RESEARCH PERIODICAL THE ECONOMIC OUTLOOK FOR LONDON

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1 RESEARCH PERIODICAL THE ECONOMIC OUTLOOK FOR LONDON Report prepared for the City of London Corporation by Oxford Economics Published April 2013

2 Overview The outlook suggests that London is expected to remain at the forefront of the UK recovery given its concentration of high valued added exporting service sectors. The region is also expected to account for an increasing share of UK output over the forecast. In labour market terms, the forecasts suggest that 374,000 of jobs created in the UK between 2013 and 2018 will be within London, which equates to approximately 1 in every 4 jobs. Since the December version of London Outlook there have been significant revisions to London s GVA data, with reported growth of 1.4% in 2010 (0.9% previously) and 0.8% in 2011 (2.2% previously). Partly as a result of a lower base in 2011, our estimate for London s growth in 2012 is now higher at 1%, compared to 0.2% quoted in December, with business services providing most of the growth, and accommodation & food and wholesale & retail trade being held up by the Olympics. Looking ahead, as the Eurozone is widely anticipated to experience a recession in 2013, likely to reduce the level of financial services activity, our outlook for London remains subdued. We anticipate that the European debt crisis will be resolved by 2014, with business and consumer confidence recovering. We therefore forecast London s GVA growth to pick up to 2.8% in 2014, while during we expect London s economy to return to its long-run growth path of around 3.6%. London s labour market performed well in 2012 with total employment growth estimated at 3% (150,000 jobs); however we expect recruitment to slow down in 2013 as a result of sluggish GVA growth. Activity is likely to pick up again in 2014 and we see London s employment averaging a growth rate of 1.3% over (67,000 net jobs per annum). Key sectors driving London s employment in our forecast are expected to be professional services and administrative & support services. Forecast summary GVA (basic prices, % / year) Employment (% / year) Unemployment rate (%) Population (%/year) Source: ONS, Oxford Economics Economic growth in London (GVA) % / year Total employment in Greater London (000s)

3 Forecast summary London forecast GVA (basic prices, % / year) Employment (thousands) Employment (% / year) Unemployment rate (%) Employment by borough (000 s) City of London Westminster Tower Hamlets Rest of London Employment by borough (% / year) City of London Westminster Tower Hamlets Rest of London GVA by borough (% / year) City of London Westminster Tower Hamlets Rest of London Source: ONS, Oxford Economics London s GVA growth by sector (% / year) Financial & business services Financial & insurance activities Real estate activities Administrative & support service activities Mainly public services Public administration & defence Education Human health & social work activities Wholesale & retail trade Accommodation & food service activities Information & communication Other service activities Manufacturing Construction Total Source: ONS, Oxford Economics 3

4 London s labour market Incorporating the most recent employment data, strong recruitment in business services and the hospitality industry mean that London s total employment is estimated to have grown by 3% in 2012, almost twice as fast as the UK s rate of 1.65%. This robust performance of the labour market also means that London s total employment is estimated to have already risen above its pre-recession peak of 2008, whereas the UK is only expected to do so by The combination of strong recruitment and lacklustre GVA growth in 2012 indicates that most firms currently have some spare capacity and are less likely to continue recruiting in the near future. This results in our forecast of very modest growth in London employment in Most notably, due to the Olympics ending we expect there to be almost no new jobs in accommodation & food and wholesale & retail trade, while job gains in business services will be less than half of that in As the spare capacity gradually erodes away, our forecast is for employment growth to pick up to 1.1% in 2014 and then settle at a rate of 1.3% over , underpinned again by robust business services. At the same time employment in public administration and health & education are forecast to continue falling as a result of on-going cuts in government spending. Labour market change (000s) Employment Self employment Total employment Unemployment Source: ONS, Oxford Economics Employment growth in London Change (000s) Public admin Education Manufacturing Human health & social work Other production Financial & insurance Real estate activities Other service activities Arts, entertainment Transport & storage Construction Information & comms Accommodation & food Wholesale & retail Admin & support services Professional, scientific Claimant unemployment rate Rate (%) Source: Nomis,Oxford Economics 2019 The Claimant count unemployment rate in London remains below that of the UK (by around 0.8% points) and in 2012 stood at 4.1%. As the London labour market struggles to create jobs in 2013 we expect this rate to remain relatively flat until 2014, and then to start falling as recruitment picks up, eventually dropping to 2.7% by London s nominal workplace wages are estimated to be 704 per week in 2012, up by 1.2% from the year before. In the long run over we forecast London s nominal wages to grow by an average rate of 4% and to reach 957 by In the short run, new EU bonus regulations could account for rises in pay and drive wages further upwards. At the same time anticipated falls in the rate of inflation mean that real incomes are expected to receive a boost from 2014 onwards, which will then feed through to consumption and provide an extra boost for the London economy

