Manchester was essentially built on the cotton industry but now is powered by high-tech sectors. (Photo by Christopher Furlong/Getty Images)

Manchester is the city in which it all began. By the dawn of the 20th century, the city also widely known as ‘Cottonopolis’ was spinning 32% of the world’s cotton, with the textile industry responsible for three in every ten of the city’s jobs.

When the textile industry began to falter after the First World War, this was compensated by the growth of new sectors – electrics and engineering. It was after the Second World War, however, just as Prime Minister Harold Macmillan was declaring that the UK “had never had it so good”, that Manchester experienced economic disaster.

From 1951 to 1981, jobs in engineering and electrical goods fell by almost half, while jobs in textiles and logistics fell by 86%. This caused an enormous rise in unemployment, which damaged the city’s pride and social fabric, with years of government austerity only adding to the hardship.

Manchester’s services focus

In recent years, however, Manchester’s fortunes have risen again. The city’s economic growth is once again keeping pace with the rest of the UK, while its ambitious investment strategy has seen it excel in advanced, high-value-added industries.

Manchester is now ranked as the 12th most popular global destination for foreign direct investment (FDI), according to IBM, and as the leading UK city for foreign investment outside of London, as reported by EY. In 2019 alone the city hosted 34 new FDI projects.

From 1991 to 2011, the continued decline of industrial employment, to the tune of more than 26,000 jobs, was more than offset by the creation of almost 95,000 new jobs in the burgeoning services sector.

However, while services employ 84% of Manchester’s workers, the sector produces only around 76% of the city’s economic output. Although no longer a source of mass employment, Manchester’s industrial base is being reborn as a high-skill, high-technology economic powerhouse. While just 3% of Mancunians are employed in manufacturing, mining or utilities, these sectors account for 18% of the city’s economic output.

This comeback has been fuelled by foreign investment, with multinationals such as Heinz, Hitachi and Unilever all establishing a presence in the city.

An advanced manufacturing hub

Manchester’s resurgence as a centre for advanced manufacturing has also been enabled by its extremely high levels of human capital. The University of Manchester is the second largest in terms of student numbers in the UK, while the conurbation of Greater Manchester is home to five universities that together produce 36,000 graduates a year. Almost half of those (46%) will remain in the city after graduation. Technical, scientific and professional activities employ 55,000 Mancunians, or 13.6% – far higher than the UK average (8.8%).

This investment in human capital is already paying off in terms of innovation. The University of Manchester’s School of Materials, the largest such department in Europe, was the first to isolate graphene, the market for which is expected to top $1bn by 2027.

This enormous pool of human capital has also served as the basis for Manchester’s growing tech industry, recently ranked as the best in the UK by The Data City. Manchester’s tech talent pool includes more than 2,000 machine learning engineers – the largest number in the UK outside London.

Manchester has particularly excelled in financial technology, or fintech, developing the UK’s largest regional fintech ecosystem. The city’s 109 fintech firms, employing almost 10,000 people, will produce an estimated £541m of gross value-added in 2020 – 8.2% of the UK’s entire fintech output – according to Invest in Manchester figures.

Cybersecurity and digital health are also key areas of focus for Manchester, with major investments by GCHQ, Google and Amazon taking advantage of the city’s talent pool.

A link at the heart of the UK

In addition to its large and highly skilled labour force, Manchester also benefits from its strong transport connections, with an international airport offering direct flights to Atlanta and Beijing, among other major global cities. 

Further down the line, HS2, the UK’s much-anticipated high-speed rail network, will reduce by half the time it takes to get to London from Manchester. and by almost two-thirds the time it takes to get to Birmingham. However, repeated delays to the construction of the line mean that Manchester is not expected to be connected to the network until at least 2035.

The city also enjoys much lower commercial rents than London. The rateable value of commercial property is just £130 per square metre in Manchester, compared with £270 in London. This can substantially lower the cost of investment projects requiring a significant amount of commercial floorspace.

Residential housing, on the other hand, is proving more of a challenge for the city. While Manchester has suffered less from the UK’s chronic housing shortage than London, as of June the city had 3,535 households living homeless in temporary accommodation.

The top-line construction figures look healthy. Manchester’s construction output for 2020 is estimated to be more than $6.1bn, three times the level seen in Birmingham and greater than any other UK city outside London. This is expected to increase to $6.8bn by 2025. 

However, this construction is heavily concentrated in top-end flats, apartments and townhouses in the relatively affluent city centre. Despite the 92,475 households on the waiting list for social housing in Greater Manchester, just 64 new homes were built for social rent in the year up to March 2019 – 0.56% of all new homes, a decrease from the year before.

Manchester’s inequality problem

The city is also grappling with related issues of inequality. Tim Newns, CEO of Manchester’s investment promotion agency MIDAS, says: “In Greater Manchester, we actually have a microcosm of the UK economy in that we have a slight north-south divide ourselves.

“In the 1990s and 2000s, you saw the central and southern areas of the metropolitan area really start to accelerate and grow, whereas the northern districts tended to be much slower in that regard. They were still dealing with structural challenges from the industrial change.”

MIDAS is hoping to tackle this geographic inequality through a targeted investment programme. Newns explains: “We have a lot of expertise in some of the major universities in the centre. What we are trying to effectively do is distribute some of that high-value research activity into these areas, but with activities that couldn’t take place in the central areas.”

The effort to spread Manchester’s high value-added jobs outwards can only help lift deprivation so far, however. Despite its levels of highly skilled workers, Manchester also has 41,500 workers with no qualifications – 11% of the workforce, compared with a UK average of 8%. Such workers risk being left out of the city’s industrial strategy.

The twin challenges of Brexit and Covid-19

In addition to the challenges of housing and inequality, the twin shocks of Covid-19 and Brexit are set to have long-term consequences for Manchester’s economy.

In October, the reopening of the city’s five universities brought with it a surge in coronavirus cases that forced Manchester into Tier 3 lockdown. The October crisis also highlighted the strengths and limitations of the city’s devolved authority, after talks between the mayor and the UK government broke down with no agreement reached on financial support.

The UK government’s tightening of restrictions on FDI due to both the pandemic and rising geopolitical tensions could also pose a problem for the city, which has heavily promoted inward investment from China.

On the other hand, the city is also home to the UK’s greatest concentration of e-commerce start-ups, putting it in pole position to take advantage of a potentially semi-permanent shift to online shopping after Covid-19.

Moreover, while early indicators suggest that the pandemic reduced the number of tech FDI projects in the UK by half during the first quarter of 2020, tech investment in Manchester has proven more resilient than expected following Brexit, likely due to the industry’s comparatively limited exposure to tariffs.

Newns remains optimistic. “We have a very strong pipeline,” he says. “We have got more than 250 live projects at the moment. About 70 of them are delayed because of what has been going on, as I think most decision-making is at the moment, but the good news is that none of them have cancelled any projects this year.”

Additional reporting by Marina Leiva.

For more of Investment Monitor’s coverage of the UK’s cities, read through our Future of British Cities series: