Brexit – A regional assessment of spending power development on the British Islands
Since the referendum on the UK’s membership in the European Union (commonly known as the Brexit-Referendum) on June 23, 2016, there has been a lot of political discussions between the UK and the European Union on what conditions the UK will be leaving the EU by March 29, 2019 (or even if it will at all). The whole process has been like a messy divorce with lengthy discussions on EU budget contributions, paybacks, legal consequences, hard or soft borders in Ireland, a backstop agreement, and many other technical issues. The economic consequences on a per capita level of this impending split only recently started coming into focus.
As is already well known, the outcome of the referendum differed strongly between regions in the UK. The map above shows that London, Northern Ireland, and Scotland voted to remain whereas the East and North Eastern regions of England voted strongly to leave. A recent study by YouGov and The Economist from February 23, 2019 also revealed that the voting behavior of British citizens was strongly dependent on age, gender and income, education and party preference: “Old, poor Tories with little education chose to leave, while rich young Labourites with degrees wanted to remain.”
Using our state-of-the-art forecasting tool Market Pro, we explored real-time data and forecasts on spending power development on a NUTS 2 regional level, segmented by gender and age cohorts. We combine country-specific historical income distribution forecasts with projections from the Intergovernmental Panel on Climate Change (IPCC) on population trends by age and education, as well as GDP forecasts provided by the World Economic Outlook of the IMF. Thus, it is now possible to provide the first internally consistent predictions of economic development and other indicators for all countries and regions worldwide. For methodology, see the publication in the renowned scientific journal Nature.
As such, we have the opportunity to provide some empirical evidence regarding the claim made by The Economist. First, we will look at the spending power development of different British regions and then check for any correlations with demographic factors such as gender and age. We will start with the heart of the British Empire: London.
London – Paris: A Tale of Two Cities
“It was the best of times, it was the worst of times.” In A Tale of Two Cities, Charles Dickens started his novel of events in London and Paris with these famous lines. We follow his inspiration and compare these two cities in terms of spending power development and forecasting until 2031.
During the Brexit referendum, Londoners were strongly in favor of remaining in the European Union. Since London is a capital city and since it’s difficult to compare a capital to any other region in a country, we decided that the next best choice was Paris due to similar economic and social factors and shared history.
As of March 2019, the living standard in London and Paris are very comparable—a person living in London can on average spend $28,170 (in 2011 PPP) on an annual basis and the average Parisian, $27,789. But it wasn’t until the end of 2016 that London was able to overtake Paris in potential annual consumption power. Both capitals already had a high spending power level, but it appears to have been saturated in Paris.
The spending power of Parisians is expected to grow a very slow 0.09% per year on average from 2016 to 2031, Londoners will—ceteris paribus—witness an annual increase of their spending power by 1.05%, more than 10 times as fast as Paris. Hence, by 2031 an average Londoner will be able to spend $32,664, whereas Parisians will fall behind considerably to $28,196 annual spending power.
While we only have data for Ile de France (Greater Paris), our data on London is more granular. Therefore, we can compare the different municipalities of Greater London, namely Inner London – West; Inner London – East; Outer London – East and North East; Outer London – South; and Outer London – West and North West.
As of March 2019, living in Western Inner London provides the highest spending power per capita: those who live in this area have almost $60,000 (in 2011 PPP) per year to spend. This is more than double the amount of Eastern Inner London with around $27.600. Together these two regions form the City of London with a total consumption power of $155 billion. The three regions of Outer London – East and North East, South, and West and North West – fall considerably behind, but in total provide an annual spending power of $82 billion. London in total thus has a total spending power of $237 billion, which represents 15% of the total spending power of the UK. In comparison, the people living in Ile de France combined would be able to spend $349 billion throughout 2019, which amounts to 24% of total French spending power.
The City of London voted to remain in the EU but will need to leave if Brexit happens. By analyzing the city’s potential economic development within a yet unchanged framework, London’s prospects look well in comparison to Paris as the growth rate of its per capita spending power is more than tenfold of Paris. But with Brexit, of course, these numbers are prone to be challenged as they are calculated with the current IMF GDP forecasts, which have not taken any effect of Brexit into account. Since these GDP figures are adjusted every six months, we will be able to easily detect any effects of Brexit soon after, if it should occur, on economic performance and average consumption power. We will be able to provide real-time evidence of whether London will go to “a far, far better rest” (to quote Charles Dickens again) without the European Union or the opposite.