LQ of 963 where GB=100); manufacture of paints, varnishes (1,300 jobs +45% growth, LQ 720); manufacture of insulated wire and cable (700, -10%, LQ 845)

manufacture of weapons and ammunition (1,000, +2%, LQ 608); manufacture of machinery for the production and use of mechanical

power (1,700 jobs – 39%, LQ 267); manufacture of other special purpose machinery (1,400, -2%, LQ 259);

and, forging, pressing, stamping and rolling of metal (600, -6%, LQ233)14.13. Each of these manufacturing sub-sectors is small – the largest accounts for just 5% of manufacturing jobs in NG – and specialised. NG’s share of GB employment in some of these sectors is very significant; just under 10% of the remaining jobs in the manufacture of tubes are in NG (including the German-owned RTR); 7% in the manufacture of paints and varnish, and 6% in weapons and ammunition. 14.14. Analysis of the company base and then employment growth at 2 and then 3 digit SIC level reinforces OECD’s view118 of a diverse economy lacking in nationally or internationally significant specialisms. Although the company base is dominated by business services and wholesale/retail distribution, the business services sector is very diverse and actually under-represented compared to the GB average in some key areas of activity (most notably in tradeable services). 14.15. The under-representation of business services firms is, in part, a result of the lack of a ‘core’ economic activity to generate demand for/procure business services support. OECD119 note that the diversity of the City Region economy means that the supportive relationships between sectors are not particularly strong. The Tees Valley process industries cluster provides perhaps the best example of this, generating a supporting infrastructure of engineering and design firms which is not replicated to the same extent elsewhere in the Region.14.16. Manufacturing still matters – and is one of the most significant distinguishing features of the NG economy. NG has high location quotients for employment in a handful of small, specialised manufacturing sectors which, though employing just under 7,000 people

117 Annual Business Enquiry, 1998-2007


119 ibid


(around 2% of the workforce) do not appear to relate particularly well to each other, or to the rest of the economy. 14.17. Finally, in understanding the NG economy it is important to distinguish between the presence of: complex, integrated business clusters – OECD argue120 that the City

Region retains only two – marine/offshore and automotives; regionally significant sectors – where NG makes an important

contribution to employment and GVA growth but, with the probable exception of software, does not have real specialisms; and,

NG’s knowledge/research assets, which are, in some fields, of international significance but have yet to be fully commercialised or have a significant impact on economic output or employment.

14.18. Thus, drawing on the available evidence, seven sectors are analysed in more detail. These are a mix of the high performing sectors identified in our analysis of employment and GVA growth, and some more aspirational sectors/clusters which nonetheless feature prominently in the thinking of policy makers. It is important to note that full sector studies have not been undertaken as part of Workstream 1 – this is simply a snapshot of their current performance to inform future stages of the EM. 14.19. The seven sectors analysed (using ABI data from 1998-2007 and ONS GVA data 1998-2006) in the final part of section 3- some of which are overlapping- are financial services business services (including software) the creative industries tourism and hospitality manufacturing and engineering - including marine/offshore science and technology – including healthcare Higher Education.

Financial services

14.1. The financial services sector has been NG’s ‘star performer’ in terms of GVA and employment growth, increasing its contribution by almost £400m and growing – from a low base – at more than 14% per annum. In 2007 it had just over 12,700 employees and accounted for 43% of financial services employment in the North East. 14.2. Although growth (to the end of 2007) had been significant, NG remains a comparatively minor centre for UK financial services. It ranks 5th

of the 8 core cities for employment growth; a number of other UK cities – including London, Leeds, Edinburgh and Norwich have a much higher proportion of the overall workforce employed in core financial intermediation. 14.3. However, the nationalisation of Northern Rock and the subsequent announcement of 1,500 redundancies, substantively from Northern Rock 120 ibid


but also from the Newcastle Building Society have already had a large impact on employment in the sector. 14.4. Estimates of the future impact of the recession on financial services employment vary wildly. Oxford Economic Forecasts research for the Core Cities121 suggests that at least 125,000 UK financial services jobs could be lost over the period to 2011; Business Monitor International122

suggest that the figure may be in excess of 570,000. cebr’s latest projections produced for the purposes of this study suggest that output from the sector will fall by 7% in 2009 with a further 2% contraction in 2010123.14.5. The differential impact of the recession on financial services employment is very dependent on the mix of financial services employment – and of course their overall dependency on financial services jobs. A high proportion – 75% of financial services employment in NG is in financial intermediation – effectively ‘good old fashioned’ retail banking, serving the domestic and consumer market, rather than in corporate finance or in the ancillary activities (call centres, related business services) which support the financial services sector –so called financial and related business services, or FRBS.14.6. This is in direct contrast to Leeds, which has a much larger financial services sector (employing 84,900 people in 2007, almost seven times larger than the sector in NG); has a higher absolute number of jobs in core financial intermediation (just over 19,500) but, importantly, has a much larger financial and related business services sector (FRBS) which accounts for over 75% of financial sector jobs in Leeds. 14.7. The Centre for Cities124 note thatIt is helpful to consider job losses…in four tranches. Firstly losses have occurred in core financial services as a direct result of restructuring; secondly professional services have excess capacity, having seen a reduction in the volume of work required by the financial sector; thirdly the wider supporting services, such as recruitment and marketing have suffered as costs have been cut, and fourthly the wider..economy…will see spending fall.

14.8. Thus it is arguable that the first phase of restructuring of the sector has taken place – and the second and third are underway in the associated FRBS activities. By simple virtue of relative scale, ancilliary job losses in NG are unlikely to be as significant as they may be in Leeds. 14.9. The nationalisation of Northern Rock may well create some short/medium-term stability for employment. The recent report of the Office of Fair Trading125 notes that, under public ownership, Northern Rock has almost doubled its retail savings balances (now standing at some £19.6bn, near 2006 levels) and has repaid £18bn of the £27bn of loans received from the Government. Although its share of mortgage lending has reduced, it is to restart lending in 2009/10.

121 Oxford Economics Forecasts for the Centre for Cities, Nov 2008

122 Business Monitor International, 2009

123 Cebr, February 2009

124 Into Recession: vulnerability and resilience in Leeds, Brighton and Bristol, Kieran Larkin and Malcolm Cooper, Centre for Cities 2008

125 Northern Rock: The Effect of Public Support on Competition, Office for Fair Trading, March 2009


14.10. Whilst the immediate prognosis may be good for both savers and employees, the medium-term disposal of Northern Rock to the private sector will create further uncertainty. As Centre for Cities126s note “for banks, domestic and consumer finance has become a less attractive and profitable activity. As a result it is likely to be the target of a concerted drive to cut costs and improve efficiency – in which job losses will feature.”

14.11. The 1NG partners will wish to engage with Northern Rock and other key financial sector firms to identify their support needs and to support long-term investment in the sector.

Business services

14.1. In recent years it is in fact business services, rather than financial services, which has been the driver of employment growth in the UK, as illustrated in the following graph:

-600

-400

-200

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200

400

600

800

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Source: Oxford Economics, 2009

14.2. The North East and NG have both followed the national trend, with significant growth in both business services employment and GVA over the last decade. As highlighted earlier in the research, business services firms dominate the business stock.14.3. Employment in business services in NG is skewed by the fact that 22% of employees in this sector work in labour recruitment and provision (this is not just recruitment services but also covers those temporary workers who are provided with positions as clients of these services). In addition: 13% are in software consulting; 11% in legal activities; and,

126 Into Recession: vulnerability and resilience in Leeds, Brighton and Bristol, Kieran Larkin and Malcolm Cooper, Centre for Cities 2008


10% in architectural and engineering services.14.4. Around two-thirds of business services employment is classed as knowledge intensive business services, or KIBS. The North East has the lowest employment in KIBS of all nine English regions (just over 90,000 jobs) – of which just over 32,200 (35%) are in NG, and in fact 80% of them work in Newcastle. NG has a smaller proportion of KIBS workplaces in the region (23%) – suggesting that on average NG firms are larger than their counterparts elsewhere in the region.14.5. Compared with other Core Cities, NG fared well for the growth of business services employment – behind Manchester (+22,000 jobs 1998-2007) but, with growth of 13,600 jobs, ahead of Leeds (+12,900), Liverpool (+12,600) and Sheffield (+7,000). 14.6. In NG, the majority of business services growth took place in three core sectors (see 3.126 et seq): Legal/accounting/management consultancy (+4,145 jobs or 76%); Miscellaneous business services (+3,027 jobs/+156%); and, Software consultancy and supply (+2,434 jobs/+143%).14.7. Despite this, business densities are very low – the first two of these growing sectors have location quotients of 94 and 93 respectively. Only four sub- sectors (at SIC 3 digit level) stand out in having a high location quotient: Data processing (LQ 227); Architecture and engineering (LQ 126); Software consultancy and supply (LQ 120); and, Investigation and security activities (LQ 119).14.8. cebr forecast a contraction of approximately 5% for professional and business services GVA in 2009 and 2% in 2010, with those activities linked to support housing or construction particularly badly affected. However, the longer-term prognosis for the sector – at least nationally - is strong, with Oxford Economic Forecast’s recent research for the Core Cities suggesting that around 40% of post-recession jobs growth in the UK over the period from 2011-2015 will be in business services.14.9. Will business services lead NG out of the recession? If specialisation is the key, then NG faces a significant challenge. Much of the previous growth in the sector has, at least in part, been linked to the expansion of NG’s financial services and commercial/residential property sector, then it is unlikely that this will be mirrored in future. There is little specialised or distinctive about the business services firms that have supported this activity.14.10. Si’s forthcoming research(with Gavurin) on the North East Knowledge Intensive Business Services sector for One NorthEast suggests that the North East has just two distinct business services specialisms which underpin future growth, both regionally and in NG – software consultancy and supply, and architecture and engineering design. As many European cities diversify out of financial services and related


activity and into high technology KIBS127 this may provide an important lesson for NG.14.11. SAGE is a major global player in the development and supply of business software – supporting accounts, payroll, forecasting and business intelligence, customer relationship management and e-business activities. The firm employs 14,000 staff worldwide (of which just over 10% are based in the North East) and supports more than 760,000 SMEs in the UK. SAGE distributes its software directly and via a network of business partners who both sell software and provide implementation support fort businesses.14.12. The other – albeit much smaller – element of the software sector in NG is computer gaming – NG is home to an emerging cluster of software design companies including Mere Mortals and Eutechnyx, both of whom specialise in the full development of new game titles as well as providing technical support and facilities to other games developers and publishers. 14.13. The UK games development sector grossed some £1.24 billion in 2007. Some £370 million was invested in games development and the UK is the fourth largest games producer behind the US, Japan and Canada. 28,000 people were employed in games development, publishing and retail and there are clusters of activity in a number of other UK cities including Brighton, Dundee, Guildford, Leeds, Cambridge, Liverpool, Manchester and Coventry/Leamington Spa128.14.14. Although the industry has grown significantly in recent years, there are increasing concerns about its future competitiveness as many of its international competitors receive national or regional/state tax breaks. There are also significant skills shortages as demand for maths, physics and computer science courses is falling. 14.15. TIGA, the industry body, claim that many UK games developers are relocating and claim that over the next five years, the sector will in fact contract by between 5-10%. It is pressing the Department for Business, Enterprise and Regulatory Reform for a new system of tax breaks to mirror those developed for the UK film industry129.14.16. The computer software sector is small, but growing. Its core components – SAGE, and a small but significant games development cluster – are largely unrelated – but face common issues in accessing highly skilled labour. 14.17. The 1NG Partners, through the EM, should consider whether to prioritise support for the software development/digital content sector in NG, through:

working with SAGE to secure further inward investment to build on its headquarters presence and to extend supply chain development opportunities for firms throughout the region;

working with the University of Northumbria to further develop the provision of relevant graduate and postgraduate degree

127 Work Foundation128 TIGA, 2009

129 ibid


courses in line with employer needs to support long-term growth of the sector;

supporting NG firms to access appropriate private investment; and,

upgrading and modernising NG’s digital networks and infrastructure –including Next Generation Access Networks.

14.18. Turning finally to NG’s apparent strengths in architecture and engineering design, the sector will of course form part of One NorthEast’s proposed Design Centre for the North (DCN). Developed in response to the Cox Review130 on design and creativity and announced in the 2005 Budget, the DCN will support SMEs to develop their competitiveness and productivity by promoting design across a range of sectors, products and processes and bring together science, technology and design disciplines. DCN will deliver a range of activities including: showcasing new technologies and developing new research

programmes; developing workforce skills; working with SMEs to embed high quality design in new products and

processes; and, providing specialist facilities and services, including testing,

prototyping and virtual realisation. 14.19. The DCN is to be built by developer Terrace Hill at the Baltic Business Quarter. The £13 million project, to be funded by One NorthEast and ERDF, was recently granted planning consent by Gateshead Council.14.20. The EM will explore how the region’s acknowledged strengths in architecture and engineering design can be developed through the Design Centre North project.

Creative Industries

14.1. The creative industries include a wide range of activities encompassing film, television and radio; art and crafts; the performing arts; advertising and publishing; designer fashion; architecture and computer and video games. Creative industries GVA increased from £31.5 bn in 1997 to £57.6bn in 2006, increasing its share of UK GVA from 1.7% to 2.7% over this period131. Thus the overall picture is one of steady growth in GVA and employment over the last decade – with the creative industries narrowing the gap in overall GVA growth in recent years.14.2. 42% of total GVA is generated through software, computer games and electronic publishing, which also generates 30% of creative industries exports. The next largest contributor – publishing – generated 16.6% of creative industries GVA in 2007.14.3. Creative industries employment increased from 1.56 million to 1.98 million between (or 26%) between 1997-2007. The largest employer is also software, computer games and electronic publishing, with 32% of 130 The Cox Review of Creativity in Business: Building on the UK’s Strength, Cox G, 2005

131 Creative industries economic estimates, DCMS/ONS January 2009


jobs, followed by publishing (14%) and music and the visual and performing arts (13.2%). Employment in both software and design/designer fashion grew at 5% per annum over this period.14.4. The North East has long been recognised as a vibrant and creative region, supported by enviable cultural infrastructure and a growing creative economy. The region spends a higher proportion of its disposable income on recreational and cultural activities (16%) than London (11%).132

14.5. NG’s major cultural regeneration projects – particularly the Baltic and SAGE – are a major part of the area’s transformation. It also has some significant creative industries assets – including the BBC’s regional presence, a small independent film and television production sector and critical infrastructure including the Tyneside Cinema (the first fully digital cinema in the UK); Waygood Gallery and studios (currently subject to a major extension/refurbishment) and the groundbreaking Live Theatre.14.6. Based on the accepted DCMS definition133 in 2006, there were 18,700 jobs in the creative industries in NG – around 7% of total employment, which is just below the GB average of 7.7%. Since 1998 the sector has demonstrated modest growth in employment – of around 3% per annum – and annual GVA growth of 5.6% which is in line with the output growth achieved by Tyneside over this period.14.7. By virtue of the wide ranging DCMS definition the sector overlaps with the professional and business services sector. The largest employers are specialist retail - 22% of employment; architecture/engineering design -21%; software consultancy -21% - included here, but see also ‘business

services’; and, just 4% of jobs are in ‘artistic and literary creation; 3% in advertising

and 2% in radio and television activities.14.8. Manchester, Leeds, Birmingham and Bristol have a larger base of creative industries employment than NG, which is on a par with Sheffield and Liverpool. Liverpool experienced the highest percentage increase in employment in the creative industries (+40% or +3,500 jobs) over the period from 1997-2007, whilst NG saw an increase of 3,600 jobs (38%), the same as Sheffield. Manchester and Leeds saw creative industries employment grow by just over 15% over the same period.14.9. Research for Culture North East134 identified advertising, design and brand communication; new media, games and software and film, TV and video as the commercial creative sectors most capable of optimising the benefits of their IPR for the economic benefit of the North East – and with the most potential for growth in the short-term.

132 Expenditure and Food Survey, Office for National Statistics, 2007

133 The definition is based on the mapping between creative industries and official data classifications provided by the Department for Culture, Media and Sport. This mapping clearly cuts across many different broad sections to separate out the creative aspects of each industry.

134 Commercial Creative Sector Report (North East Region), NMP, 2007


14.10. Evidence presented in a recent report for Culture North East by NMP135, suggests that there is increasing evidence of critical mass and a ‘brain gain’ to the region. Some of this critical mass is demonstrated in the NG area particularly with regard to the design and new media, games and software subsectors. Convergence the ability to develop different types of product across a range of platforms and media outlets - is critical.Nonetheless, a number of barriers to growth remain including:

a lack of purchasers of creative content - stimulants of production are scarce if not entirely missing from supply chain;

lack of venture capital; poor networks across sub-sectors – a key issue when a lot of growth is

stimulated via community building; shortage of high-level experienced talent; and, lack of critical mass to attract specialist services to the area.14.11. Has the investment in ‘big’ cultural infrastructure paid off for NG, and served as a catalyst for cultural consumption as well as production? The hard economic facts are that progress has been modest; employment growth has been limited and the sector’s contribution to GVA, whilst outpacing the creative industries nationally has been on a par with many other sectors. 14.12. The historic model of creative industries development in cities like Manchester and Bristol – with growth anchored by the presence of a major commissioning institution like the BBC – has not been followed in NG although it has nonetheless had success in attracting smaller national organisations including Dance City and Creativity, Culture and Education.14.13. NG’s physical infrastructure for the cultural and creative industries – primarily workspace/studio space – continues to evolve. The expansion of the Waygood Gallery and studios in the heart of Grainger Town is scheduled for completion in 2010. 14.14. The Lower Ouseburn Valley, to the east of the City Centre has been a focus for the creative industries since the mid 1990s and retains much of its historic character developed during the industrial revolution when the area was a focus for glass making, milling, pottery and other industrial development. 14.15. A number of studios/workspaces have been developed through the conversion of former mills and other industrial buildings including 36 Lime Street and The Biscuit Factory. Northern Film and Media – as the key agency driving the growth of the commercial creative sector – is exploring proposals to relocate to the historic Hoults Yard to anchor a mixed use development that could include café’s, studios and gallery space and could further cement Ouseburn’s role as a hub for the commercial creative industries.14.16. Nationally, regionally and in NG software/computer games and architecture and design are driving the economic growth of the creative industries and make the most substantive contribution to GVA and employment. These are also the most distinctive elements of NG’s 135 Commercial Creative Sector Report (North East Region), NMP, 2007


business services sector (the overlap is the result of the wide ranging DCMS definition of the creative industries).14.17. The 1NG partners should consider whether they wish to prioritise support for the growth of these two key sub-sectors of the creative industries in NG.

