London business survey December 2012

London business survey December 2012 Report sponsored by London

2 CBI/KPMG London business survey December 2012 About the sponsor KPMG is a global network of professional firms providing audit, tax and advisory services. KPMG in the UK has over 10,000 partners and staff working in 22 offices and is part of a strong network of member firms. Its vision is to turn knowledge into value for the benefit of clients, people and capital markets. For KPMG Richard Reid London chairman KPMG LLP 15 Canada Square London E14 5GL T: +44 (0) 20 7311 8956 E: richard.reid@kpmg.co.uk Matt Lewis Partner, National Markets KPMG LLP 8 Salisbury Square London EC4Y 8BB T: +44 (0) 20 7694 5452 E: matt.lewis@kpmg.co.uk For the CBI Sara Parker Director, member relations and London CBI Centre Point 103 New Oxford Street London WC1A 1DU T: +44 (0) 20 7395 8212 E: sara.parker@cbi.org.uk Bryan Cress London policy CBI Centre Point 103 New Oxford Street London WC1A 1DU T: +44 (0) 20 7395 8125 E: bryan.cress@cbi.org.uk

CBI/KPMG London business survey December 2012 3 Contents Foreword 05 Executive summary 07 1 Economic and business prospects 08 2 The 2012 Olympic and Paralympic Games 12 3 London s competitiveness 14 4 London s transport 16 Annex about the survey 18

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CBI/KPMG London business survey December 2012 5 Foreword We are delighted to present the findings of the sixteenth CBI/KPMG London business survey. We received 168 responses from a good cross-section of the capital s businesses, from CEOs and other senior leaders. Sixty-four percent came from SMEs. The survey was carried out in the autumn against a backdrop of uncertainty over the global economic outlook, particularly the difficult economic situation in the eurozone and the looming fiscal cliff in the US. The results show that although confidence is holding up, companies are feeling rather cautious and consequently there is a mixed picture on investment plans. The survey is clear also that while London retains its particular strengths, issues around its high operating costs, tax environment and housing are viewed as significant threats to its position as a global city. On the other hand, the spectacle and opportunity of the London Olympic and Paralympic Games provided a welcome boost to confidence such that London businesses believe the longer-term legacy of the Games will be positive and that a post- Olympic London is a great place to do business. The urgent message to the mayor is that the opportunity of the Games has to be grasped even more firmly now with particular focus on building and maintaining infrastructure, attracting foreign investment and boosting tourism in order to rev up the engines of growth. A hugely welcome finding from the survey is that the capital s transport networks have been steadily improving over the past 18 months. But congested roads remain a challenge. And while London s internal and domestic connectivity has been improving, its international links are judged to need urgent action with respondents now highlighting airport capacity as the number one priority going forward, it clearly demonstrates how much of a pressing issue this has become for business. Richard Reid London chairman, KPMG LLP Sara Parker London director, CBI

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CBI/KPMG London business survey December 2012 7 Executive summary Economic and business prospects Business confidence remains broadly unchanged from mid-year, with 40% of respondents feeling positive about the next six months. A similar cautious mood holds for sentiment about individual company prospects 48% of respondents are optimistic about the next six months, largely unchanged from 47% six months ago. The impact of the eurozone crisis and whether the government has a clear strategy for growth top the list of concerns. The eurozone crisis and global slowdown are blamed for the UK economy s lacklustre performance, while increased bank lending to business, pushing ahead with infrastructure and helping exporters are highlighted as ways to promote growth. Companies caution is reflected in their expansion and investment plans. Slightly fewer (53%) have plans to expand over the next year compared to the previous survey (54%). Spending intentions show a mixed outlook: more spending is planned on recruitment and training, product and process innovation, and marketing and promotion but less on IT, equipment, plant and machinery, and land and buildings. Though significantly more are hiring as normal (61%, compared to 16% in June), and fewer are resorting to redundancies (21%, compared to 31% six months ago), cost considerations still feature prominently more are hiring only where essential (69%, up from 60% in June) and using HR policies to reduce costs (27%, up from 24% six months ago). London s competitiveness Ninety-two percent of respondents rate London as a good or very good place to do business up from 86% in the last survey. London s continuing resilience comes from its great strengths its access to global markets, its skills base and talent pool, and its proximity to customers and clients which will continue to ensure that firms see the capital as retaining its position as a good place to do business over the next five years. But unless some of the main weaknesses such as high overall operating costs, tax environment and housing are addressed, London stands to lose its attraction and competitiveness in the global marketplace. London s transport Improvements across all transport modes have continued over the past eighteen months even roads have stopped getting materially worse for the first time in recent years. More respondents are generally rating the other main networks as staying the same or getting better, including transport connectivity into the capital. The Tube has shown a remarkable turnaround over the last eighteen months, with nearly half saying it is improving. Looking ahead to the capital s future infrastructure needs, respondents have highlighted airport capacity as the most urgent issue to address. The 2012 Games Twenty-four percent of respondents said their business benefited directly from the Games. For the wider business community, international promotion of London continues to be seen as the most important economic benefit (92%), followed by boosting the image and regeneration of east London and increased tourism. More believe that in general a positive long-term legacy from the Games will be delivered (55%) but respondents remain sceptical about whether the Games will deliver a skills legacy or benefit the rest of the UK outside the capital. London businesses want post-games action to focus on developing infrastructure, attracting foreign investment and boosting tourism.

