00Executive Summary

The Midlands Engine plays a large role in the UK economy, accounting for 13 per cent of the national output. However, its economy is £18 billion per year smaller than it should be, with its cities accounting for 89 per cent of this output gap. This is because its cities, and in particular its city centres, are not attracting enough highly-skilled service export firms to increase productivity across the region. Policy must address the barriers to growth if the Midlands Engine area is going to generate more prosperity locally and make a larger contribution to the national economy.

The Midlands Engine’s economy is concentrated in its cities and city centres in particular. Its eight largest urban areas account for nine per cent of land area but 52 per cent of jobs and 50 per cent of output. The Birmingham urban area alone accounts for around a quarter of all jobs and output, despite only accounting for three per cent of the land area.

While production is concentrated in certain places, the benefits of production are felt across a wider area. One in five workers who live outside of a Midlands Engine city work in one, and often in higher-paid work than they can find near where they live. For example, a person commuting from Lichfield to Birmingham gains an annual boost of £3,900 to their salary, a 15 per cent increase compared to a person remaining in Lichfield to work.

The challenge for the Midlands Engine is that despite its cities playing a crucial role within it, they underperform. Centre for Cities’ estimates suggest the Midlands Engine economy is £18 billion per year smaller than it should be, and 89 per cent of this gap is the result of the underperformance of its urban economies. The Birmingham conurbation alone accounts for £11 billion (58 per cent).  This underperformance reduces the prosperity of the residents that live in and around the cities of the Midlands Engine and means that the national economy as a whole is smaller than it should be.

This mainly results from the underperformance of its service exporting sector. Productivity in manufacturing export industries in the Midlands Engine, a sector in which this region performs relatively strongly, is close to the UK average. But output per worker in service exporting industries such as finance and communications, which have a particular preference for an urban location due to the inherent benefits that such a location offers to these activities, trails well behind the national average. This suggests that the cities are not offering the ‘agglomeration’ benefits that they should be to such businesses.

For the Midlands Engine to meet its full potential and play an even greater role in the national economy, policymakers should aim to help places within it to reach their potential. But policy should also recognise that the potential of some areas is inherently greater than others, and use this to guide policy focus. It should work to improve the benefits that different places offer by:

  1. Improving the skills of residents. The Midlands Engine has a higher share of residents without qualifications, and a lower share of graduates, compared to the UK as a whole. Policy interventions in the region should focus on getting those who currently don’t have the equivalent of five good GCSEs up to this level by targeting skills money in the area’s allocation from the Shared Prosperity Fund to support these people.
  2. Making city centres more attractive places to do business. Midlands Engine city centres have below average shares of office space. New high-quality city centre office space that meets the needs of occupiers, in particular service exporters, should remain a priority, even in a world of hybrid working. Policy should focus on helping to bring forward appropriate office space in these centres through planning policy and the use of central government funds designated for this purpose. For example, placing the region’s investment zones, which were announced in the Spring Budget 2023, in Birmingham, Nottingham and Leicester city centres would be one way to do this.
  3. Improving public transport infrastructure and density within the big cities. The Birmingham and Nottingham conurbations have the poorest transport accessibility in the region, shrinking their labour market and damaging their economic performance. Policy makers should look to align brownfield regeneration funds available from central government together with the current City Region Sustainable Transport Settlement for Birmingham and any future settlement for Nottingham to develop transport and housing in tandem, increasing the number of people who live around public transport stops.

It should also continue to support a competitive manufacturing sector, which is more likely to be found in the suburbs of or hinterlands around cities. The Midlands Engine manufacturing sector is currently performing close to the average for Great Britain. Policy makers should set out how to meet future manufacturing demand by ensuring land, in particular greenfield sites, with access to large pools of workers are available in the suburbs and urban hinterlands.

Finally, national and local policymakers should look to better match economic policy with the geography it operates over by getting devolution deals that together cover the whole of the Midlands Engine by 2030. The West Midlands Combined Authority area has already benefited from the greater control it has had over policy, and this will likely increase with its recently-announced trailblazer deal. The East Midlands is also looking to benefit with the proposed deal now waiting for approval. The parts of the Midlands Engine without one should begin working on their own devolution deal to take advantage of the Government’s intention to give all parts of England a deal by 2030.