We will outperform the rest of country – again

Mar 7 2008 by Iain Laing, The Journal

WHETHER the economy falls into recession or merely slows this year, one of the most encouraging trends of recent years should continue.

Our region will outperform the rest of the country, as we did from 2003 to 2006, and probably last year, too.

The turnaround has been remarkable, considering that our economy underperformed the rest of the UK for 10 straight years until 2002.

People in the North East are still poorer than the UK average and the gap, about 19%, is far too big to close across the course of a single economic cycle.

But we are moving in the right direction, with strong growth across a range of sectors.

Even the manufacturing sector has rebounded, after shrinking outright from 1997 to 2003.

Manufacturing accounts for a much bigger share of the North East economy than in the rest of the country, so this is hugely important. Part of the relative strength of North East manufacturing in recent years has been driven by the apparently endless surge in energy prices, which is generating increased business for offshore engineering companies and associated enterprises.

This boom shows no sign of ending, even though the US economy, which accounts for more than a quarter of the entire global economy, is probably shrinking already.

Sustained growth in energy demand from rapidly-growing emerging markets is offsetting the drop demand from America.

Growth in China and India and other Asian economies will eventually slow, but even if oil prices were to drop by $40 per barrel, it would still be profitable to get it out of the ground more or less anywhere.

And the lags between movements in oil prices and investment in extraction are so long that even a huge price drop – which I don’t expect – would take at least a year to have any visible effect on business here. For once, our engineering and manufacturing heritage stands us in good stead.

This year, it will pay much better to be making things rather than, say, buying other people’s mortgages, only to find they can’t keep up the payments.

Still, the North East cannot escape unscathed in a broad economic slowdown.

The biggest single problem facing the UK economy today is that the debt-fuelled consumer boom is coming to an end, and there is no reason to think shoppers in this region will prove much more resilient than elsewhere.

In the housing market, the drop in prices is still quite modest. If it accelerates, the North East could fare quite badly after the boom of recent years. The inevitable job losses at Northern Rock won’t help either.

For once, our engineering and manufacturing heritage stands us in good stead