8 CBI/KPMG London business survey December 2012 1 Economic and business prospects London businesses remain cautious about current activity and the future economic outlook after the rebound in sentiment six months ago. Investment plans paint a mixed picture, with plans for spending on physical capital subdued but somewhat stronger in other areas. Hiring intentions are clearer: normal hiring practices have risen and fewer companies are freezing recruitment or resorting to redundancies. The impact of the eurozone crisis remains the major on-going concern and is seen as the key cause of the UK s slow economic recovery. Bank lending, progress on infrastructure projects and increasing exports are highlighted as key ways to stimulate growth. A more competitive tax system is seen as the best driver of growth in the capital. Key findings Economic prospects and concerns Forty percent of respondents feel more optimistic about prospects for the economy over the next six months, broadly unchanged on six months ago (41%) and still below the proportion seen at end-2010 (54%). At the same time, 22% feel more pessimistic, once again a similar proportion compared to six months ago (20%) and certainly higher than the figure of end-2010 (12%). Among SMEs, the picture is broadly the same 38% are more optimistic, the same as six months ago, while 22% are more pessimistic (slightly less than 25% six months ago). Exhibit 1 Prospects for the economy over the next six months (% more optimistic) 100 75 50 25 0 Oct '10 Apr '11 Top three concerns for London business over the next year. 1 Impact of the Eurozone crisis 2 Threat of another recession Sept '11 Apr '12 3 Lack of a clear government strategy to deliver growth These are the same three concerns that were ranked highest six months ago. Sixty-one percent of respondents ranked the impact of the eurozone crisis as a concern and 53% ranked the threat of another recession. The threat of continuing recession was top a year ago. Lack of a clear government strategy to deliver growth was ranked by 32%. Availability of credit is fourth, up from fifth six months ago. Despite inflation currently easing, rising prices has climbed back up to fifth place in the list of concerns over the next 12 months from sixth place six months ago. Oct '12 Fifty-one percent of companies think the public spending cuts will have at least a moderate impact on their business, somewhat lower than 58% six months ago and significantly lower than in December 2010 (71%).

CBI/KPMG London business survey December 2012 9 Causes of the slowdown and solutions for growth Business view of the main causes of the continued slowdown in the UK economy 1 Eurozone crisis 2 Global economic slowdown 3 Lack of UK consumer confidence 4 Government austerity programme Almost a third each said that the eurozone crisis (31%) or the global economic slowdown (30%) has been the principal cause of the UK s lacklustre economic performance. Macro measures to drive growth in the UK 1 Increase lending by banks to business 2 Give go ahead on key new infrastructure projects 3 Help UK companies to do business with emerging markets Overall, 28% of respondents said that lending by banks was the single biggest way to stimulate growth, closely followed by investment in infrastructure projects (25%). The figures were 31% (bank lending) and 19% (infrastructure projects) for SMEs. Exhibit 2 Major issues of concern for businesses over the next 12 months (rank score) Impact of eurozone crisis 190 Threat of recession 85 Lack of clear government strategy to deliver growth 79 Availability of credit 73 Rising prices and inflation 67 Tax regime 46 Cost control 41 Energy supply and costs 40 Reduced public sector investment 32 Rising unemployment 27 Greater complexities in forecasting and business planning 11 Industrial relations difficulties 0 50 100 150 200 250 Exhibit 3 Macro measures to drive UK growth (rank score) 217 229 Increased lending by banks to businesses 177 Go ahead from government on key new infrastructure projects 134 More initiatives to get UK companies connected & working with emerging economies 124 Government to devise ways to stimulate economy and increase business confidence 96 Employment initiatives 76 Measures to promote housebuilding 72 Bank of England to continue Quantitative Easing 18 Stimulate national household energy conservation programme 0 50 100 150 200 250