Manufacturing

14.1. The North East retains a higher dependency on manufacturing employment than England as a whole, accounting for 12.5% of jobs in 2007 against a national average of 10.6%. The North East has shed manufacturing jobs more rapidly than England as a whole – with manufacturing as a proportion of total employee jobs falling from 20.9% in 1995 to the current figure of 12.5%. The England average fell from 17.7% to 10.6% over the same period.14.2. Manufacturing GVA for England fell sharply during the first part of this decade, recovering to near 1999 levels in 2006, when it stood at £126.9 bn. Over this period the North East’s share of national GVA increased marginally from 5.2% to 5.4% - although the region ranks 9 th of the 9 English regions based on the scale of its contribution. The largest contributors to regional manufacturing GVA – which totalled £6.81 bn in 2006 – were: chemicals and chemical products (19.7%); basic metals and fabricated metal products (13.6%); transport equipment (13.3%); machinery and equipment (11.5%); and, food products, beverage and tobacco (9.5%).14.3. Manufacturing GVA in the South West – ranked 8th – is 1.9 times greater than that of the North East. The three southern regions (South West/South East and London) now make a greater contribution to manufacturing GVA than the three ‘Northern Way’ regions combined136. Thus whilst manufacturing remains of regional significance, the North East’s manufacturing sector is only of limited significance nationally.14.4. Whilst sectoral GVA figures for 2007 and 2008 are of course not yet available, they will tell a very different story. The recession has had a massive impact on global manufacturing as the collapse of demand has crushed the prospect that the falling value of Sterling would create significant export opportunities for UK manufacturers. 14.5. Output fell by 2.9% between December 2008 and January 2009 – and decreased by 6.4% in the three months to January 2009, the most severe contraction since records began in 1968. Year on year output is 10.4% lower than in January 2008. Some sectors – e.g. basic metals and metal products – have seen even greater falls in output – with only food and drink and refined petroleum holding up. cebr forecast a contraction of around 5% in 2009 real GVA, with a return to growth in 2011 and 2012 of around 2% per annum.

136 Kevin Rowan, ‘Manufacturing now’ The Future of the North East, ed Tomaney, The Smith Institute March 2009


14.6. In response, Lord Mandelson has called for ‘a new industrial activism137’ in Government to support the long-term growth of the UK’s ‘modern manufacturing and knowledge based industries’:“The pressure from globalisation to continue to improve our productivity and focus on the specialist bases of the British economy will be relentless. We have to get better at growing smaller companies into bigger ones. I…set out the case for a new British industrial activism in Government that complements markets to produce better long term economic outcomes…especially in ensuring that we continue to develop the skills, innovation and infrastructure that will support a world class manufacturing sector as part of a modern mixed economy.”

14.7. The Government’s recently launched Manufacturing Strategy138

highlights the significance of five ‘major dynamics’ likely to shape global manufacturing in the future: “the increasing prevalence and complexity of global value chains,

underpinned by developments in information and communication technology, and consequent fragmentation of processes, encouraging specialization

the accelerated pace of technology exploitation as the demand for change implementation has increased

the growing importance of investment in intangibles such as design, branding and R&D

the increased recognition that investment in people and skills is among the most important for companies to make

the move to a low carbon economy as the response to climate change creates new challenges and opportunities for manufacturing firms.”

and sets out a range of proposals to support manufacturers to source products globally – and participate in global supply chains; potentially roll out a network of manufacturing technology centres, based on a pilot in Coventry; further enhance support from the Design Council and the Manufacturing Advisory Service and expand apprenticeships.14.8. The strategy specifically highlights the opportunities for manufacturing across the low carbon economy – the Government’s Low Carbon Industrial Strategy139 has also just been launched – and renewable and nuclear energy. 14.9. Within this rapidly changing global context, the key role of manufacturing in the NG economy is nonetheless a recurring theme throughout this section of the report. The sector accounts for 10% of employment in NG as a whole but 16% in Gateshead. Manufacturing contributed £1.35bn to NG’s GVA in 2006 – 14% of the total and more than tourism and the creative industries combined. NG’s manufacturing GVA grew by 26% between 1999-2006, increasing its share of the regional total from 16% to 19.8% over the same period and compared with negligible growth in GVA nationally.

137 A new industrial activism, RSA Lecture, December 2008

138 Manufacturing: new challenges, new opportunities, BERR September 2008

139 Low Carbon Industrial Strategy, BERR March 2009


14.10. The OECD Territorial Review140 highlights evidence of diversification in the manufacturing sector, particularly in areas such as offshore sector, automotive assembly and supply, pharmaceuticals and biotechnology, however, the report also highlights that only 2% of manufacturing firms in Tyne and Wear are engaged in high technology manufacturing. OECD also highlight low levels of private sector R&D and low levels of innovation. This is evidenced by applying OECD’s definitions of high/medium-to high tech etc manufacturing to the 3 digit SIC data:High technology Meduim to high tech Meduim to low tech Low technology

Pharmacueticals Chemicals (less pharmacueticals)

Rubber and plastics Food, drink, tobacco

Areospace Engineering (less areospace)

Minerals and metals Paper, print and publishing

Electronics Fuel production Other manufacturing

High, medium high and medium low tech manufacturing, 2007

0%

10%

20%

30%

40%

50%

60%

70%

80%

Great Britain Gateshead Newcastle-upon-Tyne

Liverpool Manchester Leeds SheffieldSource: Annual Business I nquiry

% o

f tot

al m

anuf

actu

ring

empl

oym

ent

Mediuim-low tech manufacturingMedium-high tech manufacturingHigh Technology Manufacturing


15.1. Thus whilst Gateshead has a low level of high technology manufacturing, it has a much higher proportion of jobs in medium-to high-tech but a comparatively large ‘tail’ of potentially vulnerable medium to low tech manufacturing jobs. Newcastle has a higher proportion of high tech jobs – in part because of the presence of BAe Systems – whilst Sheffield faces a very similar challenge in terms of the vulnerability of its low tech manufacturing activities.15.2. Location quotient analysis for NG’s manufacturing sector is presented earlier in section 3, highlighting significant over-representation of a handful of small but specialised sub-sectors (including the manufacture of tubes, which may pick up some of NG’s offshore sector); insulated wire and cable and paints and varnishes. 15.3. Thus whilst much of the Tees Valley sector operates as an integrated cluster centred on the process industries, there is much less evidence of cluster formation in NG – with the exception of the 140 OECD Territorial Review of Newcastle and the North East, CURDS 2006


offshore/marine sector which was identified as one of the region’s few cluster strengths in the OECD report. 15.4. Centred at Walker Riverside – which affords access to specialist port and marine infrastructure (deep water berths, cranage etc) – and with strong links to NaREC in Blyth, NG is home to three key marine employers- Duco, Wellstream and Shepherd Engineering – who specialise in subsea technology, marine fabrication and repair and offshore decommissioning. 15.5. Wellstream manufacture a range of pipeline products to support oil and gas production at their Walker Riverside factory, and completed a further 60,000 ft² purpose-built unit in 2008. Despite strong results, the firm recently announced 90 redundancies as part of global cost reduction.15.6. Other key players in this sector based in NG include Anson – who manufacture valves, manifolds and flowline equipment for the offshore sector and now employ 400 staff at their Team Valley premises – and Express Engineering, also Team Valley-based, who manufacture precision parts for the offshore, medical and aerospace sectors and employ 160 staff.15.7. The Marine Design Centre, recently established by One NorthEast and located in central Newcastle aims to encourage collaboration between businesses and Higher Education Institutions to open up new markets and to share access to specialist facilities and skills, targeting commercial shipping; defence; oil and gas and the renewables sector.15.8. The long-term prospects for the marine/offshore sector remain closely tied to fluctuating oil prices – which have fallen by almost two-thirds over the last year – and their impact on investment in further North Sea oil exploration. ‘Peak oil’ – the point at which global demand for oil and gas moves into decline – is expected to occur over the next fifteen to twenty years. 15.9. Opportunities in offshore wind and wave power may create further opportunities for North East manufacturers, including the established marine/offshore sector where a number of processes and skills are highly transferable. 15.10. The UK retains a commitment to increase the proportion of UK energy generated from renewable sources to 15% by 2020 – requiring a ten fold increase on current generation from renewables - and to reduce carbon emissions by at least 26% by 2020 and by 80% by 2050 through the Climate Change Act. The Government has committed at least £7bn to the Offshore Wind Round 3 programme and the Crown Estates have also committed to supporting the generation of up to 33GW off the UK coastline. The UK is expected to have installed around 20GW of offshore capacity by 2020.15.11. The British Wind Energy Association has identified the North East as the potential ‘capital city of the UK’s wind industry’ for the construction and servicing of offshore wind turbines across the UK and Europe. The region has a number of critical strengths including world-class expertise in manufacturing and ports which provide access to key development sites in the North Sea.


15.12. To date, the UK has no wind turbine manufacturing capacity. US-based Clipper Wind has confirmed that it is to establish a manufacturing operation in the North East – to develop the world’s largest offshore turbine. The production facility will have the capacity to produce around 200 turbines per annum, and is expected to be located in Tyneside.15.13. The Land Systems division of BAE Systems is another world class manufacturer based in NG employing more than 650 people at its Scotswood Road site where it builds the British Army’s Warrior and Challenger tanks and a wide range of armoured support vehicles. Almost all of the British Army’s armoured vehicles have been built by Alvis Vickers. BAe could also benefit from the diversification opportunities being created for offshore wind.15.14. The analysis suggests that NG’s manufacturing base is not strongly linked to the automotive cluster centred on Nissan’s Washington base. The recent wave of 1,200 redundancies at the Sunderland plant is expected to lead to up to 8,000 job losses in the supply chain and whilst much of the sector is clustered outside NG, Johnson Controls, based at Team Valley, may be impacted. A significant number of NG residents will also commute to jobs outside the area.15.15. Manufacturing still matters for NG. There is at least one ‘mini-cluster’ present in the marine/offshore sector which could extend its supply chain reach still further and another major opportunity emerging in the form of the offshore wind sector which could create significant diversification opportunities for offshore, defence and other manufacturers. Securing a site for Clipper Wind in the north of the region must be a priority for the 1NG partners and the EM should explore the wider opportunities for NG firms associated with the development of the offshore wind sector.

15.16. Design is also a recurring theme. The Design Centre for the North and the recently established Marine Design Centre could both have a significant long-term impact on the manufacturing sector – but only if they can be harnessed effectively and are led by the needs of North East businesses. The EM will explore this issue further in later workstreams.

Tourism

15.1. Tourism is the sixth largest industry in Britain. It generates £86bn p.a. for the UK economy (6.4% of GDP), directly supports 2.2 million jobs (7.7% of the total workforce). The 32.8 million overseas visitors who came in 2007 spent £16.0 billion in the UK. 2007 was a record year for the volume of visits, but spending fell in cash terms for the first time since 2001; the UK now ranks sixth in international tourism earnings behind the USA, Spain, France, Italy and China

15.2. Other tourism markets have grown more rapidly – the UK Tourism Alliance141 claims there is now a £20bn gap between the UK visitor economy and the best performing visitor economies; that the UK's share

141 The UK Tourism Alliance, January 2009


of global tourism receipts has fallen by almost 20% and revenue from domestic tourism has fallen by more than 25%.

15.3. The United Nations World Tourism Organisation predict that in 2009 international tourism is set to grow by between 0% and 2%. UNWTO argue that there is a very real chance international tourism trips will fall during 2009 - this has only happened twice in the past forty years. Similarly the International Air Transport Association (IATA) is pessimistic about current prospects for global air travel; in the year to September 2008, demand fell by almost 3%.

15.4. VisitBritain has forecast that inbound tourism to the UK will fall by 1.1 million visitors from their 2007 peak, although visitor expenditure is expected to rise by around 0.7% in 2009. The impact of the recession on the US economy has been identified as the major risk facing the UK visitor economy.

15.5. Whilst international tourism will be hit hard by the recession this could be tempered by the lower value of the pound as more people seek to visit the U.K and domestic travel increases. cebr forecast a fall in GVA of over 3% in 2009, followed by a further modest (0/2%) fall in 2010 before a return to growth of 1.7% in 2011.

15.6. To some extent, the North East appears to be bucking some of these trends. The value of tourism in the North East has grown by 30% between 2003 and 2007 and is now worth £3.9 billion to the regional economy. 8.9 million overnight tourists visited the North East in 2007 – of which around 500,000 were from overseas - spending almost 25 million nights in the region, and there were 74 million day visits. Day visitors contribute just under 40% of revenue. Approximately 60,000 jobs (full time equivalents) were supported by direct tourist expenditure in the North East, and a further 15,800 jobs were supported by indirect revenue from tourism142.

15.7. Tyne and Wear accounts for 37% of all overnight visitors to the region and 51% of all tourism revenue. Tourism in NG generated £1.225 billion in 2007 – almost one-third of regional tourism revenue - and there were 21.91 million tourist visits in 2007, representing growth of 3% from 2006. The number of overnight visitors staying in serviced accommodation in NG has risen by 18% since 2003143.

15.8. Employment in hospitality and tourism has also increased significantly in recent years. 22,681144 people are employed either directly or indirectly by the sector. Two-thirds of employment in NG is in hotels, bars and restaurants.

15.9. NG experienced an increase of 2,600 jobs in tourism and hospitality between 1998-2007 which represents modest growth compared to Leeds (+8,100 jobs) or Manchester (+6,700) over the same period.

142 STEAM, 2007

143 STEAM, 2007

144 STEAM, 2007


15.10. NG’s vibrant nightlife, sports events and developing cultural offer have established it as a leading city break destination over the last ten years. NG was ranked 13th in the list of the UK cities most visited by overseas residents145. Newcastle was ranked 6th most popular destination in the British conference venues survey 2006. The top 10 most visited attractions in Tyne and Wear in 2007 are set out below – demonstrating that major investments in the SAGE, Baltic, the Laing and Centre for Life are having a significant impact:

Attraction VisitorsSaltwell Park, Gateshead 4,035,092Sage Gateshead 600,000EDiscovery Museum, Newcastle 442,706BALTIC, Gateshead 379,479Theatre Royal, Newcastle 341,590Sunderland Museum and Winter Garden 331,296Empire Theatre, Sunderland 292,692Laing Art Gallery, Newcastle 257,231Life, Newcastle 254,662Customs House, South Shields 188,813

Source: Tourism North East

15.11. City centre hotel occupancies and achieved room rates in Newcastle are some of the highest in the UK and many city centre hotels are regularly denying business both during the week and at weekends. Corporate demand is strong and growing and the city is rapidly developing as a major national and European conference destination. The supply of hotel bedspaces increased by more than 40% between 2002 and 2007, with the opening of 12 new hotels146.15.12. Business tourism is an important and growing share of tourism sector - the potential to expand this market in the North East has been highlighted. NG and Durham City are the leading market destinations for Business Tourism in the North East. There were just under 1.4 million conferences held in the UK in 2006147 – of which around 50% were corporate events. 15.13. Most of the larger conference centres (e.g. Birmingham’s NEC, Edinburgh’s International Conference Centre) are in urban areas, benefiting from the supporting infrastructure for large scale events. The majority are owned and operated by the public sector because of the economic benefits generated.

145 2005 International Passenger Survey

146 NewcastleGateshead Hotel Futures study, Hotel Solutions, 2007

147 Sage Gateshead – Exhibition and Events Centre Feasibility Study – Tribal HCH


15.14. The number of UK exhibitions increased to just under 1,000 in 2005. In that year, there were 44 UK venues offering more than 2,000 sq.m of indoor exhibition space; the largest is the NEC in Birmingham. 15.15. There has been a significant growth in demand for exhibitions which are part of conferences (sometimes called the ‘confex’ segment). This segment generated around 90 exhibitions in 2005, with one-third focused on medicine, healthcare and pharmaceuticals. It has been identified as a potential growth opportunity for NG.15.16. NG’s central location and links to other attractions are positive attributes but there is an acknowledged lack of accommodation (constraining the ability to attract conferences/exhibitions for 1,500 delegates or more). There is an identified gap for a medium sized conference and exhibition centre venue of around 4-5,000 seats in NG148.15.17. The last ten years have seen significant growth in NG’s short break and business conferencing markets. NG has emerged as a major UK destination in both – yet it is clear that further investment is now required to -

further develop/refresh the visitor product – the reopening of the Hancock as the ‘Great North Museum’ will make a significant contribution but it will be vital to identify the ‘next wave’ of cultural investment as NG develops a new cultural vision/strategy; this could include the development of proposals for a World Heritage Site, centred on the Tyne Bridges (although the timing window is a narrow one) and/or the attraction of a further, national scale gallery or museum,

further develop the business conferencing infrastructure – a feasibility study is ongoing, alongside the EM to review the market opportunity for a new conference/exhibition centre, to develop a clear facilities brief and to identify a preferred site; a number of locations, including Science Central and the SAGE Gateshead are under consideration.

Science and technology

15.1. The ‘Innovation Nation’ White Paper149 highlighted the vital significance of science and technology to the UK economy. In 2007, the UK exported around £75 billion of knowledge services, representing a near doubling over the last decade. The UK’s share of the top 1% of cited papers in peer-reviewed journals is second only to the United States and we lead the G8 Countries on science productivity and efficiency measures.

15.2. According to Cancer Research UK, the UK is spending more per capita on cancer research than any other country in Europe. Yet the White Paper also highlights the increasing competition for mobile science and technology investments from China, India and the Middle East, driven by an increase in both the volume and quality of research.

148 North East England Business Tourism Action Plan (July 2007)

149 Innovation Nation – Science and Innovation White Paper, DUIS, March 2008


15.3. The sense that the UK punches above its weight in developing new innovations – but below its weight in commercialising them continues to pervade. The productivity of UK technology firms is growing at a much slower rate than their competitors – and some of the other challenges150

include:

a strong dependence on biotechnology, other life sciences and pharmaceuticals, which are facing increasing globalisation pressures; other global centres of technology and innovation have a much more diverse sectoral base (e.g. Silicon Valley) and are increasingly developing a business model which brings together innovation with service delivery;

many fledgling UK biotechnology or pharmaceuticals businesses are unable to secure funding for clinical trails and have to license their Intellectual Property to other players to achieve this; there have been some notable examples of ‘decapitation’ where small UK firms have been bought by larger organisations only to have their IP shelved, or destroyed;

many technology firms continue to report a lack of science based graduates – and this is resulting in the relocation of some UK technology firms to North America and South and East Asia where there are much larger pools of graduates, and technology businesses;

the availability of venture capital and other investment to support innovation; the returns on UK early stage technology companies are often low – and some UK venture capitalists now focus on the US market; and

a limited critical mass of higher value added manufacturing businesses – compromising the ability of UK technology firms to take product to market here.