5 London s property market Since the December version of the report there have been some revisions to the London house price data, and growth of 5.2% in 2011 and 10.1% in 2012 is stronger than previously reported. Furthermore, according to research by Savills, in 2012 there has been a record number of 5m+ sales, with prime areas such as Chelsea and Kensington continuing to attract wealthy foreign buyers 1. The report however also points out a slowdown in activity in 2012Q4, which can be partly attributed to a gradual effect of the stamp duty on properties above 2m rising to 7% in March Following on from this, our forecast is for London house prices to slow down in 2013 and 2014 while the market adjusts for the higher taxation. After that, as inflation is expected to fall back and real incomes regain momentum, we see house prices picking up again in 2015 and accelerating further over There is also some evidence of Londoners holding on to their properties or moving within London instead of cashing in and moving elsewhere in the UK. This means that currently London is less of a driver for the UK property market than it has been in the past. However, weak sterling will make investment more attractive from international locations. London house prices Change (%) Source: ONS, Oxford Economics Standard office rents Change (%) London UK Driven in part by lease renewals, in 2012 central London office rents grew by 4.6%. In spite of this reasonable growth, JLL reports that in terms of take-up 2012 turned out to be the most subdued letting market since 2003, largely attributed to slow commitment to relocations caused by economic uncertainty 2. The forecast is also slightly weaker than reported in December. The expectation is for rents to grow by 3.5% in 2013 and 4.2% in 2014, before slowing down slightly in The estimated vacancy rate of central London in 2012 stood at 6.2%, more or less unchanged for the past three years. As completions eventually start falling in the near future and demand picks up, the forecast is for vacancy rate to come down slowly, dropping to 4.6% by Prime London Residential Markets, Savills, July The Central London Market Q4 2012, Jones Lang LaSalle Source: Jones Lang LaSalle, Oxford Economics London office vacancy rates Rate (%) Source: Jones Lang LaSalle, Oxford Economics 5

6 Key European centres analysis Performance of the London economy in 2012 was average by European standards, with manufacturing centres Munich and Stockholm outpacing it in terms of GDP growth, despite the slowdown in global trade. One of London s closest financial rivals Frankfurt also grew marginally faster, while Italian and Spanish cities contracted as a result of the on-going debt crisis and consequent austerity measures. Although London s performance in 2013 is expected to be only slightly better, our forecast is for most of its European peers to struggle as the Eurozone recession continues. Looking ahead to 2014 and 2015 we expect London to rank at the top of the table in terms of GDP growth, with only Stockholm and Munich being able to keep up, aided by acceleration in world trade. London s productivity in 2012 is estimated at around 58,000 per worker. Stockholm (due to high-value added manufacturing), Paris (due to higher productivity in business services) and Brussels still remain significantly more productive than London. At the same time low productivity remains a big issue for Italy and Spain. In terms of ILO unemployment London fairs relatively well, with only Frankfurt and Munich having a notably lower rate. Meanwhile high unemployment, especially amongst the young, is another big drag for Barcelona and Madrid. Overall, since the December report we have made downward revisions to a number of our European city forecasts, which now makes London stand out very favourably in terms of its future prospects. What remains to be seen is whether the proposed EU cap on bankers bonuses will have an effect on London s global competiveness as a financial centre, with some analysts suggesting it might not be that significant due to a number of potential ways around it. Productivity in key European cities, 2012 London = 100 Stockholm Brussels Paris Frankfurt London Munich Milan Rome Madrid Barcelona Unemployment in key European cities, 2012 London = 100 Barcelona Madrid Brussels Rome Paris London Milan Stockholm Frankfurt Munich GDP growth in large European cities (%) Brussels Munich Frankfurt Madrid Barcelona Paris Milan Rome Stockholm London

