London has outpaced other UK regions for 20 years - but will this continue?
March 20, 2018
Our latest UK Economic Outlook report projects steady but relatively modest UK GDP growth of around 1.5% in 2018 and 1.6% in 2019. But how will this vary by region?
One obvious way to assess this is to look at history. As analysed in detail in our report, and summarised in the chart below, London has consistently outperformed other UK regions for most of the past two decades in terms of economic growth, both before and after the global financial crisis. Only during the crisis in 2008-9 was the fall in London’s economic output slightly worse than the UK average.
Outside London, there is less of a clear North-South divide in historical regional growth patterns. Some Northern regions and Northern Ireland did better than some Southern regions in the decade before the financial crisis, though they have performed less well since the crisis.
The Midlands struggled before the crisis but has performed relatively better since 2010 when compared to other regions except London.
Our analysis of sectoral trends shows that London’s relative outperformance on growth reflects two factors:
- First, a relatively high proportion of London’s economy is in relatively high growth sectors like business services (and financial services before the crisis, though this has been less advantageous since the crisis).
- Second, within key sectors like business services, London’s growth rate has been higher than any other region. Success had bred success in such sectors, with the best UK and international talent drawn to London.
London growth falls back to the pack
More recently, however, there have been signs that London’s relative performance has been less strong. For example:
- In the year to December 2017, official data show London house prices rising slower than any other region – and indeed actually falling during the second half of the year. This is likely to have negative wealth and confidence effects on spending by London consumers.
- In the year to the fourth quarter, London’s employment rate rose but only in line with the UK average – regions that had previously lagged behind such as North East had the strongest jobs growth over this period (see chart below).
In part, this may be the consequence of London’s past success catching up with it as house prices hit affordability buffers and the transport system struggles to accommodate additional workers. Brexit could also have had a role in dampening international investment in London and creating uncertainty for the City, given that a deal with the EU on financial services will be more challenging to negotiate than a Canada-type free trade agreement on goods.
Whatever the precise reason, we expect London’s growth rate to drop back to close to the UK average in the near future, with projected GVA growth of 1.6% in both 2018 and 2019. As manufacturing has bounced back recently on the back of a stronger global economy and a more competitive value of the pound, this has helped parts of the UK with stronger industrial bases such as the North and the Midlands. This is consistent with our latest Good Growth for Cities report, which saw the faster rates of improvement in cities like Birmingham and Leeds.
While some may welcome signs of the London economy (and particularly the housing market) cooling down, ultimately we need stronger growth to resume across all regions of the UK, including the capital, which provides a disproportionate contribution not just to GDP but also to the tax revenues used to fund public services across the UK. This will require a longer term programme of investment in housing, transport, skills and innovation across the country.