15.4. In this context, the North East’s comparative under-performance on innovation is highlighted in paragraphs 3.85-3.108. Just under 10,000 people were employed in science and technology in NG in 2006 – around one-third of the regional total – but this includes a significant number of workers in architecture and engineering and software consultancy. When those are removed, the jobs figure is around 2,000. However, the wider Higher Education sector – which is of course inextricably linked – employs around 12,150 people in NG and has grown rapidly (+2,500 jobs or 27%) over the period from 1998-2007.15.5. Although the science and technology sector does not make a significant contribution to employment at present its potential has been widely acknowledged and underpins the Newcastle Science City initiative. Newcastle Science City – a partnership between Newcastle University, Newcastle City Council and One NorthEast – and is focused on four key areas of science: ageing and health – through the internationally recognised work of the

Institute for Ageing and Health, based at Newcastle General Hospital and focused on research themes including the biology of ageing; nutrition and oral health; experimental medicine and the links between ageing, health, society and technology;

150 Dr Nicholas Miles, Oxford to Cambridge ARC


stem cells and regenerative medicine through the North East England Stem Cell Institute, which brings together Newcastle and Durham Universities and the NHS; Newcastle Biomedicine; CELs and the International Centre for Life;

energy and environment, primarily through the work of the Sir Joseph Swan Institute which has a particular focus on low carbon energy; and,

molecular engineering, where the University is seeking to exploit opportunities for nanotechnology, plastic electronics and bioprocessing.

15.6. Four main strands of activity have been developed, with the aim of building on and accelerating the commercialisation activities of the University and the Centres of Excellence: Science Central – the science and technology-led redevelopment of

the former Newcastle Brewery Site – described in more detail in section 4 of the report;

the Innovation machine which will focus on encouraging technology start ups through a new approach to commercialisation which focuses on unmet needs; this has an ambitious target of creating up to 500 new technology businesses by 2025 and could have a physical presence as part of the Science Central project;

Science Enterprise – which seeks to accelerate commercialisation from within the region’s HE/FE sector and market these globally via exploitation of networks, communications and inward investment; and,

Education and public engagement – efforts are focused on promoting science and technology to school children and the wider public.

15.7. OECD151, IPPR152 and others highlight the importance and value of developing a long-term approach to building Newcastle’s reputation for the commercialisation of science and technology, citing productivity and output benefits. Both are more reticent about the short-term impacts on employment and output. 15.8. This theme is further developed in recent research by the Centre for Cities153, who, whilst noting that the Science City brand has been a catalyst for successful partnership working in York and Newcastle in particular, that a realistic assessment of the prospects for University-led growth is required:“but is it realistic to expect a powerful life sciences cluster to develop in the city? If not, how much time and money should Newcastle dedicate to trying to build one up? Unfortunately, the answer to the first question is that this seems unlikely – at least in the medium term. Life sciences activity tends to cluster disproportionately around the very best research universities (Library House, 2007), and while Newcastle University performs very well in research it does not rank alongside the likes of Cambridge, Oxford and others either in research performance or economic impact.”

15.9. In York, which has pioneered the collaborative Science City approach, ten years worth of investment has led to 100 start ups and 151 OECD Territorial Review of Newcastle and the North East, CURDS 2006

152 OECD Review of Newcastle in the North East: One Year On; IPPR North, 2007



created 3,000 jobs. Whilst the ‘Cambridge Cluster’ of technology firms is around ten times this size and employs 42,000 people – this is itself dwarfed by the sheer scale of the technology clusters in Shanghai or Malaysia154.15.10. In addition, despite the comparative lack of private equity investment in the North East, the public sector innovation and commercialisation landscape appears quite crowded, with the University, Centres of Excellence, NorthStar and Science City all having potential roles in the commercialisation process. BERR’s Business Support Simplification Process acknowledges that innovation is an important area of business support which can be fragmented and confusing for the customer.15.11. Science City – and the wider growth of the Higher Education sector in NG – represent significant and long-term opportunities for the economy of the twin cities, and for the region as a whole. OECD, IPPR and the Centre for Cities all highlight the reputational benefits that will accrue to NG – whilst adding a note of caution that a realistic approach must prevail which recognises firstly that the UK is facing increasing competition for research and commercialisation investment; and secondly that, international strengths in ageing and stem cell research not withstanding, some technology investments will continue to focus on the Cambridge/Oxford/M4 research triangle. 15.12. The EM will explore the ‘factor conditions’ which would require to be satisfied to attract a higher proportion of research, scientists and investment to NG.

15.13. NG’s Universities and Colleges are also increasingly significant employers and play a key role in attracting and retaining talent; they depend on NG’s continued vitality in order to do so. The EM will seek to identify both the academic and wider place factors to enable NG to become even more popular as a student destination.



16. THE NEWCASTLEGATESHEAD LABOUR MARKET

16.1. The demographics of Cities and the operation of labour markets have fundamental impacts on their competitiveness. The State of the Cities research155 argues that the wider demographic changes taking place in society create a strong environment for sustained population growth in cities“National population growth, the strong net immigration from overseas, the rapid growth of the ethnic minority population, the increasing proportion of younger adults without children, the growth in the financial services sector and rising participation in higher education all suggest bright demographic prospects for urban England, especially its larger cities.”

whilst recognising that other factors – including the lifestyle choices of an increasingly ageing population and an apparent inability to deliver affordable, family housing in urban rather than suburban locations – could mitigate against this.16.2. England’s population growth (the population increased from 46.8 million to 51.1 million between 1981-2007) has also been unevenly distributed; typically the population of London and the Greater South East has increased more rapidly than that of the other English regions but there have been periods when growth rates have converged. Most notably between 1991 and 1997 the population of the North fell, and again for the early part of this decade156. Migration from within and beyond the expanded EU has also been an important feature in recent years.16.3. At the same time, the Work Foundation157 note that the changes in the UK labour market have been driven by: structural change with the contraction of employment in manufacturing

and other traditional industries and the corresponding increases in service-based employment, some of which has created an increased demand for knowledge-based jobs,

technology driven change which has created and enhanced some jobs and removed others.

16.4. Whilst the population of some English Cities has increased since the mid 1990s, employment rates have also improved significantly over this period. The SEC158 research notes that“much of the increase in rates of employment was a reflection of the upturn in the business cycle. It should not, therefore, necessarily be regarded as an indication of increasing competitiveness.”


156 ONS, Census and mid 2007 population estimates




whilst highlighting the apparent disparity between high employment rates and low levels of productivity that appears to characterise the UK economy. Yet employment rates for those with low skills levels remain very low. We return to this issue later in section 4.

16.5. In considering NG’s urban competitiveness it is important to link the underlying structure of and changes in the economy with demographic change and the dynamics of the labour market; the SEC159 research captures this relationship:“human capital is the third essential ingredient of successful knowledge driven economies….the importance of a highly qualified workforce as a prerequisite to compete among the knowledge driven economies can hardly be over-emphasised. While many of the largest English cities have one or more universities and produce their own graduates, some have difficulties in recruiting and retaining them in their own local economies. Another critical underlying factor is the educational base. Indigenous educational strengths are important. But urban economies also need sectors that provide returns to education…. (emphasising) the need to encourage high quality, productive and knowledge based employment. In too many cases these types of employment are mainly provided by the public sector in northern cities… (creating) employment that provides greater returns to education…could encourage cultural and aspirational shifts in local attitudes towards education.”

16.6. Much of the agglomeration theory described in section 3 is relevant here. High rates of economic growth can be best sustained by a combination of increases in productivity and participation fuelled by a growing working age population. Firms locate in places where people want to live in order to optimise the pool of skilled labour. A wide pool of skilled labour can drive up productivity by increasing access to specialist skills. In turn workers are more willing to invest in acquiring specialist skills if they are able to access a wider pool of employers.16.7. The SEC competitiveness framework160 highlights the pivotal importance of labour productivity, employment rates and wage rates as the key indicators of the revealed competitive performance of urban economies; each contributes to the Gross Domestic Product or standard of living of a city or city region. 16.8. Yet we know that NG has achieved above average growth in economic output and employment over the last decade almost in spite of the underlying trends of a relatively low skills base (discounting the large student population), low workforce productivity and at best sluggish improvements in economic activity and employment rates, particularly in Newcastle. 16.9. In this context, section 4 considers: demographics and population growth; commuting patterns, including the relative earnings of both in-

commuters and residents; employment, self-employment and economic activity rates;


160 ibid


deprivation and worklessness; and, future labour demand.

Population and demographic change

16.1. The population of the North East actually fell from 2.64 million in 1981 to 2.56 million in 2007 (-2.7%), reaching a low point of 2.54 million in 2001 before an upturn. In comparison the population of England increased by 9% over the same period.16.2. In 2007, NG had a total resident population of 462,100, having declined from a peak of 497,600 in 1981161. The steepest decline was between 1993 and 2001 when the population fell by 5% through a combination of higher rates of net out-migration and falling birth rates. Gateshead’s population declined significantly during the 1980s and 1990s Newcastle’s population fell between 1981-1992; increased between 1992 and 1996 and then fell again between 1996 and 2001 before increasing again from 2005 onwards.

NG components of population change

-6,000

-4,000

-2,000

0

2,000

4,000

6,000

91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07Annual change

Total ChangeNatural ChangeMigration

Source: ONS Components of population

17. Source: ONS Components of population

17.1. Population change has been manifest quite differently across the Core Cities. Leeds saw a significant decline in population during the 1980s, followed by a period of stabilisation during the 1990s and a significant increase in this decade; in overall terms its population has increased by 6% between 1981-2007.

17.2. In contrast Manchester witnessed a steep decline in population throughout the 1980s and 1990s with an upturn commencing in 2000. In 2007 the City’s population, at 458,100, was still marginally less than the 1981 figure. Similarly Birmingham’s population fell into a long but comparatively shallow decline between 1981-2001 but has grown rapidly since then and has almost returned to 1981 levels162.

17.3. In contrast, Liverpool’s population has declined by 15.8% since 1981 and continues to fall, although the rate of decline has reduced

161 ONS Population data 1981-2007

162 ONS Population data 1981-2007


significantly during this decade. The following graph, from the SEC research163, highlights the changing demographics of some of the Core Cities, and London, during the 1990s:

17.4. During the late 1990s, the Cities accounted for just over 40% of population growth – a significant improvement on their performance during the 1980s. However London accounted for almost 80% of the total growth. Towards the end of the 1990s, the growth rates of the English cities began to converge; between 2004 and 2007 they were as follows: Manchester +5.1% Bristol +4.75% Leeds +4.4% Nottingham +3.7% Sheffield +2.6% London+2.3% Newcastle +1.7% Birmingham +1.5% Gateshead +0.05% Liverpool -0.4%17.5. Thus population growth has increased in a number of the Core Cities at a higher rate than London since 2004, overturning a long-term trend. However, there is considerable variation in the rate of growth across the Core Cities; only Birmingham and Liverpool performed worse than Newcastle. The rate for NG combined would be + 0.9%, behind Birmingham. 17.6. Some 65% of NG’s population – 301,000 residents – were of working age in 2007, slightly higher than the North East as a whole. A 163 State of the Cities, The Competitive Economic Performance of English Cities, Simmie et al, Department of Communities and Local Government, 2006


lower proportion of Gateshead’s population (61.5%) is of working age than Newcastle’s (65.7%). However, most of the other Core Cities have a higher proportion of their population of working age – Nottingham (69%), Manchester (68.8%), Bristol (67.9%); Leeds (65.6%) and Liverpool (65.4%) all outperform NG on this measure.17.7. Although more than one-fifth of the population of Newcastle falls into the 20-29 age group – this is the largest single group - a significant proportion of this group are students; NG has 107 students per 1,000 residents, more than 2.5 times the England average. Perhaps more significantly, there has been a significant reduction in the number of young people under the age of 14 over the last decade (-15% or -13,000) 164.17.8. The impact of in-migration on population change in NG is evidenced by the increase in National Insurance registrations of overseas workers, rising from just over 2,000 in 2002/03 to a peak of around 5,500 in 2006/07165. Tyne and Wear has accounted for the greatest increase in migrants coming to the region. However, the North East continues to under-perform in its ability to attract migrants; both Wales and Northern Ireland have received almost double the number of registrations of overseas workers. 17.9. Evidence suggests that a number of migrants are returning to their home countries and the rate at which new migrants are arriving is slowing, with an estimated 30,000 fewer migrant workers arriving in the UK in the second half of 2007 than 2006166. As economic conditions in the new member states improve in comparison to those in the UK and the Government seeks to apply more stringent migration policies which focus on the attraction of skilled labour, this trend is likely to continue.

Population forecasts

17.1. The latest sub-regional population forecasts167 suggest a continuation of the recent upwards trend in population growth for NG. Overall the population is expected to rise to 494,000 by 2031 - growth of 7%. Newcastle’s population is expected to grow by around 23,000 (+8%), Gateshead is also expected to experience growth but at a slower rate (+5% or 10,000 people). 17.2. The population of England as a whole is forecast to rise by 19% over the period, more than twice the projected growth for NG. Most significantly the working age population is expected to remain relatively unchanged (-0.2%), compared to a 9% increase for England as a whole; the proportion of children aged 0-15 is also expected to increase at almost half the rate for England, suggesting that a low working age population will be an enduring feature of the NG economy.

164 ONS 2007 mid-year population estimates

165 NINO Registrations to Overseas Nationals Entering the UK, DWP

166 Floodgates or turnstiles?, Post-EU enlargement migration flows to (and from) the UK, IPPR, 2008

167 ONS 2006 Based Sub-National Population projections


2006 Population Projections NG

96

98

100

102

104

106

108

2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

Inde

x of

pop

ulat

ion ch

ange

(200

6=10

0)

Total Population Working age

18. Source: ONS Sustainable Population Projections

18.1. The proportion of children aged 0-15 is projected to rise by 8% (+6,300) over the period 2006-2031, again below that for England as a whole (+14%). This will impact on the size of the working age population in the longer-term and could well reduce NG’s competitiveness in relation to some of the other Core Cities who have a younger and faster growing population.18.2. The older population, on the other hand (aged 65 plus) is forecast to grow by 34% (+25,000) over the period 2006-2031, compared to 63% for England as a whole. This could cushion the impact of increased demand for health and social services and for lifetime housing.

Commuting patterns

18.1. NG is the principal employment centre for a regional labour market that extends into Northumberland, Co Durham and Sunderland as well as the Tyneside conurbation. Despite the recent revival of “living in the city”, a traditional travel-to-work pattern prevails, with a large daily net inflow of commuters (especially into Newcastle) from a wide catchment area. 18.2. Over 100,000 people commute into NG every day168. This is reflected in very high job densities, particularly in Newcastle, where the number of jobs available is greater than the working age population (1.17 jobs per working age resident). 18.3. In fact this is the highest jobs density of all of the Core Cities – eclipsing even Manchester’s 1.15 – and reinforcing the critical importance of commuting in sustaining the Newcastle economy. In contrast Gateshead is a net exporter of labour – some of it to Newcastle; as are Birmingham, Liverpool and Sheffield.

168 ONS, Census 2001


In-commuting and out-commuting flows, NG 2001

-15,000 -10,000 -5,000 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000

Elsewhere in NE

Elsewhere in UK

South Tyneside

Sunderland

Durham CC

Northumberland CC

North Tyneside

NewcastleGateshead out

NewcastleGateshead in

19. Source: 2001 census

19.1. The charts show separate commuting flows for Newcastle and Gateshead, highlighting that: flows into Newcastle (88,900 in-commuters) are much larger than

those into Gateshead (41,500 in-commuters); in-flows from North Tyneside to Newcastle are larger than those from

Gateshead to Newcastle; inflows from County Durham to Gateshead are marginally larger than

those from Newcastle to Gateshead; and, over half of all out-commuters from Gateshead work in Newcastle, but

just 30% of out-commuters from Newcastle work in Gateshead;

In-commuting and out-commuting flows, Gateshead 2001

20.

-20,000 -15,000 -10,000 -5,000 0 5,000 10,000 15,000

Elsewhere in NE

Elsewhere in UK

North Tyneside

South Tyneside

Northumberland CC

Sunderland

Newcastle upon Tyne

Durham CC

Source: 2001 Census

Gateshead flows out

Gateshead flows in

Source: 2001 census


In-commuting and out-commuting flows, Newcastle 2001

-15,000 -10,000 -5,000 0 5,000 10,000 15,000 20,000 25,000 30,000

Elsewhere in NE

Elsewhere in UK

South Tyneside

Sunderland

Durham CC

Gateshead

Northumberland CC

North Tyneside

Newcastle flows out

Newcastle flows in

21. Source: 2001 census

Workplace and resident earnings

21.1. Workplace earnings is one of the key measures set out in the CLG competitiveness framework. As in other major cities, people who travel to work in NG from the outer suburbs and the countryside are more likely to work in higher level occupations and to earn more than local residents. There is a significant gap between workplace earnings and resident earnings.21.2. This notwithstanding, workplace earnings in NG are also substantially below the GB average. Average weekly workplace earnings in Gateshead stood at £396 in 2007, just 86% of the UK figure of £459. Earnings in Newcastle in 2007 were slightly higher at 90% of the UK average or £412 per week169. 21.3. NG falls bottom of the core cities league table in terms of workplace earnings at an average of £434 per week, compared to £491 in Manchester, £461 in Leeds, £458 in Liverpool and £452 in Sheffield. Since 2002 workplace earnings growth in Newcastle has kept pace with the regional and UK average, while Gateshead has enjoyed an even faster rate of growth (+20%) but from a lower base170.

Deprivation

21.1. Low average resident earnings – and persistently high levels of economic inactivity – contribute to poverty, deprivation and benefit dependency in NG, and to some of the most acute income disparities of any UK city (rank 49 of 56). Newcastle was ranked 37th most deprived local authority in the 2007 IMD, Gateshead was 52nd.

169 Source: Annual Survey of Hours and Earnings (ASHE)

170 Source: Annual Survey of Hours and Earnings (ASHE)


Area Total Number % of TotalNewcastle 173 69 40%Gateshead 126 44 35%City Region 1,089 371 34%North East 1,656 566 34%England 32,482 6,496 20%

Area Total Number % of TotalNewcastle 173 80 46%Gateshead 126 56 44%City Region 1,089 422 39%North East 1,656 631 38%England 32,482 6,496 20%

Within 20% most deprived in England 2004

Within 20% most deprived in England 2007Index of Multiple Deprivation, 2004 & 2007

22. Source: Index of Multiple Deprivation, 2004 and 2007

22.1. 40% of neighbourhoods in Newcastle fall with the 20% most deprived in England, compared with 35% for Gateshead, and the overall position on deprivation has improved. The SEC research171 notes that some cities can combine economic growth with acute deprivation, citing apparent polarisation in both Derby and Manchester.22.2. In ‘The Economies of Deprived Neighbourhoods172’ CLG suggest that the “relationship between local economic performance and concentrations of unemployment is complex. The ‘disconnect’ between some deprived neighbourhoods and the wider economy persists, unaffected by sometimes inappropriate and ineffective policy responses. The evidence suggests that the case for targeting job creation initiatives on disadvantaged neighbourhoods is not strong, because of the difficulty attracting businesses and substantial leakage effects, i.e. many new jobs will not go to the existing residents.”

22.3. A significant proportion of the population is still not benefiting from new economic opportunities. Many live in deprived communities which have become trapped in a cycle of deprivation, poor health, low aspirations, inter-generational unemployment and low skills. The EM will explore how to better connect Newcastle and Gateshead’s most deprived neighbourhoods to the economic opportunities in the urban core.