7 Focus on City of London After very robust performances in 2010 and 2011, the City s labour market is estimated to have had another strong year in Driven by recruitment in its business services and information & communications sector, total employment grew by 3.7%. As recruitment activity slows down across London, the City is also forecast to see a weaker year in 2013 with its biggest sector financial services expected to lose some jobs. Further falls in employment are anticipated in wholesale & retail, accommodation & catering and public services, while business services will create fewer jobs. As a result, total employment in the borough is forecast to grow by 0.8%. With business and investment confidence expected to recover by 2014, the City s financial sector is forecast to start expanding again contributing to total employment growth of 1.3%. We expect this rate to hold in 2015, and then average 1% per year over City of London s employment change (000s) Financial & business services Financial & insurance activities Real estate activities Administrative & support service activities Mainly public services Public administration & defence Education Human health & social work activities Wholesale & retail trade Accommodation & food service activities Information & communication Other service activities Manufacturing Construction Total Source: ONS, Oxford Economics 7

8 City of London: economic growth % / year City London City of London: employment by sector Percentage of total employment, % 39% 37% City of London: total employment (000s) Financial services Business services Other Based on these employment numbers, our estimate for City s GVA growth in 2012 is 1.1%. We forecast a similar rate of growth for 2013 and then, as activity picks up, an acceleration to 3.1% in 2014 and 3.9% over So overall, although the City s long-term employment growth is expected to be marginally lower than that of London, productivity gains will result in its GVA growth outpacing London and the UK on the whole Focus on Westminster Out of the three boroughs covered in this report Westminster s economy is the most diverse, with only 6% of its employment attributed to financial services. Business and public services account for the majority of borough s employment and together make up 45%. This diversity also makes Westminster vulnerable to cuts in public spending. Despite employment in public services falling in 2012, stout performances from professional and administrative services, information & communications and the hospitality industry meant that total employment grew by 2.3%. This strong job creation combined with slow GVA growth in 2012 result in substantially weaker employment forecast for 2013, with most sectors slowing down or even posting losses. In 2014 we anticipate Westminster s labour market to bounce back and then settle at a growth rate of 1.6% over , underpinned by sizeable job gains in business and most other private services. At the same time public services are expected to continue losing jobs well into the forecast. 8

9 Westminster s employment change (000s) Financial & business services Financial & insurance activities Real estate activities Administrative & support service activities Mainly public services Public administration & defence Education Human health & social work activities Wholesale & retail trade Accommodation & food service activities Information & communication Other service activities Manufacturing Construction Total Source: ONS, Oxford Economics Westminster: economic growth % / year Westminster London Westminster: total employment (000s) Westminster: employment by sector Percentage of total employment, % 10% Business services 29% Other 11% Public services Wolesale & retail Information & comms 16% Financial services 28% As a result of our relatively weak short-term employment forecast, Westminster s GVA growth will also lag both the City and Tower Hamlets over After that, however, we expect the performance of Westminster economy to match that of the City and record an average rate of 4.1% between 2016 and