10 CBI/KPMG London business survey December 2012 Specific ways to stimulate growth in the capital 1 Make the tax system more competitive 2 Provide support for SME innovation and entrepreneurs 3 Tackle issues around apprenticeships and youth unemployment Overall, 31% of respondents said that making the tax system more competitive was the best way to stimulate growth in the capital and 18% said that supporting SME innovation and entrepreneurs would be their first-choice action. More SMEs (36%) said a more competitive tax system would help and 18% equally identified support for innovation and entrepreneurs, and apprenticeships and youth employment measures as their first choice. Business prospects Forty-eight percent of respondents are optimistic regarding prospects for their business over the next six months, broadly unchanged from 47% six months ago and well above the figure of 31% in December 2011. Ten percent are more pessimistic about their six-monthly prospects, down a little from 15% six months ago and significantly down from 26% a year ago. Among SMEs, more respondents are positive about their six-monthly prospects (53%), up somewhat from 48% in June and 31% a year ago. Fewer are pessimistic about their prospects (13%), compared with 17% in June and 22% a year ago. Exhibit 4 Specific ways to stimulate London s growth (rank score) A more competitive tax system Supporting SME innovation and entrepreneurs 133 Address issues around apprenticeships and youth unemployment 124 Champion London as a place to do business 88 Simplify planning regime 75 Address issue of hub capacity 59 Boost incoming tourist numbers 48 Boost help for new exporters 23 Ensure Royal Docks enterprise zone a success, incl. innovative use of business rates 0 50 100 150 200 250 Exhibit 5 Prospects for business over the next six months (% more optimistic) 100 75 50 160 215 25 0 Sep 08 Apr 09 Oct 09 Apr 10 Oct 10 Apr 11 Sep 11

CBI/KPMG London business survey December 2012 11 Expansion plans Fifty-three percent of respondents have plans to expand over the next year, continuing a downward trend over the past two years. Of those looking to expand, a growing percentage wish to do so in London (54%) compared with either outside the capital (19%) or outside the UK (27%). A year ago, 42% of respondents planned to expand in London, 21% outside London and 37% outside the UK. Exhibit 6 Spending plans over next six months compared to last six months Overall rating: 4 = more 3 = same 2 = less 1 = none 4.0 3.5 Overall, companies are planning to spend relatively more on recruitment and training, product and process innovation, and marketing and promotion than six months ago, and less on IT, equipment, plant and machinery, and land and buildings. Investment intentions in all categories have not increased beyond what they were in June 2010. The percentage of survey respondents who are now freezing their recruitment has dropped significantly back to 31% from the sharp spike seen six months ago (51%) though it is still higher than a year ago (23%). There has been a keen rise in hiring practices that would have been normal before the downturn (61%), up from the figure of 16% reported six months ago, the highest proportion since December 2009. The percentage of companies resorting to redundancies has fallen to 21% from 31% six months ago. That said, more companies are hiring only where essential (69%), compared with six months ago (60%). 3.0 2.5 2.0 Mar 06 Oct 06 Sep '07 Sep 08 Oct 09 Recruitment/training Land and buildings Marketing and promotion Apr 10 Oct 10 Apr 11 Sept 11 IT, equip, plant, machinery Product/process innovation

12 CBI/KPMG London business survey December 2012 2 The 2012 Olympic and Paralympic Games The 2012 Games represented a huge opportunity for London. Business helped deliver highly successful Games and about a quarter (24%) directly benefited. More than half (55%) are confident that enough is being done to ensure a long-term legacy. However, greater effort should be made to allay doubts about the extent to which the Games will bring benefit to the UK economy outside the capital or secure a legacy of improving skills. If the opportunity is not to be lost, action needs to be focused on maintaining and developing infrastructure, attracting foreign investment to London and boosting tourism. Key findings Long term benefits of the Games Twenty-four percent of respondents said their business benefited directly from the Games, compared with 26% who thought they would benefit directly six months ago. Ninety-two percent think the Games will help promote London internationally, the same percentage as six months and a year ago. This continues to be seen as the most important benefit. Other important benefits: 87% think the Games helped give a positive image of east London, 82% think they will boost tourism, 80% think they will have a positive impact on regeneration, and 65% think they have improved transport. More think the Games have and will enhance skills (43%) than six months ago (37%). Boosting the UK economy outside London is the area where respondents think the Games will leave the least impact (33%). More respondents think enough is being done to ensure a positive long-term legacy from the Games (55%) than six months ago (46%) or 18 months ago (35%). Capitalising on the opportunity of the Games Top three actions to take: 1 Maintain current infrastructure/invest in new infrastructure (25%) 2 Highlight investment potential of London/attract more foreign direct investment to London (22%) 3 Boost tourism (19%)