Employment, Self-Employment, Unemployment and Inactivity

22.1. Participation in the labour market is a central driver of economic growth not just because a larger workforce increases the productive capacity of the economy – by as much as 40% - but because it raises consumption and reduces the social and economic costs of worklessness.


172 The Economies of Deprived Neighbourhoods, North, D et al Department of Communities and Local Government, 2006


22.2. NG has made significant progress in raising participation in recent years; however there is still a large cohort of residents who remain disengaged from the labour market, many of which are concentrated in disadvantaged communities as discussed above.22.3. Evidence suggests that much of the recent growth seen in NG has been driven by increases in economic participation. However, while progress has been made less than optimal participation continues to act as a drag on growth – low participation is a key contributor to the output gap – together with low productivity this makes up around 80% of the gap in core cities173. 22.4. In June 2008 Newcastle had a much lower proportion of its working age population in employment – just 65.2% - compared to the regional (70.8%) and GB (74.5%) averages whilst Gateshead (74.8%) had a much higher employment rate174. This is well short of the Government objective of full employment (80%). To achieve even the current GB average would require an additional 16,800 Newcastle residents to enter the labour market.

Percentage of the Working-Age Population in Employment, 2008

50%

55%

60%

65%

70%

75%

80%

Newcastle Gateshead Tyne & Wear City Region North East GB

23. Source: Annual Population Survey, 2008

23.1. Just 6% of NG’s working age population are self-employed against a national average of 9%175. This is manifest in NG’s small business stock (see section 3). NG continues to under perform in this area which acts as a constraint on innovation and growth. Self-employment is notably higher in Bristol (10%) and Nottingham (7.4%)23.2. Economic inactivity in NG has fallen but remains stubbornly above the England average. This is demonstrated among all age groups, although strikingly over one-third of those age 50 to retirement age were classed as economically inactive in 2007, which is significantly above the national average176. The gap with the national average is also wide amongst those aged 25-49 years.


174 Annual Population Survey, 2008

175 Annual Population Survey

176 Annual Population Survey


23.3. NG’s total benefit caseload has dropped by 18% over period 2000-2008, a much faster rate of decline than the national average (-6%). In 2008 the benefit claimant rate was 18.5%177. This was markedly above the national average of 14.1% but slightly below the regional rate (18.8%). Nonetheless, a number of the other Core Cities have significantly higher rates – most notably Liverpool (25.9%), Manchester (21.1%) and Birmingham (21%).23.4. The most commonly claimed type of benefit in NG is Incapacity Benefit (28,500 claimants), followed by Jobseekers Allowance (9,300 claimants) and Lone Parents Benefit (7,400 claimants). 23.5. The IB claimant rate in 2008 stood at 9.7% of the working age population above the national figure of 7.1%, this accounts for 1 in 10 of the working age population. A large number of these claimants are aged 50 years plus, and 78% of claimants have been claiming for over 2 years and the proportion of Incapacity Benefit claimants in NG who have been claiming for over 5 years is significantly above the national average. 23.6. The IB caseload in Newcastle fell from a peak of 19,800 in 2002 to 15,800 in August 2008; Gateshead has seen a similar decline from 15,830 in 2001 to 11,900 in 2008.23.7. The number of Jobseekers Allowance claimants has fallen dramatically since the 1992 from 10.4% to a June 2005 low of 2.9% for Newcastle and, for Gateshead from 9% to a December 2007 low of 2.7%178. However, in the year from January 2008, the number of JSA claimants living in NG increased by almost 4,000. The composition of claimants is also likely to have changed significantly, with a significant number of people being made redundant for the first time.23.8. Whilst NG does have a greater proportion of Jobseekers Allowance claimants that the national average it has less long-term (2 years plus) claimants (2%) than the UK as a whole (4%). However, there are a greater proportion of younger Jobseeker Allowance claimants in NG, accounting for 34% of all claimants compared to a national average of 32%. 23.9. The majority of those commencing a new Jobseekers Allowance claim in NG are repeat claimants, suggesting a “revolving door” for many between benefits and low paid employment. This lack of ability of many individuals to sustain employment can be due to a combination of lack of support and lack of skills and opportunities to develop skills and progression opportunities in the workplace. 23.10. This is point is reinforced by research by Sheffield Hallam University179 which estimates that up to one million of the 2.7 million on Incapacity benefits in the UK should be regarded as the ‘hidden unemployed’ and would almost certainly be in work during times of ‘full employment’.23.11. However, recent research in Easington and Wansbeck by the Centre for Regional Economic and Social Research180 identified that the 177 Department of Work & Pensions Longitudinal Survey (WPLS) 178 Source: DWP Claimant Count

179 The Real Level of Unemployment 2007

180 Easington’s Incapacity Claimants; Wansbeck’s Incapacity Claimants, CRESR (2007)


majority of IB claimants feel that their condition prevents them from doing any work or limits the work that they could do. As the nature of worklessness changes, with new, perhaps more qualified people entering unemployment for the first time, maintaining long-term support for those most excluded from the labour market will continue to be a significant challenge.

Occupational structure, educational attainment and skills

23.1. A highly qualified workforce is a pre-requisite for local areas to compete in the knowledge driven economy. Higher skilled workers are more productive and provide the ideas which in turn lead to innovation. Skills are central to increasing employment, helping people stay in work and giving them the opportunities to get on in work. 23.2. Research181 demonstrates a powerful connection between skills and city growth and that the most important determinant of firm location is access to skilled workers. This was reinforced by the recent Leitch review182 which highlighted the need for the UK to urgently raise achievements at all levels of skills and commit to becoming a work leader in skills by 2020, requiring at least a doubling of current skills levels. The review also highlighted that employment opportunities for the lower skilled would significantly decline in future. This is especially pertinent in NG, as discussed below, given the projected grater demand for higher levels skills and a lower demand for people with no qualifications.

Occupational Structure

23.1. The demand for higher skilled workers is demonstrated by significant structural change in occupational classes during the 20th century. Elementary occupations have declined substantially and have been displaced by growth in managerial, professional and sales based occupations as cities become more successful in attracting knowledge intensive activities. 23.2. However, NG still retails a higher proportion of lower skilled occupations that the national average – 14% of the areas workforce is employed in elementary occupations, compared to national and regional averages of 11% and 13% respectively. NG has a higher proportion of its workforce in professional and sales/customer services occupations; however, much of this is made up of lower value call centre type employment. NG is also over-represented in admin and secretarial occupations – these sectors are also expected to decline in future. There are negligible differences in the occupational structure of Newcastle and Gateshead.23.3. Analysis of the workplace occupational structure of NG also reveals a deficit of higher level occupations; this is reinforced by earnings levels below other core cities (discussed above) and reinforces the view –

181 Glaser E and Saiz A (2004) the rise of the skilled city

182 Prosperity for all in the Global Economy – Work Class Skills, Lord Leitch, 2006


set out in section 3 – that NG has been less successful than other Core Cities in capturing high value, knowledge based employment. 23.4. There is also evidence183 to suggest that migrants employed in the UK are under employed – this could be applied to NG also. Many tend to be employed in administrative and manual services and in the hospitality sector and in low wage “entry level” jobs despite a large number having skill levels at NVQ3 equivalent level and above. Anecdotally the under-employment of students is also a significant factor.

Employment by occupation, 2007Employment by occupation, 2007

0% 2% 4% 6% 8% 10% 12% 14% 16%

elementary occupations

process, plant & machine operatives

sales & customer serviceoccupations

personal service occupations

skilled trades occupations

administrative & secretarialoccupations

associate prof & tech occupations

professional occupations

managers & senior officials

GB North East Tyne & Wear City Region NewcastleGateshead

Source: Annual Population Survey, 2007

24. Source: Annual Population Survey 2007

Labour Demand

24.1. Comparing the current occupational structure and skills base with future demand for labour is an important exercise. Forecasts of labour demand are not available at the local authority level; however, we can draw on regional and sub-regional information to provide a perspective of future labour demand in NG. 24.2. The Working Futures research184 suggests that over the period to 2014 net employment in the North East is forecast to grow by 27,000 with replacement demand – i.e. workers retiring or moving jobs - accounting for a further 369,000 jobs. 24.3. Demand for corporate management, managerial and professional, sales and customer service and health staff is set to increase whereas there will be a decline in demand for metal and electrical skills trades and manual and clerical elementary occupations. 24.4. The sectors/industries forecast to account for highest growth in jobs were call centres, other services, automotive and culture and

183 Floodgates or turnstiles?, Post-EU enlargement migration flows to (and from) the UK, IPPR, 2008, The Impacts of Migration – A View from the North East IPPR, 2008

184 Working Futures 2004-2014 Spatial Report


creative, albeit that the current restructuring of the economy brings some of this into question185.24.5. Similarly, for Tyne and Wear sales and customer services occupations were forecast to see the largest increase in employment over this period, followed by managers and senior officials, and professional occupations. Elementary occupations were forecast to bare the burnt of projected jobs losses. Jobs losses were also predicted for skilled trades and administrative and secretarial occupations186. 24.6. This is broadly in line with the forecasts developed as part of the Leitch Review of World Class Skills187 - achieving the aspirational target set by Leitch in terms of 90% of the adult workforce with at least a Level 2 qualification by 2020 would require an additional 71,600 working age residents to obtain a Level 2 qualification in NG. To achieve the corresponding Level 4 target would require a further 46,700 people to acquire a Level 4 qualification in NG. This is a massive challenge.24.7. There is already some evidence that recruitment difficulties and skills gaps exist. Tyne and Wear LSC has a higher incidence of skills gaps than the national average. In 2007 21% of employers reports skills gaps with in their current workforce. 24.8. More worryingly, in Tyne & Wear a high proportion of employers reported skills gaps among managerial staff. In terms of the types of skills lacking the most commonly reported –in order of importance - were: technical, practical of job specific skills; customer handling skills; problem solving skills and oral communication skills.188 There is a real threat of these recruitment difficulties and skills gaps increasing in future as the skills levels demanded by employers goes up, while skills levels in NG remain low, this is examined in more detail below.

Skills and Qualifications

24.9. North East GVA per worker for 2006 was around 85% of the UK average189, the second lowest regional proportion (only slightly ahead of Wales) – much of this low productivity can be attributed to low skills. We explore the position in NG in section 2 – where productivity per worker is skewed by the presence of larger firms. The NG position on skills is less favourable than the other core cities - the percentage of the population with at least a level 4 qualifications is 26.7% in NG, compared to 30.3% in Manchester, 27.6% in Leeds, 27.9% in Sheffield and a staggering 44.2% in Edinburgh190. 24.10. There are significant differences in the performance of both authorities on skills. Newcastle appears to have a well qualified pool of labour – 30.4% of the population have qualifications at NVQ level 4 (although this is in part skewed by the high student population many of

185 http://www.nerip.com/reports_briefing.aspx?id=656

186 Working Futures 2004-2014 Spatial Report

187 Prosperity for all in the Global Economy – Work Class Skills, Lord Leitch, 2006

188 Source: National Employers Skills Survey 2007

189 ONS, cebr analysis

190 Annual Population Survey, 2007


http://www.nerip.com/reports_briefing.aspx?id=656

whom are economically inactive or in further study). Of the Core Cities Bristol has an exceptionally high rate of residents with at least an L4 qualification (36%)24.11. The number of residents with intermediate (L3) skills in Newcastle is also above the GB average. Gateshead, on the other hand, performs poorly – just 21.1% of the local population hold degree level skills and there is also a deficit in terms of intermediate skills.

Qualifications – January 2007-December 2007

Newcastle Gateshead Great BritainLevel 4 or above 30..4% 21.1% 28.6Level 3 or above 51.7% 40.5% 46.4Level 2 or above 66.1% 63.3% 64.5Level 1 or above 77.7% 76.8% 78.1No qualification 13.3% 17.1% 13.1

25. Source: Annual Population Survey

25.1. The high proportion of residents with no qualifications among the prime working age group in NG which is of particular concern. The gap with the national average is widest amongst those age 30-39 years, 16% of this age group in NG have no qualifications, almost double the national figure (9%). As outlined above these low levels of skills in the working age groups act as a significant constraint on productivity and growth and the ability to attract high value firms to the area.25.2. Attainment of young people in NG is better than the national average – 75% of pupils in Gateshead and 67% of pupils in Newcastle achieved 5 or more GSCE passes at grades A-C compared to a national average of 65.3%. Attainment against other core cities is also favourable with both Newcastle and Gateshead outperforming the other core cities.25.3. However, when Maths and English are included attainment in Newcastle (39%) and Gateshead (47%) is lower than the national average of 47.6%. Pupils in Newcastle also under perform compared to regional and national averages at key stage 2 and 3191.

191 DCSF, 2007/08


26. THE NEWCASTLEGATESHEAD PROPERTY MARKET

Introduction

26.1. Workstream 1 is concerned primarily with the current and future prospects for the commercial office, industrial and retail property markets in NG. In particular, the analysis seeks to answer a number of key questions: what are the key drivers of the NG office market and which are its main

competitors? how will the recession impact on demand/supply of office space? does the City Centre office market compete with Team Valley and the

emerging opportunities at Baltic Business Quarter? is there a continued demand for industrial (B2) or warehousing (B8)

floorspace and where is this to be met in future as Team Valley and Newburn Riverside become mixed use locations?

how competitive is the Newcastle City Centre retail offer? What are the respective roles of the City Centre and Gateshead town centre and how can they complement each other?

what is the long-term potential for growth of retail provision? what role could the urban housing offer play in attracting and retaining

talent?

Office Market

Introduction

26.1. The estimated office stock for the Newcastle and Gateshead area at the end of 2007 was 11.0 million ft². This is roughly comparable with Birmingham Central and London Midtown. 26.2. In recent years Newcastle and Gateshead and the surrounding out of town areas have experienced a very buoyant office market with annual take up being sustained between 400,000 and 600,000 ft² per annum. 2008 was another successful year, albeit demand is now slowing due to the current global economic challenges.26.3. As the regional capital Newcastle has been the predominant location for major office development in the North East. For some firms, a City Centre location continues to be vital and many of the city’s larger office occupiers have been located there for some time. 26.4. The Newcastle City Centre office market is distinct from the Gateshead market, although the distinction is blurring. Gateshead has a much smaller supply of office accommodation – much of which has been centred on the Team Valley Industrial Estate. Here the mix of industrial and office space has changed with a number of former industrial premises


being redeveloped to provide offices, albeit achieving lower rents than City Centre floorspace. However, the development of the Baltic Business Quarter – to the north and east of Gateshead town centre – affords the opportunity to extend the central office core south of the river. 26.5. North Tyneside - and in particular the Enterprise Zone sites along the A19 have also have a significant impact on the market for offices in the NG urban core. Cobalt Business Park has been developed over the last ten years and offers good quality buildings, with good car parking and access to the Metro and to the A19. 26.6. Although take up in NG and the surrounding out of town areas has remained consistently at between 400,000-600,000 ft2 per annum, office take up rates in the wider Leeds, Manchester and Edinburgh areas were much higher, if more fluctuating, between 2000-2008, and prime rents, particularly in Manchester and Edinburgh, are significantly higher:

Prime Office Rents: City Comparison

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

2000 2001 2002 2003 2004 2005 2006 2007 2008

Year

£'s

per f

t²

Newcastle and GateheadLeedsManchesterEdinburgh

27. Source: King Sturge

Demand

27.1. Despite Newcastle’s dominance as a regional office location the current equilibrium between supply and demand has not always been in place. During the recession of the early 1990s, there was a clear over-supply of office space on the market – driven in part by the completion of major developments at East Quayside and elsewhere in the City, supported by the former Tyne and Wear Development Corporation. 27.2. Over-supply acted to constrain rental growth during the late 1990s and consequently the amount of new floorspace coming onto the market fell significantly during this period. As demand increased in the early part of this decade - driven by a combination of growth in financial services, consolidation of the professional/business services sector and public sector relocations – the supply of new floorspace has increased in response, although the majority of this space continues to be pre-let or purpose built rather than built speculatively, is also tends to be


Office Market Take Up Rates: City Comparison

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

2000 2001 2002 2003 2004 2005 2006 2007 2008

Year

Take

Up

Rat

e (ft

²)

Newcastle and GatesheadLeedsManchesterEdinburgh

undertaken by regional rather than national developers. The availability of land – particularly in the City Centre – also serves to limit supply. We explore this later in this chapter.

Office Completions in Newcastle and Gateshead

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1000

Year

000s

ft²

Pre-let/PBlds

SpeculativeCompletions

Office Market Take Up Rates: Newcastle City Centre and Gateshead Town Centre

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

2000 2001 2002 2003 2004 2005 2006 2007 2008

Year

Take

Up

Rat

e (ft

²)

Newcastle andGatesheadCentre

Out of town

Total

Source: PROMIS

27.3. Over the period 2000-2008 take up in central Newcastle and Gateshead has averaged at around 210,000 ft². Newcastle has been successful in attracting the back office functions of a number of major financial services companies – including RBS and GE Money – with relocation driven by comparatively cheap wages and property costs. 27.4. At the same time the growth of the professional/business services sector – through both the consolidation of the property requirements of existing firms and the creation of new regional offices for others – has also been key. PWC, Sitel, Wise Speke, Eversheds and Dickenson Dees all employ over 250 staff in the city and have created demand for large floorplate office accommodation in the City. However, most of the larger firms have now upgraded their offices and, like financial services, this sector is not expected to drive demand in the next 2-3 years.


27.5. Take up in central Newcastle and Gateshead in 2008 was 172,000 ft², an increase from 2007 despite the slow down in economic conditions and a significant drop on office space requirements. 27.6. Although demand has tailed off during the second half of 2008, the longer-term trend, coupled with a limited supply of large floorplate, Grade A quality office space entering the market has seen a significant increase in City Centre prime office rents which have effectively doubled over the past decade. At the end of 2008 Grade A office space was achieving £23.00 per ft².

