Sunday, December 22, 2013
The fall and rise of the London economy
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

It has been a big week, with the Federal Reserveís tapering decision, good news on inflation and unemployment, and the question of what the Bank of England does when the jobless rate gets down to 7%.

But let me this week tackle a subject which I know is of intense interest. I know this because when I dropped a small pebble into the pond last week, asking for input on whether London helps the rest of the economy or drains it, I was indundated.

Some have made up their mind. Vince Cable, the business secretary, said in a Today interview on Thursday that Lodnon sucked the life out of other parts of Britain.

We have had a London-centric few days, with Sir Howard Daviesís Airports Commission, set up to investigate the issue of UK airport capacity, publishing a short-list of London solutions. It is tempting, to coin a phrase, to say ďI agree with VinceĒ.

What I want to do, however, given that this is a very big subject, is something slightly different. Today I want to set out the extent of Londonís dominance, and the reasons for it. Then, events permitting, I will do two pieces next month.

One will try to answer the question of whether London is good or bad for the rest of the country. The other, without prejudging that answer, will examine what can be done to improve the performance of Britainís regions, and the balance of the economy.

When I arrived in London in the 1970s, it was a city in decline. New York went bankrupt then and, while that does not happen in Britain, the capital was in a sorry state.

Londonís population was falling - it dropped three-quarters of a million between 1971 and 1981, with good reason. It was dirty, strike-prone and, crime-ridden, its Victorian infrastructure crumbling. The swinging sixties had come and gone.

The comeback was, however, swift. The London School of Economicsí Growth Commission found there was a step-change in Britainís economic performance around 1980 - GDP per capita suddenly began growing more rapidly than in the rest of the G7 - and there was a similar change in London. The sick man of Europe, and its sick capital, suddenly started to recover.

From 1980 Britain started to do better than other countries, and London started to do better than the rest of Britain. Population reversed its earlier decline and began to grow. By the end of the 1980s the north-south divide had re-established itself.

A book of mine published then, North and South, just republished as an e-book, chronicled that rise. As an aside it reminded me in 1982 the Monopolies Commission ruled against bids by HSBC and Standard Chartered for Royal Bank of Scotland (things might have been different).

Why did London revive? There have been three broad trends in recent decades, all of which have fuelled Londonís growth.

The first is the rise of global cities, which some call modern city-states. Modern globalisation has benefited strategically-placed cities just as in an earlier era trade led to great prosperity for the ports.

The second is the shift from manufacturing to services, and the so-called knowledge-based economy. Though London was and is an important manufacturing centre, its great advantage during Britainís deindustrialization was its economic diversity.

The third is financial services. Though it is easy to overstate the contribution of the City, it should not be underestimated, or the impact of Big Bang in 1986, which effectively opened up a closed and protected sector to the world.

There are other factors. When I wrote my book in the 1980s, the shift of regional head offices to London waa in full flood. Now very few top firms have head offices outside London. The civil service, despite waves of regional relocation, remains firmly London based. So does the media, despite the BBC shifting some activities to Salford. Regional newspapers are an endangered species. Last week saw the final edition of the Liverpool Daily Post.

The numbers for Londonís domination are striking, as is the fact that the capital has prospered since the crisis. It is the smallest of the Office for National Statisticsí standard regions, accounting for just 1% of the UKís land area.

It houses, within that, 13% of the countryís population and, as noted last week, has a 22.4% share of the economy, measured by gross value-added. That share is up from 18.5% in 1997 and 20.7% in 2007.

To put Londonís 22.4% share of the economy in perspective, it is bigger than Wales, the northeast, Northern Ireland, Yorkshire & Humberside and the West Midlands combined. They have a combined population share of 29%, more than double that of London.

There are many other such indicators. Londonís gross value-added per head, £37,232, is 75% above the UK average. Only four parts of the country: Scotland, the rest of the southeast, the east of England and the southwest, have a GVA per head more than 50% of the London figure.

Put like that Londonís higher incomes - wages and disposable incomes are 25-30% above the UK average - look quite modest, though house prices, averaging £437,000 versus £234,000 in the rest of the country, put that in context.

London has the youngest population, a median age of 34 comparing with a 39.7 average. If you wanted evidence it sucks in young talent from the rest of the country (and the rest of the world), that may be it.

The question is whether it sucks in all the economic life. I think I know what my answer will be when I return to this early in the new year. I can tell you that most of the very large number contacting me agree with Vince. What everybody accepts is that, for good or bad, Britain has become regionally very lopsided.

London and the southeast combined account for 37% of the UK economy, a share that is rising inexorably towards 40%. It is not unthinkable it could reach 50% in this century, which would be a nightmare vision of an overcrowded corner pulling along an underdeveloped and unproductive economic tail. Would that be remotely healthy? Surely not. To be continued ...