At the height of the credit crunch, everyone said that London’s economy was doomed. The City, and the industries that fed off it, would crash to earth. The rich would flee, and the bankers would soon be applying for jobs at McDonald’s.
It hasn’t happened. The financial services sector has recovered sharply. London has had a ‘great escape’, emerging from the recession in better shape than the rest of Britain. If anything, the gulf between London and rest of Britain has grown wider. There are important lessons in that. If the rest of Britain was anything like as strong as London and the southeast, the whole country would be roaring ahead. Instead of talking about re-balancing the British economy, we should be trying to get the rest of the country to perform as well as London does.
The figures make it clear that, of all Britain’s regions, London and the southeast have emerged best from the downturn. A recent Confederation of British Industry report showed that financial services firms grew strongly in the latest quarter. Big banks are making huge profits again and the City is doing well. A study by the London School of Economics, led by Henry Overman, concluded that London had comes back stronger from the recession than any other region, and that it had suffered less in the downturn too.
For example, London’s income per head fell by 2.5% between 2008 and 2009, while it fell by 2.9% in England as a whole – and London was already a lot richer before the recession began. There were fewer job losses as well. Britain saw peak-to-trough falls in employment of 3.9%, whereas London saw only a 2.6% fall. House prices bounced back more rapidly too. Savills reports that prime London properties grew in value by 5% this year, while prices were still stagnant or falling in the rest of the country.True, London benefited a little from government policy. The Olympics is a huge building project. The bail-out of the banks helped London more than anywhere else. But against that, the run up in government spending did nothing for London. The southeast has far lower government spending as a percentage of its economy than other regions. In Wales, for example, state spending accounts for more than 70% of the economy, whereas in the southeast it is around half that. London is harder hit by the tax rises than other parts of Britain – the new 50% rate will hit a lot of Londoners, but not many people elsewhere.
In fact, the evidence of the recession is that London and the southeast have a hyper-resilient, hugely competitive economy. What we must do is make the rest of Britain more like London. There are four key lessons from its success.
1. London is plugged into the global economy more than other parts of Britain. What happens to the rest of Britain or Europe doesn’t matter that much. London’s bankers, lawyers, consultants and accountants are servicing emerging economies more than anything else. Russian and Far Eastern firms are flockingto raise capital on London’s markets, and paying lots of fees. London has connected itself into booming markets – not locked itself into declining ones.
2. London has specialised in professional services, and made itself a world-leader in selling those to the rest of the world. There is a lot of talk about reviving specialist manufacturing or creating new industries for Britain. But we don’t have many sectors where we can compete with Germany on quality, or with eastern Europe on manufacturing costs. Maybe the best policy would be to recognise where our strengths lie – and get the rest of the country to try and do more of the things that London does so well.
3. London has a highly skilled, flexible labour market. The Labour Force Survey says that, for England as a whole, professional and service jobs were hit less hard by the recession than administrative, trade and basic jobs. That was good for London, as professionals make up a larger chunk of its labour force – nearly 50%, against under 40% in the Midlands and the north. There was more flexibility on wages too, partly because bonuses (which fall as well as rise) are a bigger part of pay. That helped London’s workers keep their jobs through the downturn.
4. The state accounts for a far lower share of the London and southeast economy than for the rest of the UK. Working for the government may be relatively secure during a recession, and that provides some protection for the regions. But the state sector also has low productivity, low growth, and it doesn’t export anything. It consumes rather than generates wealth – and it is only in London and the south-east that it is small enough to allow the rest of the economy to flourish.
The notion of a couple of years ago that this would be a middle-class recession, hitting London harder than anywhere else, was wrong. London is pulling further ahead. As government spending cuts start to bite, that will become more and more obvious. But there is nothing that special about London. It is part of the same country as Manchester and Cardiff and Birmingham. If those regions could learn why the capital was doing so well, Britain would be a lot better off for it.