Office Market Prime Rents

0

5

10

15

20

25

Dec

-96

Dec

-97

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Date

Rent

al V

alue

(£ p

er ft

²)

NewcastleGateshead

27.7. Until recently there has been little demand for office space in Gateshead Town Centre, due to the lack and quality of the office stock. Office requirements for Gateshead have traditional have been focused on Team Valley, as a result of the competitive rents and good quality stock.27.8. At present Gateshead is regarded as a clearly separate market by developers and occupiers alike and has not achieved comparable rents to the City Centre. However, the recent letting of over 100,000 ft² of new office accommodation to nPower and further space to the Open University could well be the catalyst to change perceptions of Gateshead – and Baltic Business Quarter –as an office location. Baltic Business Quarter offers a compromise between close proximity to the City Centre as well as out of town parking and other facilities. The scheme is now quoting asking rents of £17 per ft².27.9. Generally rental growth has not been as significant as in the City Centre – asking rents have increased from around £11 per ft2 to £16.50-£17 per ft2 over the last decade – yet demand, particularly for the North Tyneside Enterprise Zone sites, has remained strong with several major lettings to both public and private sector occupiers.27.10. Cobalt Business Park has continued to attract occupiers including some formerly in the City Centre or who would have undoubtedly have considered the City Centre as an investment location. In 2007 there were major lettings to North Tyneside Council (114,000 ft²) and Newcastle Building Society (50,000 ft²) – formerly in the City Centre - whilst GE Money extending their presence on Cobalt by taking a further 100,000 ft². The adjacent Quorum site has also seen some significant lettings over the


past 12 months, including 30,000 ft² to MWB Business Centres and 9,935 ft² to Aesica Pharmaceuticals. 27.11. The attraction of cost-sensitive back office/call centre operations (e.g. GE Money, EDS) has been a result of the significant incentives (primarily tax allowances and rent free periods) which have resulted in average rents (over a 15 year term) being reduced by approximately one third from the quoting figure of £17 per ft2. The City Centre market cannot compete on the basis of cost. In addition, unlike other Enterprise Zone sites, the quality of new development has been very high (most new buildings have a BREEAM ‘excellent’ rating) and public transport access is good.27.12. The North Tyneside Enterprise Zone will continue to attract occupiers seeking low cost/good quality accommodation for whom a City Centre location is less important. It is undoubtedly the most cost effective business location in the north of the region.27.13. Business Parks without EZ status such as Newburn Riverside and Newcastle Great Park have also continued to attract tenants with Esh Plaza’s recent announcement of the 37,500 ft² pre-letting to the NHS in the first quarter of 2008.

Supply - Newcastle

27.14. As we highlight in the introduction, the over-supply of Grade A office accommodation in Newcastle City Centre which was prevalent in the 1990s has reversed in recent years – and this has, until very recently, driven the trend of many schemes being substantially or entirely pre-let during construction.27.15. Much of the new office development since the late 1990s has taken place in out of centre locations – including the A19 corridor sites, Newburn Riverside, Great Park and Team Valley – as a result of the difficulties associated with assembling city centre sites, lower out of town land values and, in the case of the North Tyneside Enterprise Zone, a range of developer and occupier incentives.27.16. Dealing firstly with City Centre supply, there are now three core office locations: The traditional core business area around Grey Street and Pilgrim

Street; The Quayside and the western fringe around St James’s Boulevard;

and, Gallowgate.27.17. The traditional core business area around Grey Street and Pilgrim Street is generally made up of period buildings that comprise small suites. These buildings tend to suffer from functional and physical obsolescence. Agents have reported, in the past, difficulties in letting these buildings due to their small floor plates and lack of parking. There are also a number of 1960s/70s buildings adjoining the Grainger Town area which have been


refurbished in recent years, partly due to a lack of modern supply. These include, most notably, Cathedral Square in 2004. 27.18. The Quayside area, to the east of the Tyne Bridge, has witnessed a significant change of over the past two decades. There have been a number of high quality office developments attracting occupiers by offering high car park ratios and a high quality environment – and new schemes are continuing to come to the market.27.19. In 2005 the mixed use Trinity Gardens scheme was completed, providing 115,000 ft² of office space along with retail, residential and hotel uses. More recently Argon/Whelan have brought forward the East Quay 5 scheme – providing around 35,000 sq.ft of accommodation – and it is anticipated that this will be ready for occupation in March 2009.27.20. The completion of the St James Boulevard has opened up a number of sites around Gallowgate and the area to the west and south of Central Station for office development. Major developments in this area include: phase 1 & 2 of the Citygate scheme which in total produced 156,000 ft²

of office space; St James’ Gate (145,000 ft²); the recently completed Time Central (83,000 ft²); and, the cube (24,500 ft²) 27.21. At the end of 2008 Mandale completed the West One scheme at Forth Banks. This is quoting asking rents of £18 per ft², due in part to its off pitch location and the perception that the building is not of Grade A specification.27.22. There are two schemes currently under construction in the city centre, namely Wellbar Central and Fusion, Clavering Quarter. Wellbar Central will provide a 9 storey office building providing 120,000 ft² of Grade A accommodation and is expected to complete at the end of 2009. 27.23. In addition, there is the Haymarket Hub, which is a speculative mixed use development. The scheme comprises the redevelopment of the Metro Station at the north end of Northumberland Street to provide a multi story building providing improved station facilities as well as ground floor retail and leisure and 3 floors of office accommodation totalling 28,738 ft²; the office component is therefore coming forward as part of a mixed use scheme with an anchor tenant and is expected to be completed during 200927.24. Downing Developments is to speculatively develop approximately 75,100 ft² of offices at Gallowgate along with a major pre-let (100,000 ft²) to Newcastle Business School with completion of this phase anticipated by the end of 201027.25. Buccleuch have commenced groundworks at Fusion although the redevelopment of the former British Engineering and Manufacturing Company site had been put on hold given current market conditions. It is not known when this project will be completed.


27.26. In total, we estimate that no more than around 120,000 sq.ft of City Centre office space will be completed and come onto the market in 2009. In addition, there are a number of City Centre schemes with planning permission: in November 2008, Silverlink gained planning permission for the 10

acre Stephenson Quarter; this mixed use scheme to the south of Central Station will comprise 280,000 ft² of office space in addition to a new four-star Crowne Plaza hotel, another boutique hotel, 155 flats, art gallery space, a new post office sorting facility, shops, restaurants and a 300-space multi-storey car park;

Hanro’s Strawberry Place mixed-use scheme has Travelodge as its anchor hotel but the serviced office provider Stonemartin has now withdrawn; the developer is now looking to achieve pre-lets of over 60% on the space before starting construction and as such completion must be considered unlikely during 2009; and,

Hanover Square – a 20,049 ft² office building – has been on the market seeking a pre-let, has been marketing the site for circa 2 years and has not secured a pre-let, so timing of delivery of this scheme is uncertain.

27.27. At City Road, Buccleuch has masterplanned a mixed use scheme which will incorporate 100,000 ft² Grade A office accommodation to sit alongside one or possible 2 hotels. However development of this site will not commence until the Fusion scheme is completed – and with the latter on hold, it is far from certain when the Tyne Tees site will come to the market.27.28. In addition, of course, Newcastle Science City Partnership, a public sector joint venture, is formulating a masterplan for a science park on 19.6 acres at the former Gallowgate brewery site in Newcastle. The scheme as originally conceived proposes to deliver 1.25million ft² of dedicated science space; 540,000 ft² of serviced offices; 155,000 ft² of retail and leisure space; 1,423 units of student accommodation; 60,000 ft² of educational space; two hotels; and 2,412 residential units – although as configured a substantial level of public sector subsidy would be required to bring the site forward for development. 27.29. It is likely that the mix of uses will be reconsidered to reduce the requirement for gap funding, including considering the long-term demand for science floorspace. The CDC is working with Science City to develop proposals for the first phase of the Science Central project which is likely to include incubation facilities.

Supply – Gateshead

27.1. In Gateshead, office development has traditionally been focused on Team Valley, which had Enterprise Zone status during the 1980s and 1990s. Today many international companies, lured by cheap rents and good out of town office provisions (i.e. high car park ratios), are based here. These include HSBC and TNT who set up a new call centre in 2006. 27.2. UK Land Estates has over 200,000 ft² masterplanned for their scheme at The Point and Phase 1 will comprise 60,000 ft², although the


scheme has now been put on hold – almost certainly until Queens Court is fully let - with completion not expected before 2010. 27.3. Traditionally Gateshead Town Centre has not been a major office location although it is estimated that there is around 100,000 ft² of poor quality accommodation in and around the town centre, including the 1960’s blocks on Sunderland Road, one of which is occupied by DHB which provides serviced office space.27.4. However, Terrace Hill has been appointed as preferred developer by Gateshead Metropolitan Borough Council for the development of the 139,355 m² / 1.5 million ft² at Baltic Business Quarter, on the banks of the Tyne. The Baltic Business Quarter will offer City Centre office space with the benefits of an out-of-town business park – including high levels of car parking provision. The scheme has been anchored by Gateshead College - which opened in 2008. 27.5. The Open University has also purchased a 20,000 sq.ft unit and Baltimore House, a speculative 24,000 ft² office block, has also just been completed. 27.6. Baltic Place is a scheme by City & Northern and the Robertson Group with two speculative office buildings totalling 131,000 ft², comprising two eleven-storey tower blocks linked by a shared entrance foyer and underground car park with 100 spaces. This is likely to be the only scheme completed at Baltic Business Quarter during 2009.

Supply – out of town

27.1. With a distinct lack of Grade A stock in Newcastle city centre in recent years there have been an increasing number of occupiers seeking out of town floorspace, where there is a much greater supply of Grade A accommodation. There is currently 255,000 ft² available at Cobalt and 275,000 ft² at Quorum over several buildings. Cobalt is now one of the largest business parks in the UK with a further 1.2m ft² built-out with proposals for a further 1.3 million ft² master planned as part of the Atmel site which has recently been acquired around 1 million ft² now constructed and planning consent for the scheme to double in size.27.2. Quorum Development Partners have recently raised a further £75 million of investment which will bring forward the construction of the rest of Quorum. This new development will provide a further 451,000 ft² of varying sized buildings over the next four years. 27.3. At Newcastle Great Park, up to 3 million ft² can be developed.27.4. The large out of town office parks (Team Valley, Cobalt and Quorum) attract both local and national companies on the back of their competitive cheap rents and out of town service provisions (i.e. high car parking ratios).


Industrial market

27.1. The decline of Newcastle's and Gateshead’s historical industrial/manufacturing base has led to the redevelopment of a number of former industrial and warehousing sites for other uses, most notably offices and retail. This has resulted in a more dispersed pattern of industrial occupation. 27.2. Team Valley remains a regionally significant location for manufacturing and engineering activity, comprising over 700 acres adjoining the A1. Enterprise Zone status played a key role in stimulating development at Team Valley during the 1980s and 1990s.27.3. Over 550,000 ft² of industrial units have been completed since 1998 with major occupiers including Royal Mail, York International, Del Monte and Headlam Flooring. UK Land Estates completed Queen’s Court in the last quarter of 2008, which is a new development consisting of 6 units totalling 100,000 ft². Prior to this, UK Land Estates’ developed Princes Park in 2001 and City & Northern built a 20,000 ft² speculative scheme in 2003.27.4. Whilst the site is almost built out a number of areas have been redeveloped for a broader mix of office and retail units and it is likely that the ‘reinvention’ of the industrial estate will continue, with UK Land and others seeking to capitalise on a well established, high profile location.27.5. Follingsby Park Industrial Estate, located adjacent to the A194(M), has good links to the A1 and A19, and unlike Team Valley Trading Estate has mostly large scale units. Just under 500,000 ft² of industrial floorspace has been completed since 2000. The park is home to a number of important occupiers including; Fila UK, Northern Electric, Mailcom, Logistics North East, Royal Mail and Pioneer Food Distribution.27.6. Newburn Riverside Industrial Park, which lies 4.5 miles west of Newcastle City Centre, is the other major industrial location in NG. Completed developments on the park include a 65,000 sq ft production and distribution unit for Stannah Stairlifts in July 2005, and a speculative development by UK Land Estates in April 2006. Other occupiers at the Park include MacFarlane Packaging, DEFRA, ONE North East and the North East Ambulance Trust. 27.7. Caddick Developments is constructing 180,000 ft² of speculative space over 12 units between 5,000 ft² and 50,000 ft². It is due to complete in the first half of 2009.27.8. Newburn Riverside was originally to have a strong focus on advanced manufacturing although the development has evolved into a mixed use scheme – in much the same way that Team Valley is also evolving. 27.9. Walker Riverside provides a range of specialist port and marine/offshore related infrastructure and is the home of three key marine employers- Duco, Wellstream and Shepherd Engineering. In 2008, Wellsteam completed their 60,000 ft² purpose-built unit at Walker Riverside Industrial Park and the estate also includes small starter units.


Demand

27.1. Take up in the Newcastle Gateshead area was estimated to be 378,000 ft² in 2007, which is up by 17% from the 2006 figure of 323,000 sq ft. 27.2. Although in 2008 there have been few deals over 50,000 ft², the 170,000 ft² pre-sale to the Co-op in Gateshead, along with a couple of medium sized deals at Follingsby Park, has meant that take up for 2008 will be slightly above the five year average. 27.3. Prime rents in Newcastle and Gateshead currently lie at £5.50 ft² and have remained unchanged for the past few years. Over the past decade the Newcastle Gateshead area has witness greater rental volatility compared to the national average.27.4. There has been a significant reduction in the number of Industrial requirements over the past six months, due to the weakening economic conditions. There is expected to be a surplus of industrial stock come on to the market in 2009, resulting in longer void periods and a small drop in industrial rental values.27.5. The combination of Newcastle and Gateshead’s, geographical location and poor motorway links mean that it holds little attraction for distribution and logistics firms except on a very localised basis. Consequently the market share for such space is well below the national average.

Supply

27.1. The following diagram illustrates there has been a steady provision of industrial space for the past 6 years across Newcastle and Gateshead, with supply peaking in 2007 at 768,000 ft².

NG Industrial Market


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2003 2004 2005 2006 2007 2008

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s ft²

Completions

28. Source: PROMIS

28.1. According to Promis there is a substantial pipeline of industrial development in Newcastle, Gateshead and North Tyneside – around 8.3 million ft² - although only 270,000 ft² is currently under construction. A further 5.1 million ft² has planning consent but it must be considered unlikely that the majority of this floorspace will be constructed unless pre-lets can be secured.28.2. The largest scheme with planning permission is at Cobalt South in North Tyneside, where outline consent has been granted for around 975,000 ft² of industrial development. Phase 2 of the park, totalling around 374,000 ft², also has outline planning permission. 28.3. There are a number of other large pipeline schemes located in North Tyneside. These include additions to Tyne Tunnel Trading Estate, Cobalt Business Park and Gosforth Business Park. The Orion Business Park, which commenced development in 2007, has seen more than 140,000 sq.ft of speculative development constructed. The second Tyne Tunnel, due to open in 2011, will alleviate local congestion and could lead to a resurgence of demand at the Tyne Tunnel Trading Estate and the adjoining area.

Retail market

Newcastle

28.1. Newcastle City Centre has a catchment population for comparison (non-food) shopping of just over 1.4 million people – encompassing much of Northumberland, County Durham as well as Tyne and Wear - and estimated comparison retail sales of over £1.43 billion. 28.2. Newcastle has an above average supply of retail floorspace (2.42 million sq.ft) for its catchment population. The city’s prime retail pitch lies between the Eldon square entrance on Northumberland Street, along Eldon Way and Douglas Way, and into Blackettbridge. Northumberland Street, the historical prime pitch, is host to a number of national multiple retailers, including Marks and Spencer, Primark, Next, H&M and Fenwicks.


28.3. Eldon Square is by far the largest of the City Centre’s four managed shopping centres and, at just over 960,000 ft2 accounts for approximately 40% of the total City Centre retail floorspace.192 The mall is jointly owned by Newcastle City Council and Capital Shopping Centre. It is situated on a sloping site and has a complex internal layout on a number of different levels. A John Lewis department store is located in Eldon Square, along with Waitrose, Fenwick, Marks and Spencer, which all have entrances into the centre. The other main shopping centres are: Monument Mall, owned by St Martins Properties and providing 125,000

ft² of gross retail floorspace over 4 floors with frontages onto Northumberland Street and Blackett Street; although historically Monument Mall has suffered from a high turnover of tenants, the attraction of TK Maxx and JJB has stabilised the situation.

Eldon Gardens, which is linked to the north-western corner of Eldon Square, provides 79,000 ft² of gross retail floor space and is owned by the Peer group; focusing on quality niche retailers, its tenants include Crombie, Ortak Jewellers, Rohan, Lakeland Ltd and the Sony Centre but it has also suffered from high turnover rates.

The Newgate Shopping Centre, which is the smallest and oldest of the city centre malls, is situated south of the city centre’s prime retail pitch and owned by McAleer & Rushe, providing 50,000 ft² of gross retail floorspace; despite its refurbishment in 2003 it is considered dated and tenants include Halfords & Games Workshop, along with a number of independent retailers.

28.4. In addition, there are a number of important retail areas adjoining the prime pitch including Grainger Street, Grey Street, Market Street and the Central Arcade. A substantial proportion of the city’s quality fashion retailers such as Reiss, Coast, Jigsaw, Kurt Geiger, French Connection, T M Lewin, Oasis, Karen Millen and Sassoon Salon locate here. 28.5. Newgate Street is now considered a secondary retail location with retailers including Wilkinsons having taken space there. West of Newgate Street The Gate provides the City Centre’s main leisure complex, housing a 12 screen cinema, a casino and a range of restaurants and bars.28.6. Prime rents in Eldon Square are around the £330 per ft² ITZA mark and prime rents from Northumberland Street to Greys Monument range from between £200-£330 per ft² ITZA. 28.7. Rental growth in Newcastle has outperformed the majority of the core cities – and current rental levels are significantly higher than in Manchester – where Zone A rents peaked at £315 per ft2 and are have now fallen to around £295 per ft2.

192 PROMIS Newcastle upon Tyne Retail Report 2008


Retail Market Prime rents

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ents

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Newcastle-Upon-TyneGateshead

28.8. Newcastle’s city centre’s main retail completion comes from the MetroCentre, which was the first of the large out-of-town regional shopping centres. The centre was extended in 2004, is nearly 2 million ft² in size. Anchored by House of Fraser, Debenhams and Marks & Spencer, it provides a range of multiples. In addition, it has a number of leisure provisions, including a multiplex cinema, a bowling alley, an amusement park, and several pubs and restaurants. 28.9. The Metro Centre experiences strong demand from retailers, with prime rents being broadly similar to those in Newcastle city centre, at around £335 per ft² ZA. 28.10. In 2009 the UK economy witnessed a significant economic downturn and the outlook for consumer expenditure growth looks poor. Consequently the environment for retailers across the UK, over the next two years, will undoubtedly be difficult. The consolidation of the high street banking sector and the increased completion from the internet has resulted in retailers facing significant cost pressures. 28.11. As a result, the retail sector as a whole is forecast to see a slight drop in rental values over the next two years. The out-of-town market is due to fair slightly better, due to the restrictions in supply, compared to the in-town market, where there is a significant amount of floor space coming on to the market over the next few years. So far, prime rents have remained steady but the expansion of Eldon Square, which will have increased in size by a third by 2010, could have an impact.28.12. The City Centre has already seen a significant reduction in retailer requirements for representation in the City Centre. As of November 2008 this figure was at its lowest for a decade and 8.3% of City Centre retail units were vacant - higher than the corresponding figure in 2006. 28.13. Despite the downturn, work is underway on the final phase of the Eldon Square extension which will create an additional 323,000 ft² of gross retail space. The first stage, which was completed in autumn 2006, involved the creation of new units on the eastern side of Blackett Bridge


and two restaurant units on the Old Eldon Square, now let to Strada and Wagamama’s. 28.14. The north extension, which completed in mid February 2008, involved the redevelopment of the former bus station. This part of the mall now leads to the newly landscaped Old Eldon Square. The final stage, which is due for completion in 2010, will create a new 180,000 ft²mall at the southern end of Eldon Square called St Andrews Way. Debenhams and Waitrose have signed up as the anchor tenants and the majority of the space is now pre-let – so should be somewhat sheltered from the current economic condition. 28.15. The City Council, as part of its preparatory work on the Local Development Framework, has forecast significant capacity in the City’s provision of comparison floorspace by 2016, based on modest population growth within the City Centre retail catchment – but a significant increase in catchment spending of some 31% over this period. 28.16. Based on various market share scenarios embracing both the City Centre and the Metro Centre, the increase in catchment spend has been translated into capacity for an additional 75,000 sq.m of comparison floorspace over the period to 2016. The East Pilgrim Street area has been identified by the City Council as a location with the potential to meet this requirement. 28.17. The area is in multiple ownership, but Brookfield (formerly Multiplex) and its joint venture partner Aldersgate own around 17 acres of the 42 acre site and are working up plans. Brookfield have proposed a retail-led, mixed use scheme that could accommodate up to 700,000 ft² of retail space with the aim of extending the prime retail pitch from New Bridge Street to the Swan House roundabout. 28.18. The scheme would target high end fashion retailers and other quality multiples not currently represented in the City, as part of a mixed use destination. Thus East Pilgrim Street would compete with Grainger Street, Market Street and Grey Street for occupiers of this type and could have a significant impact on those locations outside the prime retail pitch.28.19. However, the recession will of course impact on both occupier demand and on the catchment expenditure assumptions upon which this future requirement is based; at present the East Pilgrim Street scheme is expected to commence construction in 2014; it is highly likely that the scheme will be pushed back several years at the very least.

