UK: NORTHERN TORTOISE GAINS GROUND. - David Smith is economics editor of The Sunday Times.

Last Updated: 31 Aug 2010

David Smith is economics editor of The Sunday Times.

The recession has narrowed the North/South gap widened by the '80s boom.

One of the most remarkable aspects of the 1990-92 recession (I think it is now safe to call it that) was the shift in the relative fortunes of the North and South of Britain. The disparities between the two widened markedly during the late '80s boom years, but the subsequent narrowing of the gap has been even more dramatic.

By the early months of 1993, as the chart below shows, unemployment in the South East, at 10.4% of the workforce, was above that in Wales (10.2%) and Scotland (9.9%). Moreover, it was only fractionally below Yorkshire and Humberside (10.5%) and the North West (10.8%). Greater London, with an unemployment rate of 11.7%, has become a jobless blackspot. To put all this into perspective, as recently as 1989, unemployment in the South East, at 3.9% of the workforce, was roughly half that in Wales (7.3%) and Yorkshire and Humberside (7.4%). The North West (8.5%) and Scotland (9.3%) were even worse off.

The shift in relative house prices has been just as extraordinary. Using Nationwide Building Society figures, and taking the first quarter of 1989 as a starting point, average house prices in East Anglia, the '80s boom region, had fallen by 35% by the first three months of 1993. Prices in Greater London were down by 30%, in the South East by 34% and in the South West by 24%. By comparison, average house prices in what statisticians call the North were up by 23%, those in the North West by 24%, and in Scotland by 31%.

The North did not enjoy a housing boom as intense as that experienced by the South. Having said this, many of the current problems afflicting the housing market were caused by the suddenness of that boom-bust shift. The Bank of England suggests that some 15% of households with mortgages, are in the negative equity trap - the situation of having a house worth less than its mortgage. The problem is much worse in the South. The buyer who took out a 100% mortgage for a property in East Anglia or the South East in early 1989, is now sitting in an asset worth a third less than his mortgage. Anyone with serious negative equity in Scotland or northern England, by comparison, must have made a spectacularly bad purchase if its price fell as the rest of the local market was rising.

Overall, according to estimates by the National Westminster Bank, the South's recession has been roughly twice as bad as the rest of Britain's. In 1991, for example, NatWest estimates suggest that gross domestic product fell by 4% in the South East, compared with falls of 2.3% in Yorkshire and Humberside, 1.2% in the North West, 1.8% in Wales and just 0.4% in Scotland. Last year, a fall of 1.3% for GDP in the South East, 1.2% in East Anglia and 1% in the South West, explained most of the overall drop of 0.5% in the nation's GDP.

It has been a story of the tortoise and the hare: the South raced away in the second half of the 1990s but then ran out of steam; the North has demonstrated the greater staying power. But who will win in the end? Many people argue that the recession has given the North a net economic advantage. But this cannot be true. Even the sharp narrowing of regional unemployment differentials does not tell the full story. Southern regions have higher activity rates - the proportion of people of working age who make themselves available for work. The skills base in the South is higher mainly because high unemployment is a relatively recent phenomenon.

Heavily-indebted southern consumers gain most from lower interest rates, just as they suffered most from high interest rates in the recession. But their spending will be held back by the desire to repay debt and a reluctance to burn their fingers again. And although the South East appears to be leading the national recovery in house prices, it will be constrained by factors such as negative equity.

Northern manufacturers, meanwhile, will benefit most from the lower exchange rate and from the Government's new commitment to industry, although it is sensible to suspend judgment on this for the time being.

What will be missing in the 1990s are the great structural shifts in the economy which formerly acted to the North's disadvantage. But structural shifts are also evident in, for example, banking, where the Big Four are all in the middle of programmes to reduce staff numbers significantly. And this will hit the South hardest.

The prospect, therefore, is of something much more like regionally-balanced growth than we had in the 1980s. If I am right, this is a healthy development. Too often overheating in one part of the country has required corrective action that adversely affects the rest of Britain. If we can avoid this problem in the future, some goodwill have come of the recession.

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