CBI/KPMG London business survey December 2012 13 Exhibit 7 Confidence that the Games will boost certain activities Sep 11 Sep 11 Sep 11 Sep 11 Sep 11 Sep 11 Sep 11 Sep 11 65 17 Positive image of east London 17 65 17 15 71 15 30 57 13 Boost to UK economy outside London 9 39 52 66 4 34 62 5 28 66 Increased corporate community involvement 9 48 43 6 44 50 6 6 41 53 Enhanced visitor experience/increased tourism 26 63 11 24 57 19 24 58 18 Regeneration/physical legacy 19 59 22 11 65 24 20 60 20 Improved transport infrastructure 11 51 38 8 43 50 16 49 35 Strengthened skills base 3 31 66 4 33 63 7 36 57 International promotion of London 45 47 8 40 53 8 46 46 8 Exhibit 8 Key actions to ensure economic opportunity from the Games is seized (rank score) 222 Maintain current infrastructure/invest in new infrastructure projects in London 212 Highlight investment potential of London/bring more FDI to London 156 Continue drive to boost tourism 138 Speed regeneration of east London as catalyst for growth in capital 97 Support business to help export 0 50 100 150 200 250 0 20 40 60 80 100 Very confident Confident Not confident

14 CBI/KPMG London business survey December 2012 3 London s competitiveness More firms are reporting that London is a good place to do business but the proportion has not yet reached the high point seen in 2006. The capital s main strengths give reason to expect that its position as a global city will remain solid over the next few years. But London s main weaknesses operating costs, taxation and, rising in importance, housing are important issues that need to be addressed if companies are to remain encouraged to do business in the city. Key findings London as a global business place Ninety-two percent of respondents rate London as a good or very good place to do business compared with other global cities. This is up from 86% in the last survey, represents a continuation of the rising trend seen since the low point of June 2009 and is back on the way to reaching the high 95% recorded at end-2006. Eighty-six percent of SMEs also view the capital as a good or very good place to do business, unchanged from six months ago and up somewhat from 81% at the end of 2010. Eighty-two percent of firms believe London s position as a good place to do business will in five years be at least the same or will have improved about the same as six months ago (83%) and up slightly from 78% in December 2011 but not yet at the level of December 2006 (88%). A huge 95% of respondents believe their business will remain in the capital in five years time, up from 88% six months ago. Ninety-three percent of SMEs said they believed they would remain in London in five years time, up from 86% in the last survey. London s strengths and weaknesses London s top three strengths 1 Access to global markets 2 Skills and talent pool 3 Proximity to customers and clients The top three are the same as six months ago. For SMEs, skills and talent pool, and proximity to customers and clients were valued equally above access to markets. London s three major perceived weaknesses 1 Overall operating costs 2 Tax environment 3 Housing Operating costs came top six months ago and tax environment has moved from third place in the last survey to second. Housing is third, up from fourth six months ago, displacing transport. Top three most burdensome areas of regulation 1 Taxation 2 Health and safety 3 Employment These are the same top three as six months ago except that employment, and health and safety have swapped places.

CBI/KPMG London business survey December 2012 15 Exhibit 9 London as a place to do business Overall rating: 4 = very good 3 = good 2 = satisfactory 1 = poor/very poor 4.0 3.5 3.0 2.5 2.0 Jan 05 Sep 05 Mar 06 Oct 06 Mar 07 Sep 07 Apr 08 Sep 08 Apr 09 Oct 09 Apr 10 Oct 10 Exhibit 10 London s status in five years time Overall rating: 3 = improved 2 = about the same 1 = diminished 3.0 Apr 11 Sep 11 Apr 12 Oct 12 Exhibit 11 London s top strengths (rank score) 205 Access to global markets 196 Skills/talent pool 155 Proximity to customers/clients 85 Transport 65 Quality of life 64 Overall governance of London 63 Communications infrastructure 54 Economic environment 32 Regulatory environment 23 Proximity to suppliers 12 Return on investment 10 Housing 7 Supply of affordable office space 2.5 2.0 0 50 100 150 200 250 Exhibit 12 Most burdensome areas of regulation (rank score) Taxation 91 1.5 Health & safety 78 1.0 Oct 06 Sep 08 Oct 09 Oct 10 Apr 11 Sept'11 Employment Planning law 41 73 36 Bribery and corruption legislation Pensions 31 Company law 25 21 Environmental and waste regulations 0 20 40 60 80 100