Retail choice


2008Rank

2018 Rank

Total Comparison

Spend

Total Comparison

Spend

% Spend Gain

2008 2018

London West End 1 1 £5,347,830,712 £4,874,965,161 -9%Glasgow 2 2 £2,331,692,868 £2,386,044,798 2%Birmingham 3 3 £2,135,419,378 £2,197,103,694 3%Manchester 4 4 £2,092,705,293 £1,985,732,106 -5%Liverpool 5 7 £1,989,748,030 £1,929,404,340 -3%Nottingham 6 6 £1,722,639,411 £1,946,852,048 13%Leeds 7 5 £1,679,812,753 £2,003,762,991 19%Edinburgh 8 10 £1,666,075,446 £1,677,596,623 1%Bluewater 9 9 £1,550,272,844 £1,649,977,770 6%Cardiff 10 8 £1,528,533,853 £1,718,473,278 12%White City 11 12 £1,436,694,964 £1,422,999,737 -1%Newcastle upon Tyne 12 11 £1,432,998,469 £1,653,223,910 15%Norwich 13 13 £1,384,715,982 £1,370,202,580 -1%Bristol 14 14 £1,276,036,745 £1,210,566,068 -5%Southampton 15 18 £1,239,819,025 £1,119,737,998 -10%

29. Source: Experian

29.1. There is some evidence to suggest that Newcastle is under-represented in high end fashion retailers compared with other cities, including Leeds and Manchester. Research developed in support of Newcastle’s LEGI bid in 2006 suggested that, using a ‘Retail Variety Index’, Leeds typically has more stores (i.e. more choice) than Newcastle in most aspects of its retail offer. Newcastle ranks just 12th in Experian’s 2008 ranking of major shopping centres as a result, behind other centres including Liverpool and Cardiff

Gateshead

29.2. Gateshead town centre plays a very different role and offers a wholly different mix of retail provision from Newcastle City Centre. The Gateshead 2002 Retail Capacity Study estimates the net retail floor space within the Town Centre to be 288,000 ft² and estimates that the catchment population for the purposes of comparison retailing is just 88,000 – highlighting the significant degree of leakage of expenditure to both the Metro Centre and the City Centre. 29.3. In 2007 the total in-store comparison retail expenditure was only £191 million, significantly below the average for a town of its size.193 In comparison, Newcastle’s is £1.4 billion. Prime rents in Gateshead town centre are quoted as £33 ft² Zone A - around 10% of those in Newcastle City Centre.29.4. Gateshead is no longer the important comparison shopping centre it was during the 1970s; today the town centre meets the convenience

193 PROMIS Newcastle upon Tyne Retail Report 2008


retail needs of the local population. The retail offer is focused on four principal retail areas, namely: The Interchange Centre; Jackson Street; Trinity Square; and, Tesco.29.5. All four areas have a similar retail mix, combining basic convenience provision with lower middle fashion, pharmacies, banks and building societies and charity shop. Most of the accommodation in the town centre is outdated, small units which are ill-suited to the modern requirements of retail occupiers. 29.6. Reef Estates recent redevelopment of the former Co-Op department store represents the first major investment in the town centre for 20 years. The 110,000 ft² scheme has secured lettings to traders including Argos, Peacocks and Halifax Bank of Scotland. A new surgery, backed by Gateshead PCT, has also taken space however 6 units remain un-let.29.7. In 2007 Gateshead Metropolitan Borough Council, in partnership with Spenhill, Tesco’s development arm, submitted plans to redevelop the Trinity Square area. The scheme will include 40 shops, cafes, bars and restaurants as well as student accommodation, offices and a hotel. It aims to strengthen the role of the town centre whilst complementing, rather than competing with major schemes in Newcastle City Centre.29.8. The vast majority of retail space requirements for Gateshead are for the out of town, Metro Centre or Team Valley Retail World. As a retail location, the town centre is not widely recognised by the retailer requirement lists of any national, higher quality brands.


VenueScore 2007 Retail Rank

Score Rank

Manchester 419 2Birmingham 418 3Nottingham 357 6Liverpool 282 12Newcastle Upon Tyne 266 15York 247 21Cardiff 242 23Gateshead, Metrocentre 241 25Gateshead, Team Valley 60 414Gateshead 39 628

Retailer Requirements

0

50

100

150

200

250

300

350

Apr

-98

Apr

-99

Apr

-00

Apr

-01

Apr

-02

Apr

-03

Apr

-04

Apr

-05

Apr

-06

Apr

-07

Date

No.

of R

etai

ler R

equi

rem

ents

Newcastle Gateshead

Housing market

29.1. Richard Florida194, Charles Landry195 and others have argued that quality of life, including but by no means limited to the housing offer, is one of a number of factors which impact on economic competitiveness and in particular the ability to attract and retain skilled knowledge workers. For Florida, non-market lifestyle factors are having an increasingly significant impact on where those more economically mobile (and talented) individuals choose to settle.29.2. The link between quality of life/quality of place and economic growth has been an important focus of the Northern Way. Research196 on the quality of the residential offer in Tyne and Wear found that: Gateshead and Newcastle have separate and quite distinctive markets;

this view is supported to some extent by travel to work patterns (see section 3)

Newcastle has strong links with North Tyneside and the southern part of Castle Morpeth district, whilst Gateshead forms a separate housing market area with Derwentside

Historically, average house prices across the City Region have been around 2/3rds of the England and Wales average.

29.3. In Newcastle there is a strong distinction between the popular/leafy inner suburbs of Gosforth/Jesmond/Sandyford and Heaton and the remaining communities to the west – Elswick, Benwell, Scotswood - and east (Byker and Walker) which have a mix of deprivation, low demand and poor quality stock and present an under-utilised asset; much of the demand – particularly for family housing -that might otherwise have been met in this areas is displaced to North Tyneside194 The rise of the creative class, Richard Florida, 2002

195 The Creative City, Charles Landry and Franco Bianchini, 1995

196 Quality of Place: The North’s residential offer phase IIa, Tyne and Wear City Region Case Study, Llewelyn Davies Yeang for Northern Way 2006


29.4. Gateshead and the communities along the A1M corridor are seen as more affordable than those to the north of the river; the Borough has some housing challenges but these tend to be more concentrated in communities including Felling, Bensham and Saltwell; the area has also seen a significant volume of new housing development, particularly for first-time buyers.29.5. The Northern Way research considers those groups which should be a priority for efforts to attract and retain talent through quality of life/place measures, including recent graduates and family builders. The research suggests that Newcastle is comparatively successful at graduate retention – citing 45% of graduates remaining within Tyne and Wear – although as house prices increased (at the time of the research), a lack of affordable housing in traditional first time buyer or renting locations (including the City Centre/Quayside) could impact on graduate retention in future.29.6. In contrast, the Northern Way research further notes that“The first-time buyer market has flourished south of the Tyne with areas such as Low Fell, Saltwell Road and Dunston offering young professionals an affordable route onto the property ladder.”“Family builders” – couples with young children not yet at primary school, with some freedom of movement – have fewer choices in the Newcastle/North Tyneside or Gateshead housing markets. Access to good quality schools is a key factor.

29.7. As house prices increased to a peak in 2007, the research noted a narrowing range of affordable housing options for ‘second movers’ – with only west Gosforth, High Heaton, Monkseaton and West Monkseaton retaining comparatively affordable two and three bedroomed homes. 29.8. The recession has of course had a significant impact on the housing market, both in terms of falling values and more limited access to mortgage finance. In the UK, house prices fell by up to 15-18% in 2008 (apartment values fell by more than 20%) and are likely to fall another -15 to -20% in 2009, and by up to a further -4% in 2010, a drop of over 30% from their peak in early 2007. In the North East, prices fell by 10.3% in the year from November 2007; in Newcastle they fell by 10.8% over the same period but by only -6.3% in Gateshead.29.9. Bridging Newcastle Gateshead, the Housing Market Renewal Pathfinder which has a focus on rebuilding sustainable communities and widening housing choice in neighbourhoods which have ceased to become desirable places to live. BNG is focused on the neighbourhoods of Benwell, Scotswood, Elswick, Byker and Walker in Newcastle and Felling, Bensham and Saltwell in Gateshead. BNG has now delivered over 220 new homes, facilitated site assembly for the development of up to a further 4,000 new homes and improved 4,500 houses. 29.10. In light of the recent downturn in the housing market, the dual challenge now facing BNG is to sustain the renewal and enhancement of existing neighbourhoods whilst accelerating the pace of new housing growth to ensure that the housing needs and aspirations of graduates, family builders and other key groups can be met. BNG, with both


Gateshead and Newcastle Councils, were successful in bidding for Round 2 of the Government’s Growth Point programme in 2008. 29.11. The adopted Regional Spatial Strategy (July 2008) sets out and ambitious target for the Region to develop around 157,000 new homes (a gross figure, ignoring completions) over the period from 2004-2021 – of which just under 45% are planned for Tyne and Wear. 29.12. Net of demolitions – which are relatively high in NG as a result of the housing market renewal programme – the RSS requires Newcastle and Gateshead, together, to deliver 15,600 net additional completions by 2016 and 24,800 by 2021. 29.13. Before the downturn in the housing market, NG was achieving around 1,500 gross completions p.a – but only around 600 net as a result of the high level of demolitions. The Growth Point programme aims to deliver just over 14,000 dwellings over the period from 2008/09-2016/17 – representing a 21% increase over the RSS target. The Growth Point programme will deliver a series of linked sustainable communities in the Tyne Corridor

creating a more integrated urban form, enhancing existing high quality public transport

transformational new developments on sites identified for growth in the BNG area, including the housing expo at Scotswood

new urban living environments at Gateshead Quays and Gateshead Town Centre

new quality residential offers associated with Science City in Newcastle a new urban village in the Metro Centre area (Metro Green) providing

new neighbourhood and community facilities, a new riverside park and a new Tyne bridge connecting Metro Green to Scotswood

focusing on the following key locations:


Conclusions

Office market

29.1. Since the end of the 1990s, demand for City Centre office floorspace has increased significantly and rental levels have increased but the lack of large floorplate, City Centre office schemes has left some occupier demand unmet. Some occupiers have been forced to look to the out of centre business parks – most notably in North Tyneside but also Newburn and the Great Park – to meet their requirement. 29.2. Thus a two tier market has been in operation, with some occupiers continuing to seek the cache of a City Centre location (albeit at a higher cost) and others seeking lower cost, out of town accommodation. The supply of the latter has increased significantly during the last decade. 29.3. For the office market, we conclude that: over the next five years, it is likely that demand for prime Newcastle

city centre space will not exceed 150,000 sq ft per annum and schemes underway will meet this demand over the next three years. It is important to ensure that schemes in the development pipeline in the city centre – including key schemes at Gallowgate and the Stephenson Quarter - are “ready to go” when the economy moves out of recession

historically, the Cobalt Business Park in North Tyneside has attracted many occupiers seeking an “out of town” location, Baltic Business


Quarter could compete with North Tyneside in future and may complement the Newcastle centre locations

over the next decade, it is essential to ensure that a market equilibrium is maintained – i.e. an oversupply of new office space is avoided – to maintain investor and developer interest – whilst ensuring that a lack of supply does not constrain demand;

it could be argued that the pipeline of supply in Newcastle centre and Gateshead will far exceed forecast demand for at least a decade; at present there is at least 2 million sq.ft of office development in the pipeline which probably represents 8-10 years supply at current levels of take-up proposals for major office developments at Science Central should be considered in this context; the 1NG Plan, and the joint study of employment land requirements being undertaken by the Councils should consider whether the planned supply of sites could be reduced more in line with forecast demand.

Industrial market

29.1. There has been sustained demand for industrial floorspace in NG although the supply of poor quality accommodation has led to a concentration of demand including Team Valley, Newburn Riverside and Follingsby. Our conclusions on the NG industrial market are that: There is a significant pipeline of supply but much of it lies outwith NG;

the 1NG Plan should identify clear proposals to secure the long-term supply of high quality industrial sites and premises and consider whether the planning policy regime should seek to introduce a degree of control over the redevelopment of industrial land for non B2 uses in key locations like Team Valley and Newburn

the 1NG Plan should incorporate the emerging findings of the River Tyne North Bank Study to identify the infrastructure and other growth requirements of the emerging marine cluster at Walker Riverside

Retail market

29.1. Newcastle City Centre’s retail sector continues to demonstrate strong performance, supporting a higher than average quantum of floorspace for a catchment population of its size and sustaining higher rental levels than competing centres including Manchester; this is material in that it is high comparison retail spend per capita, rather than a significant increase in the catchment population, which has been the key driver of retail growth.29.2. To date, the recession appears to have resulted in only a modest increase in retail vacancies although retailer requirements have tailed off quite significantly. The expansion of Eldon Square – with a number of important, pre-let anchor tenants in place – will ensure that the City Centre continues to refresh its retail offer over the next 2-3 years. 29.3. On the retail market, we conclude that whilst the prime pitch is likely to robust, the recession could impact on

the performance of some secondary retail areas – even in places like


Monument Mall, which has shown some vulnerability, the Newgate Centre or Grainger Street/Clayton Street

in this context, the economics of the major, retail-led redevelopment of East Pilgrim Street – which would increase City Centre retail provision by around 30% - must be questionable at this stage;

at the very least we argue that the significant increase in forecast retail spending upon which the scheme is predicated will take longer to materialise and it must be considered doubtful that the City Centre will be able to support an additional 75,000 sq.m of floorspace by 2016; the 1NG Plan should identify how this key part of the City Centre will be regenerated in this context

the 1NG Plan should also define the relationship between Newcastle City Centre and Gateshead Town Centre as shopping centres; the City Centre is the regional comparison shopping centre and Gateshead town centre a district convenience centre which could nonetheless play this role much more effectively for residents on both sides of the river – and for visitors attracted to the Gateshead Quays;

the market sees this distinction very clearly and the 1NG Plan should be predicated on this clear delineation of roles and develop investment plans which are complementary rather than competing

Housing market

29.1. We did not undertake a detailed analysis of the housing market – this work is being done outwith the 1NG Plan by BNG and others. However, there is a strong interface between NG’s ability to attract and retain talent and its urban housing offer. 29.2. Newcastle and Gateshead’s housing markets are quite separate. In Newcastle, there are concerns around the affordability of first time buyer accommodation for graduates and young professionals; whilst prices have fallen, access to mortgage finance has tightened considerably and this remains a very significant challenge for BNG. 29.3. Similarly, the lack of ‘second move’ options for young families in the inner city has resulted in a drift of this group to North Tyneside, which demonstrates wider housing choice and greater affordability. There is a significant opportunity to address both issues in the urban core. the 1NG Plan should also explore the implications of significantly increasing the residential population of Gateshead town centre and quays – the Workstream 2 report sets out specific housing proposals for land to the south and east of the town centre.29.4. As a Growth Point, BNG plans to complete over 1500 homes per annum. The 1NG Plan could identify sites for additional homes in the centre of NG. The 1NG Plan and the two local authorities should consider whether this would fit in the wider housing strategy for NG.


30. THE RECESSION – AND BEYOND 2011

Where are we today?

30.1. There has been much analysis of the underlying causes of the current global recession and its supposed origins in the sub-prime lending decisions of the US banks. Perhaps inevitably the story is more complex than that – and we reproduce only the headlines here before considering a more detailed analysis of the implications for NG.30.2. Essentially, the global recession is a result of the unravelling of two related elements – corporate and consumer debt, and asset values. In both cases, the bubble has burst with unparalleled consequences.30.3. We borrowed too much, particularly in the US and UK. The aggregate of the UK’s consumer, corporate and public sector debt is around £4000bn – or 300% of our annual GDP. This is a record. 30.4. For the major UK banks, it became impossible to fuel this level of debt through borrowing from British households (savers), businesses or other financial institutions – and hence the level of borrowing from overseas institutions increased dramatically. The Bank of England’s ‘customer funding gap’ increased from zero in 2001 to £740 bn in 2008.30.5. In summer 2007, the realisation that billions of dollars of loans were going bad – the US sub-prime mortgage crisis - was the trigger for the rapid closing down of wholesale lending from the overseas institutions, particularly those in China, other parts of Asia and the Middle East. 30.6. This fundamentally undermined trust within the banking system – and led to the catastrophic withdrawal of funds that has seen some of the world’s biggest financial institutions go to the wall and others in the UK require effective re-nationalisation to the tune of almost £1,000 bn in the UK alone. Central banks and government authorities attempted to deal with these issues to contain the problem within the financial markets instead of having it feed into the real economy. Bank rates were lowered, extraordinary liquidity schemes and loan facilities were introduced and even capital injections and nationalisations took place. 30.7. The debt ‘bubble’ is also inextricably linked to falling asset values. The easy availability of debt pushed up the value of assets – houses, property investments, company buyouts – which in turn fuelled the demand for more lending. As the asset bubble bursts – most visibly through falling house prices, property investment values and commodity prices – the fall in values has resulted in a spiral of decline with asset sales driving down prices and causing loses for other borrowers, leading to a further contraction of lending.30.8. When asset values find their floor, the financial economy can begin the process of rebuilding and make available the finance upon which the ‘real economy’ is dependent – and the recovery will have begun. This hasn’t happened yet – it is clear that, during 2009 at least, worse is to come.


