Coming up for air
The capital has done better than expected
Aug 5th 2010
AS A recession spawned by a banking crisis struck two years ago, London looked acutely vulnerable because of its reliance on finance. The sight of distraught employees leaving Lehman Brothers’ glitzy office in Canary Wharf after the investment bank folded in September 2008 seemed to presage a similar collapse in the capital’s economy. But London has proved more resilient than expected, and there are signs that it will recover more swiftly than the rest of Britain.
A swollen financial sector was not the only reason why the capital seemed likely to take a battering in the downturn. Historically its economy has been more volatile than the rest of the country’s, suffering more in recessions but then outperforming when better times returned. London fared worse in the recession of the early 1990s and a decade later, after the dotcom crash, it slipped into a slump that the rest of the country avoided (see chart).
The recession of 2008-09 was far graver for the British economy as a whole than that of the early 1990s, and it was also more severe for London. But this time the capital did not suffer more than elsewhere; if anything the downturn hit London a bit less than it did the country as a whole. Despite forebodings about its dependence on finance, the capital’s post-industrial economy proved to be a boon rather than a bane. An attenuated manufacturing sector meant that London was spared the full effects of the sharp downturn in that sector during the world trade slump.
Now there are signs that the recovery is taking a firmer grip in the capital. One encouraging portent is that more people are using the railway network. The train-operating companies reported on August 2nd that passenger journeys in London and the south-east, which had fallen especially steeply in 2009, grew by 5.9% in the year to the second quarter, in line with the national increase of 6.1%.
Regional indicators of business activity compiled by Markit, a research firm, from reports from purchasing managers in both services and manufacturing paint a similar picture. They show that London took the lead as the recovery got under way. Since then the gap has narrowed but the latest reports, for June, still showed London just above the national average.
Consistent with this is the breakdown of the surprisingly strong figures for national GDP growth in the second quarter, when output rose by 1.1% compared with the first three months of the year. Financial and business services increased by 1.3% after a strong performance in the first quarter, during which output in services rose by 1% compared with overall growth of 0.3%.
That sudden surge in the second quarter is unlikely to be sustained. Even so, London could well outpace the rest of the economy over the next two or three years. Forecasts published in June by GLA Economics, a research unit that advises London’s government, show the capital outperforming the rest of Britain.
One boost will come from staging the Olympic games in 2012. The capital will also suffer less from public-spending cuts because the private sector is more dominant than in other parts of the country. Most important, it will benefit from its role as a world city. “London is far more tapped into the global recovery,” says Matthew Sherwood, an economist at Experian, a business-research firm.
Yet London is unlikely to outshine the rest of Britain by anything like as much as it did in the long boom that ended in 2008. Freewheeling financiers will, rightly, be shackled by tougher regulations, and manufacturing should benefit from the lower pound, which will help other regions. A less overmighty metropolis may be no bad thing. Britain would be a better place if growth were more evenly distributed around the country.