10 Focus on Tower Hamlets The economy of Tower Hamlets is quite heavily concentrated in financial services, mainly located in Canary Wharf, which account for a 29% share of total employment second only to the City. Business services are also very prominent, while at the same time the borough s share of public services is similar to that of Westminster, essentially making it a two speed economy. In our previous report we raised doubts about the reliability of borough s employment data for However the revised figure now shows even stronger growth for the year at 11.7%. Furthermore, this momentum seems to have carried over into 2012 with total employment estimated to have grown by 5.8%, driven largely by professional and administrative & support services and, to a lesser degree, construction. We regard the pace of job gains in largely a result of recruitment bouncing back from the cuts made during the financial crisis. Our forecast is therefore for employment growth in Tower Hamlets to slow down considerably over , averaging a rate of 1.7% per year. Still, this is the strongest forecast across the three boroughs, reflecting the high potential of the area as a rival to the City. GVA growth will also outperform the City, Westminster, and London on the whole. Despite this, Tower Hamlets is a borough with persistent economic problems of its own, and the area outside of Canary Wharf is well known for its high unemployment rate and economic deprivation. Tower Hamlets employment change (000s) Financial & business services Financial & insurance activities Real estate activities Administrative & support service activities Mainly public services Public administration & defence Education Human health & social work activities Wholesale & retail trade Accommodation & food service activities Information & communication Other service activities Manufacturing Construction Total Source: ONS, Oxford Economics 10

11 Tower Hamlets: economic growth % / year Tower Hamlets London Tower Hamlets: total employment (000s) Tower Hamlets: employment by sector Percentage of total employment, % 5% 29% Financial services 15% Business services Other Public services Information & comms Wolesale & retail 17% 25% 11

12 Forecasts City of London forecasts Employment (000s) Primary industries Manufacturing Construction Wholesale & retail trade Transportation & storage Accommodation & food services Information & communication Financial & insurance activities Real estate activities Administrative & support services Public administration & defence Health & education Other services Total employment Output GVA ( 2009, bn) Employment (%) Av. Growth Rate Primary industries Manufacturing Construction Wholesale & retail trade Transportation & storage Accommodation & food services Information & communication Financial & insurance activities Real estate activities Administrative & support services Public administration & defence Health & education Other services Total employment Output (%) GVA

13 Westminster forecasts Employment (000s) Primary industries Manufacturing Construction Wholesale & retail trade Transportation & storage Accommodation & food services Information & communication Financial & insurance activities Real estate activities Administrative & support services Public administration & defence Health & education Other services Total employment Output GVA ( 2009, bn) Employment (%) Av. Growth Rate Primary industries Manufacturing Construction Wholesale & retail trade Transportation & storage Accommodation & food services Information & communication Financial & insurance activities Real estate activities Administrative & support services Public administration & defence Health & education Other services Total employment Output (%) GVA

14 Tower Hamlets forecasts Employment (000s) Primary industries Manufacturing Construction Wholesale & retail trade Transportation & storage Accommodation & food services Information & communication Financial & insurance activities Real estate activities Administrative & support services Public administration & defence Health & education Other services Total employment Output GVA ( 2009, bn) Employment (%) Av. Growth Rate Primary industries Manufacturing Construction Wholesale & retail trade Transportation & storage Accommodation & food services Information & communication Financial & insurance activities Real estate activities Administrative & support services Public administration & defence Health & education Other services Total employment Output (%) GVA

15 Rest of London forecasts Employment (000s) Primary industries Manufacturing Construction Wholesale & retail trade Transportation & storage Accommodation & food services Information & communication Financial & insurance activities Real estate activities Administrative & support services Public administration & defence Health & education Other services Total employment Output GVA ( 2009, bn) Employment (%) Av. Growth Rate Primary industries Manufacturing Construction Wholesale & retail trade Transportation & storage Accommodation & food services Information & communication Financial & insurance activities Real estate activities Administrative & support services Public administration & defence Health & education Other services Total employment Output (%) GVA

16 Greater London forecasts Employment (000s) Primary industries Manufacturing Construction Wholesale & retail trade Transportation & storage Accommodation & food services Information & communication Financial & insurance activities Real estate activities Administrative & support services Public administration & defence Health & education Other services Total employment Output GVA ( 2009, bn) Employment (%) Av. Growth Rate Primary industries Manufacturing Construction Wholesale & retail trade Transportation & storage Accommodation & food services Information & communication Financial & insurance activities Real estate activities Administrative & support services Public administration & defence Health & education Other services Total employment Output (%) GVA

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