30.9. Central bank interest rates are continually reaching all time lows. The United States federal funds target rate is now at a range between 0 and 0.25 per cent while the Bank of England base rate has fallen to 1 per cent – half of the lowest rate prior to this year. Furthermore, inflation has receded enough to cause fears of a deflationary spiral. 30.10. In the UK, house prices have fallen around 20% from their peak and claimant count unemployment has already increased by almost 350,000 since November 2007.

Where are we going?

30.1. The International Monetary Fund’s January 2009 projections197

show world growth in real terms falling to ½ per cent in 2009 – the lowest rate in over 60 years. This forecast represents a downward revision of about 1¾ percentage points from their November 2008 projection.

World: GDP Growth

-2%

-1%

0%

1%

2%

3%

4%

5%

1995 1997 1999 2001 2003 2005 2007 2009 2011

% annualWorld : GDP growth

Source: Oxford Economics

Forecast

31. Source: Oxford Economics, 2009

31.1. What might lead us out of the recession? Resurgent domestic confidence in the US plus a sizeable stimulus package could be enough; the US Government recently launched an $800 billion stimulus package and the recent G20 summit saw further efforts to encourage the major global economies to develop a consistent approach. Equally, the structural growth in the Asian tiger economies could both drive demand as well as provide global liquidity. Thirdly, an improvement in liquidity via institutional changes led by centralised and coordinated Government efforts could be the driving force.

197 International Monetary Fund, “World Economic Outlook Update”, January 2009.


Impact on the UK economy

31.2. HM Treasury’s February 2009 economic forecasts suggest a contraction of GDP of some 2.8% on 2009 followed by growth of 0.5% in 2010.

Source: HM Treasury, February 2009

31.3. cebr’s latest projections for the United Kingdom economy for 2009 involve a 2.9 per cent contraction in GVA followed by a 1% contraction in 2010 and a return to growth in 2011.


United Kingdom real gross domestic product annual growth, actual and forecast 1990-2013

32.

Source: cebr, 2009

Real gross value added by industry, projected annual growth rates for 2009 and 2010

33.

Source: cebr, 2009

33.1. Furthermore, the recovery will be a long drawn out process. cebr estimate that it will take four and a half years before GDP returns to its most recent peak in the second quarter of 2008. The recession will also have a differential impact on the output of UK sectors, with financial


intermediation, construction and manufacturing all expected to contract by more than 4% during 2009. 33.2. In recent research for the Core Cities, Oxford Economics198

explored the potential impact of the recession on employment in each of the key sectors; together, they are particularly over-represented in financial services (almost 13% of total UK employment in this sector) and business services (9%) but also in public services employment. 33.3. The OE assessment – based in fact on a slightly lower fall in GDP (-2.2% in 2009) than cebr’s latest estimates – suggested that around 70,000 jobs would be lost, with business services and manufacturing experiencing much greater job losses than the financial services sector.

Sectoral job loss across core cities, 2008-2011 (000s)

-30.0 -25.0 -20.0 -15.0 -10.0 -5.0 0.0 5.0 10.0 15.0

Agriculture

Extraction

Manufacturing

Electricity, gas & water

Construction

Distribution

Hotels

Transport & comms

Financial services

Business services

Public admin & defence

Education

Health

Other personal services

Jobs loss 2008-2011 (000s)

Total job loss = 69,700 jobs

34. Source: Oxford Economics for Core Cities

34.1. Based on their dependency on these sectors, Oxford Economics then distribute these forecast job losses across the Core Cities. Birmingham (-20,000 jobs) is expected to bear the brunt of the forecast change in employment (in part due to its continued dependency on manufacturing alongside business services). Leeds (-12,700 jobs – financial services dependent) and Manchester (-10,000) are also expected to shed large number of jobs. 34.2. To place this in context, the City of London/Westminster and Tower Hamlets – the heart of London’s financial services sector – are forecast by OE to lose just over 70,000 jobs – more than the Core Cities combined – over the same period.



34.3. A further assessment of the impact of the recession was carried out by PACEC for the Local Government Association199 in November 2008. The research explored a range of measures including an assessment of the impacts of the 1979-82 and 1990-92 recessions and detailed modelling of the potential impact on 22 sectors. This paints a less optimistic picture for the North East – in effect identifying it as an area of ‘medium risk’:

Overall At Risk Index for 2008-2010

35. Source: Annual Business Enquiry, Annual Population Survey, ONS with PACEC analysis

199 From Recession to Recovery, The Local Dimension, PACEC, Local Government Association, November 2008


35.1. Finally the Centre for Cities, in its ‘Cities Outlook 2009’200, identifies a series of vulnerability measures based on the snapshot of economic performance captured in its Economic Prosperity Indices; the North East is vulnerable as a result of its above average concentration of employment in distribution, hotel and restaurants and banking, finance and insurance.

Sectors at risk – 10 cities with highest concentration of employment in distribution and hostelry, financial service and construction (Great Britain=100)

36. Source: NOMIS, 2008. ABI employee analysis broad sectoral groups (2006 data). Rochdale excluded from banking index due to errors in the underlying data

Impact on regional growth scenarios

36.1. In 2003, cebr generated some economic growth scenarios which underpinned the assumptions set out in the Regional Spatial Strategy and Regional Economic Strategy. The baseline scenario was essentially a continuation of North East’s recent performance – during the 1990s, it had the lowest GVA growth of all the English regions – and assumed a compound annual growth rate of 1.3% over the period from 2001-2016. 36.2. A range of more optimistic scenarios were also modelled and the North East Assembly chose a 2.8% cagr to underpin the RSS which was highly ambitious, given previous performance. In practice, the North East surpassed even that ambitious target growth rate, achieving 3 per cent real growth in gross value added in 2003 and 2004 – higher even than the national rate of growth. This growth rate lowered a bit subsequently, but still remained at a better than baseline value of approximately 2 per cent for the next three years.36.3. Based on the model developed for the RSS, for GVA cebr forecast that NG or Tyneside will see a worsening of its position relative to the region over the period to 2011. Whereas previously financial and business services and manufacturing (all of which are strongly represented in NG) drove regional GVA growth, these sectors will also bear the brunt of the impact in reduced output and unemployment.

200 Cities Outlook, 2009, Centre for Cities, 2009


36.4. If, as cebr forecast, the North East economy contracts by around 2.5% in 2009 and 0.5% in 2010, this will make it extremely difficult for the region to return to its previous growth trajectory. Even over a four year period to 2012, cebr forecast that the North East economy will show a negative compound annual growth rate of some - 0.02%, suggesting it will be 2013 before the region returns to the pattern of growth witnessed in the first part of this decade.36.5. In addition, as we highlight elsewhere in this report, it is less likely that output growth in NG post-2011 will be driven by financial services; and there are significant questions – see section 2 – over the scale and nature of business services growth in NG and the strength of the relationship between the business services sector and those sectors which it serves.36.6. Nonetheless, the OE forecasts suggest that over the period from 2011-2015, the UK economy will create around 1.8 million new jobs to counter the anticipated increase in employment of up to 1 million claimants over the next two years.

36.7. Longer term, the OE research for the Core Cities201 suggests that, Newcastle will see a return to peak levels of employment by 2016 and a modest net increase over the 2004 peak by 2018 – with both Leeds and Manchester witnessing more substantial levels of jobs growth from 2012 onwards.



UK 2011-2015 (000s)

Core cities 2011-2015 (000s)

Agriculture -8.4 0.0Extraction -5.5 -0.1Manufacturing -111.7 -10.6Electricity, gas & water 3.1 0.1Construction 204.8 11.5Distribution 289.8 20.1Hotels 184.7 15.0Transport & comms 14.2 0.7Financial services 80.6 5.0Business services 745.4 57.5Public admin & defence 12.9 0.9Education 63.9 8.6Health 173.7 14.2Other personal services 163.8 11.8Total 1810.8 134.7

Forecast Employment trends, selected Core Cities to 2018

150

170

190

210

230

250

270

290

310

330

350

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

000s

Manchester Newcastle Nottingham Sheffield

37. Source: Oxford Economic Forecasts, 2009

37.1. OE forecast that Newcastle will create 9,000 jobs over the period from 2011-2015 to compensate for the anticipated loss of some 2,000 jobs from 2008-2010. This is around 80% of the annual employment growth achieved by NG since the mid 1990s.

A resilient economy?

37.1. The majority of economic forecasters tend to agree that those regions with a strong dependency on financial services, business services and to a lesser extent construction and manufacturing are likely to witness the greatest falls in output and increases in unemployment over the forecast period of recession, to 2011. It has been argued that the North East, by virtue of its limited exposure (in relative terms) to each of these sectors and its strong dependency on public sector employment could be comparatively well-cushioned from the worst effects of the recession. 37.2. Other forecasters are less optimistic and the evidence, in terms of redundancies and increased unemployment, appears to support this view. Of the Core Cities in January 2009 Newcastle had the 5th highest JSA claimant count in percentage terms, behind Birmingham and Liverpool (6.6%); Nottingham (4.9%) and Manchester (4.6%)202.37.3. Post 2011, the picture may look a little different; NG may have fewer of the attributes required to demonstrate strong and sustainable post-recession growth. In particular:

202 JSA Claimant Count, January 2009, DWP


the anticipated reduction in public sector spending may have a significant impact on employment;

low levels of innovation and private sector R&D may constrain the ability of NG firms to drive up GVA;

the dependency on large firms and low levels of business start ups may limit opportunities for new market entrants and churn

other factors – most notably workforce skills and economic activity rates (considered in the next chapter) could impact on competitiveness.


38. CONCLUSIONS AND KEY ISSUES AND CHALLENGES

Workstream 1

38.1. The Workstream 1 report presents our baseline analysis of the structure of the NG economy and was carried out using the framework of CLG’s ‘urban competitiveness’ model, developed through the SEC203

research. 38.2. The State of the Cities research204 defines urban competitiveness as the City’s response to changes in its technological, competitive, market and regulatory environment – in which some industries and institutions survive and others are replaced. 38.3. In sections 3, 4 and 5 of the Workstream 1 baseline report we consider the business environment; educational base and physical infrastructure in turn, exploring the relevance to NG of some of the underpinning economic and spatial theories cited in the competitiveness framework – to inform an assessment of the extent to which the key drivers of competitive economic performance are in place, or can be developed, in NG. 38.4. Thus the report has considered whether the NG economy will be resilient in light of the current recession and whether it has the right ‘foundations for growth’ for the long term; explores the competitiveness of the existing labour market and reviews the performance of the retail, office, industrial and housing property markets.

Key findings

Complementary roles

38.1. Newcastle and Gateshead play distinct and complementary roles: Newcastle is the regional capital, and the North East’s principal centre for retail, government, learning and business, yet still has a number of deprived communities, some in close proximity to the City Centre. 38.2. Gateshead is a post-industrial town still facing major challenges – but provides an established manufacturing base, a strong housing offer and some key cultural infrastructure. By many of the available economic measures there is still a gap in economic performance between them; Newcastle has made a more rapid transition to a post-industrial economy. Yet Gateshead out-performs Newcastle on measures including business start ups, employment rates and a sustained programme of investment


204 Ibid


means that the centre of Newcastle and Gateshead are starting to work together as a coherent place, centred on the waterfront.

Closing the output gap?

38.1. Any analysis of the performance and prospects of the NG economy must take account of the regional context. On GVA per head – a widely accepted comparative measure – the North East has consistently lagged the UK economy by between 10 and 20% since the 1970s. 38.2. In the decade to 2002, the performance gap between the North East and GB widened, but the region has held its own since then, with several years of above-average increases in output, employment and economic activity before a dip in 2007 which saw the GVA gap widen still further. 38.3. In 2007 GVA per head in the North East was just 78.6% of the UK average – placing it ninth out of nine English regions205, and leading commentators to question whether the performance gains achieved in the earlier part of the decade were representative of structural changes in the regional economy, or merely a temporary result of the ‘long boom’ since the last recession.38.4. Before the recession began to bite, there were some promising signs of recovery with GVA per capita (in Tyneside) and employment (Newcastle Gateshead) both growing faster than in the rest of the UK, and driving improved performance at the regional level: between 1996 and 2006 GVA in Tyneside increased from 86% to 93%

of the national average, as a result of a shift towards higher value added sectors, rising employment and economic activity rates and a modest increase in productivity206

between 1995 and 2007, employment in NG increased by 16% (GB 9%), although half of this growth was in the public sector207.

38.5. The evidence suggests that North East has become increasingly dependent on Tyne and Wear’s contribution to regional economic output; whilst the North East economy was in the middle of a strong dip in performance during the early part of this decade, Tyneside/NG continued to perform relatively strongly on GVA per head. Yet the output of many other UK city/sub-regions has grown more rapidly since the mid 1990s, including London and much of the Greater South East; Cornwall; small pockets of the West Midlands; Nottingham and Derby and in the North of England by Leeds, Manchester, York and Sheffield. 38.6. Cities offer ‘agglomeration benefits’ - greater interaction with suppliers and customers, a critical mass of specialised, skilled labour and enhanced opportunities for knowledge exchange. London demonstrates very strong ‘spillover’ effects on the wider economy of the Greater South East along with some other UK City Regions, albeit on a smaller scale. Yet whilst Tyne and Wear is the largest conurbation in the North East, and has 205 Release of Regional and Sub-Regional GVA estimates: North East England, December 2008 Office for National Statistics

206 ONS, Regional Accounts, 1996-2006, cebr analysis

207 Annual Business Enquiry


had some success in attracting knowledge-based firms and knowledge workers, like some other medium-sized cities it is still not wealthy or big enough to drive further economic growth in the wider region.

38.7. This is a familiar story, but it is not “somebody’s fault”. Like the North East as a whole, the Newcastle city region has been faced with huge structural challenges: the decline of traditional industries, the dominant role of London in the UK economy, a low base in terms of knowledge-based industries and a small labour pool. 38.8. Tackling this post-industrial legacy is a huge, long-term task and there is some evidence that, pre-recession, the partners’ efforts were beginning to make a difference. Nonetheless, much of the analysis in the OECD Territorial Review208 still applies - progress has been made on population change, employment growth and average earnings. In practice, however, the gap between the City Region and the England average has not narrowed sufficiently to indicate a more structural or sustainable change in its economic fortunes.

Employment structure

38.1. The defining features of change in the employment structure of NG have been continuing growth in the public sector (which accounts for a third of all jobs) and the rapid shift towards a post-industrial, services-based economy. These trends have been particularly marked in Newcastle; Gateshead has moved in the same direction, but more slowly, and it retains a significant manufacturing base.

Sector Gateshead Newcastle Newcastle Gateshead

No. jobs % No. jobs % No. jobs %Manufacturing 14,703 16 11,582 7 26,284 10Construction 6,273 7 4,594 3 10,867 4Distribution and Retail 19,663 22 20,605 12 40,268 15Hotels and restaurants 4,736 5 10,283 6 15,019 6Transport and Communications 5,175 6 9,739 6 14,914 6Financial intermediation 1,461 2 10,800 6 12,261 5Business Services 13,019 14 31,820 18 44,838 17Public Administration 6,010 7 22,403 13 28,413 11Education 6,611 7 19,284 11 25,895 10Health and social work 9,294 10 23,792 14 33,086 12Personal Services 3,912 4 9,359 5 13,271 5Total 90,857 100 174,261 100 265,116 100


38.2. Data from a variety of sources (on wages, occupation, property market transactions etc) confirm that high order economic activities are under-represented in NG, especially in the private sector: few private sector businesses are headquartered in the city; and managerial/senior officer occupations are under-represented, while elementary occupations are over-represented. 208 OECD Territorial Review of Newcastle in the North East, Organisation for European Co-operation and Development (OECD), 2006


38.3. Employment in NG increased by 34,200 jobs (or 16%) between 1995-2007, above the North East (13%) average but below the England average (17.2%)209. NG accounted for 70% of the jobs growth in the Tyneside NUTS3 area – the geography used in the OECD Territorial Review – over this period.38.4. NG sits at the top of the ‘second division’ of UK Cities for employment growth, well behind London (+627,500) Glasgow (+63,190), Manchester (+ 51,600) and Leeds (+47,790) but comparable with Edinburgh (38,800) Sheffield (+35,800) and Cardiff (+31,150) and ahead of some of the other major UK cities including Bristol (+17,100), Birmingham (+15,200) and Nottingham (+14,000)210. 38.5. Local government and public sector bodies, higher education and the health service account for a high proportion of the twin cities’ top jobs – although the public sector has played a key role in driving employment growth in many of the English Core Cities. 38.6. Some of the Core Cities have witnessed a steep decline in manufacturing employment between 1995-2007. NG had the lowest absolute or percentage decline in manufacturing employment of any of the Core Cities over this period – losing just under 5,900 jobs or 18% of the workforce. Sheffield (-28%) and Leeds (-35%) had the next ‘best’ performing manufacturing sectors211.38.7. Over the period from 1995-2007, Leeds achieved the highest absolute growth in banking, finance and insurance services (+36,632 jobs, an increase of 49.5%) followed by Manchester (+34,466 or a 59.1% increase). Employment in these sectors in NG increased by 18,257 jobs (48.1%) – placing NG 5th of the 8 Core Cities both in terms of absolute and percentage growth212.

The company base

38.1. Like some other post-industrial cities, NG continues to depend heavily on medium and large employers employing 200+ people; they account for 41% of employment but around half are public sector organisations. NG has disproportionately few SMEs and microbusinesses. Whereas the public sector is the dominant employer, the vast majority of businesses in NG are in business services (29%) and wholesale distribution213.

209 AES 1995-1997, ABI 1998-2007

210 Ibid

211 ibid

212 AES 1995-1997, ABI 1998-2007



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38.2. Recent research for the Manchester Independent Economic Review214 has stressed the importance of these embedded large local companies, and the need to promote their growth and profitability through innovation and productivity improvement and ‘spinning out’ new businesses. By the same token, the NG economy remains vulnerable to the investment decisions of larger firms and to those of larger public sector employers.

38.3. NG has the lowest business density (per 10,000 working age adults) of any of the Core Cities215; London has almost twice the number of firms on this measure. In some key sectors – most notably retail, construction and business services – there is a significant shortage of businesses to drive up competition and realise ‘churn’ impacts.38.4. As a general rule, prosperous cities have a higher business birth rate, but progress in NG has been slow. The level of business start ups is also low; Newcastle and Gateshead have lower business birth (and death) rates than any of the other Core Cities although the limited size of the business stock constrains the growth of new firms.

214 Manchester Independent Economic Review – Growing Inward and Indigenous Investment, 2009

215 Annual Business Enquiry, ONS Population Estimates, 2007


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Diversity vs. specialism

38.1. The State of the Core Cities research concludes that the most successful cities combine economic specialisation with diversity. Specialisation drives wealth creation and builds sustainable competitive advantage; diversity makes cities more resilient and less susceptible to economic shocks. 38.2. The OECD report216 noted that the challenge for the Newcastle city region was to “reinvent specialisation” in the post-industrial era. Some progress has been made, but NG has not yet achieved significant competitive advantage through specialisation: financial services was the star performer at the start of the century,

and NG is the headquarters of two significant institutions; but the collapse and subsequent nationalisation of Northern Rock presaged the global crisis in the finance sector; although NG remains a comparatively small financial services centre with a very different structure to that of Leeds or Edinburgh, after large scale redundancies, future prospects must be considered uncertain and there is limited scope for the sector to ‘reabsorb’ those made redundant in other jobs

professional and business services for the North East have traditionally been concentrated in Newcastle, and this continues to be the case; but the evidence suggests that there is little that is specialised or distinctive and that tradeable services are under-represented; analysis suggests there may be scope to develop the computer software sector, building on SAGE’s presence, and for further growth of architecture, design and engineering activity

the region has made a major (and very successful) investment in cultural infrastructure, designed in part to act as a catalyst for the



creative industries; to date, however, employment growth has been modest, although there a few “hotspots”, notably in the design and development of computer games, there is as yet no evidence of nationally significant strengths;

advanced manufacturing, though much reduced in employment terms, continues to make a significant contribution to economic output: the OECD217 identified the marine/offshore industries as a key strength with potential for further growth, and there are a number of key firms in defence, steel and coatings among others; there are significant opportunities to align the area’s manufacturing strengths and deep water port facilities to support the proposed construction of large scale offshore wind turbines by Clipper Wind; the Design Centre for the North and Marine Design Centre are also important assets with the potential to strengthen our manufacturing capabilities

the value of tourism has grown significantly, and NG has become a popular city break/business tourism destination: more work needs to be done to improve the visitor infrastructure, especially for the conference market; the reduction in overseas travel arising from the recession and low dependency on overseas visitors could further strengthen NG’s position in the UK market

38.3. The Higher Education sector is also growing rapidly. NG has in excess of 50,000 students and a strong reputation as a student friendly City. NG (and the surrounding region) has significant, but not outstanding, research strengths. 38.4. Times Higher Education218 (based on RAE 2008) ranks the University of Newcastle 27th in the UK (up from 32nd in 2001): 14% of research submitted for RAE 2008 was rated as world-leading (4*), with another 44% rated internationally excellent (3*). Northumbria University was ranked 81st (up from 99) with 6% of its research rated as 4* and 28% as 3*. These are strengths to build on. 38.5. Higher education and research are important economic activities in their own right, but translating research excellence into wealth creation and employment growth is a challenging and sophisticated process requiring high level skills. Nationally, the Science City programme has met with mixed fortunes, but Newcastle Science City has been recognised for its success in bringing partners together to both commercialise and popularise science. 38.6. Science City aims to create up to 500 new technology businesses by 2025, with a new science and technology quarter at Science Central. There are significant opportunities to capitalise on research strengths in a range of areas including ageing and health, stem cells and regenerative medicine, nanotechnology and the low carbon economy. 38.7. It is important, however, to place these aspirations in a wider context; the global market for research and commercialisation investment is increasingly competitive. Over ten years, York’s Science City


218 Times Higher Education, University Rankings 2008


programme has led to the creation of around 100 companies employing just under 3,000 people219.

Demographic change

38.1. The long-term relative decline of the North East economy has resulted in an ageing and declining population, and (as in many city regions) the depopulation of the urban core. Between 1991 and 2004 the population of NG fell by about 40,000220, but the regeneration of NG, including residential development on the riverside and elsewhere, has seen this trend reversed. 38.2. Since 2004, the population increased by 5,000, driven largely – but not exclusively – by an influx of migrant labour, with almost all of the growth in Newcastle. NG’s population is growing modestly compared with most of the other Core Cities – only Birmingham has seen a slower rate of population growth since 2004221. 38.3. ONS forecasts that this recent trend will continue, with the population of NG increasing to 494,000 (up 32,000) by 2032. However, there will be little change in the working age population, at a time when it will be growing substantially at the GB level.222

Labour market

38.1. NG is the principal employment centre for a regional labour market that extends into Northumberland, Co Durham and Sunderland as well as the Tyneside conurbation. Despite the recent revival of “living in the city”, a traditional travel-to-work pattern prevails, with a large daily net inflow of commuters (especially into Newcastle) from a wide catchment area. In practice Newcastle’s commuting links with North Tyneside, and Gateshead’s with Derwentside and Durham City, are as strong as those with each other. 38.2. Commuting is not necessarily a bad thing – as NG needs to access a comparatively large labour market to realise some of the agglomeration benefits described earlier. Nonetheless, there may be opportunities to diversify housing options in NG in the future, with family housing as well as apartments in the core urban area, to capture some of the projected population increase.38.3. As in other major cities, people who travel to work in NG from the outer suburbs and the countryside are more likely to work in higher level occupations and to earn more than local residents. There is a significant gap between workplace earnings and resident earnings (which are the lowest of any major city). 38.4. Low average resident earnings – and persistently high levels of economic inactivity – contribute to poverty, deprivation and benefit dependency in NG, and to some of the most acute income disparities 219 Science, Innovation and the City, Centre for Cities, 2008

220 ONS Population data

221 ONS Components of Population Change

222 ONS 2007 mid-year population estimates


of any UK city (rank 49 of 56). Newcastle was ranked 37 th most deprived local authority in the 2007 Index of Multiple Deprivation, Gateshead was 52nd. 38.5. Things have been changing for the better in NG in the past decade, but a significant proportion of the population is still not benefiting from new economic opportunities. Many live in deprived communities which have become trapped in a cycle of deprivation, poor health, low aspirations, inter-generational unemployment and low skills. This is not unique – although other places have been better at linking need with economic opportunity.

38.6. Low levels of skills and qualifications are a key factor here and these, together with the small size of the labour market pool compared with (for example) Manchester or Leeds, are constraints on business growth, new firm formation and future inward investment. NG – like the North East – suffers from a low skills equilibrium, a cycle of low demand from employers for higher level skills which disincentivises individuals to upskill. 38.7. Yet this is a function of the region’s economic structure – the high proportion of public sector jobs, the ‘branch plant’ economy and comparatively low levels of knowledge based employment have all stifled demand for higher level skills. Creating a larger, more skilled and better qualified workforce is an imperative: this will involve action to raise skill levels and create entry-level jobs for the unskilled – but also to create more opportunities that will attract and retain highly skilled knowledge workers.

Property market

38.1. Until the recession, the office market in NG was relatively buoyant, although even at the peak there was very little speculative development and prime rents were well below the levels achieved in high performing core cities. Annual take-up in NG has been in the order of 400-600,000 sq ft, of which about half was in Newcastle city centre. 38.2. Demand has been driven by financial services (back office functions of large firms), through consolidation of established professional/business service companies and by the public sector. However, the centre of NG will continue to face very strong competition from modern city centre fringe locations including Cobalt in North Tyneside and Great North Park.38.3. The recession is causing a reduction in demand and the supply of finance for development has tightened considerably. No more than about 150,000 sq ft of city centre floorspace will come onto the market in 2009. However, many other schemes are in the pipeline and have planning consent. There are plans for more than 500,000 sq ft of speculative development at Gallowgate, the Stephenson Quarter, City Road, Strawberry Place and Hanover Square. In addition, extant proposals for Science City include some 540,000 sq ft of offices and 1.25 million sq ft of “science space.”


38.4. In Gateshead, the Baltic Business Quarter could accommodate over 1.5 million sq ft of new offices and other schemes are planned for over 250,000 sq ft. Extant consents in North Tyneside exceed 1.5 million sq ft and a further 3 million sq ft of offices could be developed at Newcastle Great Park. At a take-up rate of 300,000 sq ft per annum in the centre of NG alone, implementation of major extant consents and known schemes would be sufficient for almost a decade. 38.5. NG is the dominant retail centre in the North East. Newcastle city centre is one of the UK’s top 12 shopping centres with a catchment population for comparison (non-food) shopping of just over 1.4 million people. Rental growth has outperformed the majority of core cities; current rental levels are higher than in central Manchester, although the latter have dipped in the past year. 38.6. There is a perceived need to improve representation of quality/luxury brands, including fashion retailers, to match the appeal of Manchester and Leeds, and to make NG more attractive to visitors. Gateshead’s Metro Centre is also one of the largest shopping centres in the UK; the competing attractions of the city centre and the Metro Centre have squeezed Gateshead town centre. 38.7. The Growth Point programme aims to deliver over 14,000 homes between 2008/09 and 2016/17 in NG, an average of more than 1,500 new homes per annum. Sites have already been identified, including 4,000 homes in Bridging NG’s HMR pathfinder areas.

The recession

38.1. The economic forecasters, Oxford Economics (OE)223 argue that Newcastle may not be as exposed to the effects of recession as some other cities. They forecast about 2,000 net job losses in the Newcastle city region between 2008-2011, compared with 12,700 in Leeds and 10,000 in Manchester. This is probably an over-optimistic forecast – in the year from January 2008 claimant count unemployment increased by almost 4,000 people in NG.38.2. OE also predicts a slow recovery for Newcastle with employment not returning to 2007 levels until 2016. The prospect of a slow recovery in employment has significant implications for the business property market, especially with many new developments in the pipeline. 38.3. In contrast with OE, the Centre for Cities ranks Newcastle high in two of its sectors at risk categories (finance and retail). PACEC224, in research for the Local Government Association, reviewed the impacts of the last (1990-92) recession and identified the North East as a medium risk area where employment could fall by between 5-6%.38.4. Risk may be greater in cities where there is either narrow specialisation or over dependence on potentially vulnerable low wage/low skill jobs. Despite these differences, there is a broad consensus that the recession is deep, recovery will be slow and

223 Oxford Economics, 2009

224 From Recession to Recovery, The Local Dimension, PACEC, Local Government Association, November 2008


there is no prospect of an early return to “the way we were” between 1997 and 2007. Furthermore, Professor John Tomaney, writing in The Smith Institute’s recent publication ‘The Future of the North East’225

argues that “responses to the global financial crisis are likely to intersect with a series of other challenges, notably climate change and looming energy shortages…the ‘triple crunch.’”

NG and urban competitiveness

38.1. The baseline study has been undertaken within the framework of CLG’s SEC urban competitiveness226 research which sought to develop both quantitative and qualitative benchmarks of city performance. The research identifies three core measures – labour productivity, employment rates and wage rates which, together, inform Gross Domestic Product or the standard of living of our major cities.38.2. Taking the quantitative measures first, the research shows that despite an increase in economic output (GVA) productivity per worker remains comparatively low – and very low if the effect of large firms like SAGE is factored out. Yet the increase in GVA for NG/Tyneside is partly a result of increased participation in the workforce – a boost in employment rates – and partly a consequence of the changing sectoral mix and a shift towards financial and business services employment. As the recession deepens, both of these factors may prove temporary.38.3. Wages, particularly for NG residents rather than commuters, are comparatively low. Thus an assessment of NG’s competitiveness in these terms seems unsatisfactory – GVA is comparatively high, suggesting a correspondingly high GDP and yet the underlying evidence is much more complex and illustrative of the economic challenges faced by NG.38.4. In broader terms the CLG model is a means of understanding how a City responds to changes in its technological, competitive, market and regulatory environment. The research suggests in turn that the export base; a highly educated and skilled labour force; high rates of innovation and entrepreneurship; socio-cultural assets; communications infrastructure and strategic decision making capacity are all critical aspects of ‘urban competitiveness.’ 38.5. To these elements we might add ‘diverse specialisation’ and ‘investing in communities to link economy and regeneration’ and ‘investing in Universities, FE and schools’ from the Work Foundation’s Ideopolis framework227.38.6. Benchmarked against a wider set of competitiveness measures, the story remains one of mixed success. NG has – or has the potential for – a strong export base, driven in part by its manufacturing firms; it has many, but by no means all, of the socio-cultural assets which Richard Florida228 and others argue are fundamental to the location decisions

225 The Future of the North East, Prof John Tomaney Ed, The Smith Institute, 2009



228 The Rise of the Creative Class, Richard Florida, 2002,


made businesses and individuals. The lack of affordable, family housing in the urban core remains a significant barrier.38.7. It has a comparatively strong communications infrastructure with good road and rail connections and a lack of congestion in real terms. Yet rail and air connectivity can always be improved; the upgrading of the A1 to motorway status remains a long-term priority and Tyne and Wear Metro remains accessible to only 25% of the population of the City Region.38.8. The NG economy is inherently not specialised although there are some niche sectors upon which future economic growth could be built. Although Newcastle has a high proportion of resident graduates, this masks a significant skills and worklessness challenge. 38.9. NG has some important strengths and assets upon which it can build – but has yet to achieve its true potential as a competitive city.

Key issues and challenges

38.1. These headlines raise a series of issues and challenges which will inform the development of the 1NG EM.

Components of economic growth

38.1. With some exceptions, the economy of NG lacks competitive edge. This is generally acknowledged, and it demands a constructive and pragmatic response, with action on a broad front. The key elements of the approach should include action to encourage entrepreneurship and new firm formation, particularly in

those sectors which are growing or demonstrate growth potential grow existing businesses, including established local firms employing

200+ attract inward investment – there are particular opportunities to grow

‘domestic’ firms including SAGE as well as attract footloose investment, although this was in decline before the onset of the recession

commercialise the science base – particularly in acknowledged international research strengths including ageing and stem cells

nurture the development of competitive industry clusters; here the only cluster acknowledged by the OECD229 (marine/offshore) could play a key role in the developing a new, nationally significant cluster in offshore wind

38.2. None of this is new, and initiatives are under way on all these fronts. The partners may want to consider how well current interventions are working, and whether more effective interventions are needed on some fronts. Some recent studies suggest that not enough attention has been given to the performance of existing established



businesses, even through they may be more likely to deliver employment and export growth than “sexier” high tech start ups; they may also generate more business births through spin outs.

Diversity vs. specialism – striking the balance

38.1. The research evidence suggests that diverse specialisation is the ideal for core cities like NG. We need to develop and strengthen sources of specialisation and distinctiveness, but we must also be realistic about our real competitive strengths, including the lack of specialised infrastructure in a small region. 38.2. Turning science into sustainable businesses and significant numbers of high-tech jobs is a complex, long-term task, and it may take a long time for jobs to trickle down to lower-skilled workers. The development of the offshore wind sector could create a cluster of international significance with the potential to support a diverse range of manufacturing and port-related jobs – but there are also risks attached to this initiative. It’s vital for the long-term prosperity of NG and the wider region, but expecting too much of science or clusters would be a high risk strategy. 38.3. There is therefore a continuing need for jobs in retail, distribution, tourism and other sectors that contribute to the quality of life in the region, improve the visitor experience – and create entry-level jobs for unskilled people, which can become a platform for fulfilling careers. This balanced approach may raise questions, not about the principle of science and technology development, but about the level of demand – for property and skilled workers – that it will generate in the next decade.

Tackling worklessness

38.1. Worklessness is one of the enduring challenges for NG, and for every other major city in the UK. It is part of a recognised syndrome of poverty and deprivation in urban Britain. A decade of strong demand for labour has drawn many more people into the labour market: in a recession, some of them may be at risk of slipping back into unemployment while the hard core of workless people may find themselves even further removed from the labour market. 38.2. Again this is not a new issue, but we need to re-examine our responses to it in the light of worsening labour market conditions and the prospect (according to some forecasts) that it will take 7-8 years for employment in NG to return to 2007 levels230. This may require imaginative new interventions on the supply side, but also a renewed focus on stimulating the demand for low-skilled workers in retail, tourism and other sectors. As NG1’s transformational regeneration projects come on stream how can we ensure that they will be effective vehicles for linking opportunity and need?

230 Oxford Economics, 2009


Office pipeline

38.1. Looking over the next 5-10 years, we may wish to review some of the extant land use consents, particularly for offices. This would enable us concentrate our investments to transform relatively few locations. The consents already granted represent a generous supply of new office space in the centre of NG – perhaps sufficient to meet demand for a decade or more. 38.2. Perhaps some of these sites would be better developed for housing, rather than left vacant for ten years. If we focus our investment in new housing in the same areas where new offices, hotels, shops and conference centres will be built we may be more likely to achieve the true urban transformation that we are seeking.

Repopulating the City

38.1. One of the positive messages of this report is that the regeneration of the urban core of NG has stimulated an appetite for urban living, on the waterfront, in the city centre and in new urban quarters. This has resulted in a significant increase in the resident population of the urban core, after decades of decline. 38.2. But the experience in NG and other major cities is that the new housing stock – dominated by apartment dwellings – is too one-dimensional. It is not sufficiently attractive to families who may be looking for homes across the price spectrum. There is a growing recognition of the need for a wider choice of housing – by type, price and tenure – but we need to dig deeper to understand what will make families (especially higher income families) to choose to live in the centre of the city, as they do in Bristol and Edinburgh. This will mean thinking about schools, healthcare and the whole panoply of social infrastructure required if people are to live a good life in the city.38.3. We will also wish to ensure that our housing Growth Point/BNG programme/HCA investments are fully aligned with the priority locations that will be set out in the 1NG Plan. The HCA will probably be investing as much and possibly more in NG over the next five years than One NorthEast. If we set the right priorities, this investment could trigger massive private sector investment to realise the priorities set out in the 1NG Plan. Mortgages will be available soon, and we need more affordable housing. Most important, the headlines suggest that we need to create more opportunities for middle and higher income families to live in NG, particularly in the centre – and not in apartments. The resources mobilised by 1NG could be used to de-risk some of those sites.

Aligning our investment priorities

38.1. The realisation of the main high level physical development proposals in the NG1 will depend on a steady stream of private investment in new homes, offices, hotels, factories, and facilities such as a conference and exhibition centre. At present few developers, investors and occupiers are investing and after the recession, many will remain


highly risk averse for several years. During the recession some private investment may be triggered – if resources permit – by investment from the public sector. 38.2. Government will continue to invest in transport and community facilities and infrastructure. During the recession the Government will be using additional public expenditure to pump prime the economy. However, when the economy starts to move out of recession – and it will – it appears likely that there will be severe limits on public expenditure.

38.3. This has several important implications for the EM. First, it means we must develop clear public sector investment priorities – covering at least the next five years – for the use of ONE NorthEast, HCA, local authority prudential borrowing, and Government funding sources. We may want to give priority to the projects which will leverage the most private investment – or those that will create the most direct and indirect jobs. 38.4. We may want devise unconventional cases for public investment which are designed specifically to boost economic activity during the recession and immediately thereafter. We see very high levels of worklessness and deprivation in NG and relatively weak economic prospects; unemployment is certain to rise. We need to assess whether there is case for Government, One NorthEast and the local authorities supporting major capital projects primarily because they will be jobs-intensive. 38.5. Obvious candidates for this approach include the emerging proposals for a Conference and Exhibition Centre and the proposed retail scheme at East Pilgrim Street – all of which would create a relatively large number of low skilled jobs that would be attractive to those currently excluded from the labour market – as well as making NG a more attractive and competitive destination for business tourism.



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