Mid-market set to be fastest growing segment of UK economy between now and 2020

The mid-market is set to be the fastest growing segment of the UK economy in the run up to 2020, according to research by international law firm Gowling WLG (UK).

With the UK economy continuing its recovery, the mid-market is forecast to increase its contribution to GDP by 18% in nominal terms, from £285 billion in 2015 to £335 billion in 2020.

While large businesses have traditionally been the engines of growth for the UK, accounting for 48% of total GDP in 2015 (£861 billion), economic modelling reveals a rebalancing towards a vibrant mid-market. A global economic slowdown looks likely to mean a gradual decline for large companies until 2019, when they will see a rebound. They are forecast to increase in value by a modest 8% by 2020 to £928 billion, representing 1.5% Compound Annual Growth Rate (CAGR).

The impact of small businesses to the UK economy since the recession has been substantial, accounting for 46% of GDP at the sector’s peak in 2009. This is now set to decline from 35% of GDP in 2015 (£582 billion) to 25% by 2020 (£428 billion), representing a 26% decrease in value terms. This fall in contribution of small businesses suggests a large number will sufficiently scale up and reach mid-size status.

Fast growth ‘gazelles’ powering growth

The study, Make way for the middle, goes on to show a significant part of the success in the mid-market is driven by a small but rapid growth sub-section called ‘gazelles’ – companies that have exhibited a turnover growth of greater than 10% every year for at least five years, with a turnover of at least £30 million. One of the defining features of gazelles is their international nature and focus on exports, and by 2020 these companies alone are forecast to account for £1 in every £5 of exports.

Hugh Maule, partner at Gowling WLG (UK), explains: “A remarkable shift in the dynamic of the UK economy is taking place, creating a period of exciting opportunity for mid-market companies. Innovative new businesses and niche sectors are springing up across the country to support regional supply chains. This is the time for mid-sized businesses to decide how they will secure future growth, and the most successful will raise capital to expand, export and reach new markets.”

Tom Thackray, CBI acting director of competitive markets, remarks: “Medium sized businesses are the unsung heroes of the UK economy. Fast growth mid-market firms were the difference between recovery and recession in 2010-13 – they have the potential to help rebalance our economy and bring prosperity to every corner of the UK. The Government can help them by continuing to review the tax system to ensure it incentivises entrepreneurship, improve access to skilled workers and encourage prompt payment.”

UK regions to become hubs of innovation

Despite the political focus on creating a ‘Northern Powerhouse’, large businesses are set to decline in their share of value contribution across all regions except London, albeit modestly (outside of London this represents an average drop in real terms of -0.14%). The forecast is more positive for the mid-market, which is expected to see growth rates of over 3% year-on-year in all regions except the North East (which is set to decline by 1.77%).

Make way for the middle uses trade data to reveal which sectors are supporting growth across the UK and shows innovative businesses scaling up in all parts of the country, from life sciences and biopharma in the Midlands, to jet engines and mid-market defence manufacturers in the South West.

Maule continues: “While the government is starting to recognise that the industries of the future are run by innovative, highly skilled mid-sized businesses, further policy support is needed to ensure long term sustainable growth. More easily accessible capital, tax cuts and greater access to highly skilled workers could be the difference between rapid regional growth and economic struggle in the face of global stagnation.”

Further findings from the economic research

By 2020:

• The UK economy is forecast to grow to £1,690 billion.
• The contribution of large businesses to GDP is set to increase by 8% to £928 billion from £861 billion.
• The contribution of the mid-market to GDP is set to increase by 18% to £335 billion from £285 billion.
• The contribution of small businesses to GDP is set to decrease by 26% to £428 billion from £582 billion.
• Gazelles will contribute £1 in every £5 of UK exports. This 20% of total trade is up from 17% in 2015 and represents an additional annual contribution of £43 billion.

Selected regional trade statistics from the research

By 2020:

• London’s mid-market gazelles are expected to contribute £38 billion to the UK economy in exports.
• London’s mid-market services sector is a success story, with mid-market financial services trade set to grow at a CAGR of 4.4% to reach £12.52 billion (from £10.1 billion in 2015) and mid-market insurance and pensions growing at a CAGR of 8% to reach £4.03 billion (from £2.74 billion in 2015).
• The North East is the only region that is not expected to see mid-market growth.
• The South West, long a hub for aerospace and defence, is forecast to see mid-market jet engine trade be worth £4.23 billion to the UK economy.
• The West Midlands has a booming mid-market automotive sector, contributing £5.68 billion through exports in 2015 and set to increase at a rate of 6.69% year-on-year to reach £7.85 billion. This rapid expansion has been aided by the success of automotive giant Jaguar Land Rover.
• Growth in biopharma and life sciences trade in the Midlands will continue its momentum, forecast to grow at rates of 9.5% and 10.02% year-on-year to reach a combined total of £4.5 billion.