16 CBI/KPMG London business survey December 2012 4 London s transport London s transport networks will continue to be key to underpinning economic growth and the future competitiveness of the capital. Business has been seeing steady improvements to the capital s networks but roads are still the weak link. London s connectivity to existing and new markets is also a top priority if the city is to retain its global competitiveness, continuing to act as an international gateway for business. Key findings Performance of networks Respondents think that overall the relative improvements across all transport modes that have been seen since mid-june 2011 have continued roads too follow this trend albeit from a lower base than other modes. On average, the proportion of respondents who rated the main networks excluding roads as staying the same or getting better has edged up. The Tube again showed the biggest improvement 48% said it is improving, compared with 42% six months ago and 20% in June 2011. But 9% are still not convinced and say it is getting worse, compared with 6% six months ago and 11% in June 2011. Thirty-one percent said rail services are improving, the same as six months ago. But 23% think they are getting worse, up from 19% six months ago. Roads continue to perform relative poorly. Although they are judged to be in the best state at any time over the past seven years, 42% of respondents still said they are getting worse. Eighty-eight percent think that transport connectivity from outside London is the same or improving, slightly up from 87% six months ago. More think that air connectivity to London is getting worse (30%) than improving (21%).

CBI/KPMG London business survey December 2012 17 London s future infrastructure needs 1 Increase airport capacity 2 Improve roads 3 Build Crossrail 2 4 Improve river and waterway networks Increasing airport capacity has jumped up the agenda in our previous survey, six months ago, expanding Heathrow was in second place, up from third in December 2011, while other London airport expansion had dropped to sixth place six months ago from fourth in December 2011. Increasing road capacity and connections came fourth six months ago. Increasing rail capacity and connections came top six months ago. 52 Exhibit 13 Overall assessment of transport: is it improving or deteriorating? 3 6 42 34 14 Tube 2 3 54 33 8 Buses 4 19 46 21 10 Rail 13 29 44 13 1 Road network 1 5 35 40 19 Cycle network 3 8 50 31 8 Transport connectivity from outside London 6 24 49 16 5 Air connectivity to London 0 20 40 60 80 100 Getting much worse Getting somewhat worse Staying the same Improving slightly Improving significantly Exhibit 14 What is your assessment of the service on each transport mode? (historical comparison) Overall rating: 5 = improving significantly 4 = improving slightly 3 = staying the same 2 = getting somewhat worse 1 = getting much worse 4.0 3.5 3.0 2.5 5 2.0 Sep 07 Sep 08 Oct 09 Oct 10 Apr 11 Sep 11 Buses Rail Tube Transport connectivity from outside London Road network

18 CBI/KPMG London business survey December 2012 Annex About the survey The survey was carried out between 19 September and 25 October 2012. We received 168 responses, many directly from CEOs of leading companies. Professional services was the largest sector, covering 21% of the total sample, followed by hospitality, leisure and retail (19%), banking, finance and insurance (16%), and energy, manufacturing and construction (9%). Sixty-four percent came from SMEs. Exhibit 15 Response by sector (%) 21 Professional services 19 Hospitality, leisure and retail 16 Banking, finance & insurance 9 Energy, manufacturing & construction 7 Information, communications & technology 7 Property 5 Transport and distribution 16 Other 0 5 10 15 20 25 Note Scoring methodology: where businesses were asked to rank preferences, a scoring methodology was used to reflect the ranking given. So where respondents were asked to prioritise a number of issues from a list, for example the three most important, if the answer was ranked 1 it scored 3, where it ranked 2 it scored 2 etc. The overall score for each answer is the sum of the scores for that answer summed over the set of respondents.

For further information or a copy in large text format, please contact: Bryan Cress CBI T: +44 (0)20 7395 8125 E: bryan.cress@cbi.org.uk December 2012 Copyright CBI 2012 The content may not be copied, distributed, reported or dealt with in whole or in part without prior consent of the CBI. CBI Our mission is to promote the conditions in which businesses of all sizes and sectors in the UK can compete and prosper for the benefit of all. To achieve this, we campaign in the UK, the EU and internationally for a competitive business landscape. www.cbi.org.uk Product code: OPS_LON_349 London