London Econoomic Outlook

Executive Summary

• The London economy slowed in 2005, though the latter six months of 2005 saw London stage something of a recovery in growth. The return to strength occurred as a result of financial and business services activity.

• In 2005 Q4, there were also encouraging signs of a recovery in consumer spending.

• Employment growth in London exceeded our expectations. The latest data shows that employment growth in London outpaced that of the UK. On balance, the majority of firms in the service sector expect to increase employment further.

• London’s share of total output growth for the UK increased as a result of its strength in financial and business services, yet overall output growth is down slightly on the previous year. As growth nationally picks up in 2006 and 2007, we believe London will benefit disproportionately to the rest of the UK regions.

• The manufacturing sector will see further employment decline, yet London will benefit in terms of manufacturing output growth as consumer spending returns to trend with increased stability in the housing market from 2007.

Fig. 1: London and UK Annual GVA Growth (%) 1990-2010

GVA, 2005-2010 (% growth, p.a.)

2005 2006 2007 2008 2009 2010

London 2.9 3.5 3.1 3.1 2.8 3.0

UK 1.8 2.3 2.3 2.5 2.4 2.6

Consumer Spending, 2005-2010 (% growth, p.a.)

2005 2006 2007 2008 2009 2010

London 2.1 2.4 2.6 2.7 2.8 2.9

UK 1.8 2.0 2.2 2.3 2.4 2.5

Employment, 2005-2010, (% growth, p.a.)

2005 2006 2007 2008 2009 2010

London 1.9 1.0 1.0 0.8 0.6 0.7

UK 1.0 0.6 0.5 0.5 0.4 0.6

RPI Inflation, 2005-2010, (% growth, p.a.)

2005 2006 2007 2008 2009 2010

London 2.8 2.7 2.6 2.7 2.8 3.0

UK 2.8 2.8 2.7 2.8 2.8 3.0

Global Economic Overview

London continues to be exposed to international economic conditions to a greater extent than other UK regions as a result of its function as an international financial services centre. The performance of the US and eurozone economies will have a significant impact on the prospects for London. Strong growth in the global economy translates into increased activity in financial markets, with increased activity in London’s financial and business services (FBS) sector.

Fig. 2: Global GDP Growth, Q4 2001 - Q4 2005

The US economy recorded quarterly growth of 1% in Q3 2005, up from 0.8% in Q2, despite ongoing energy price rises (the price of a barrel of West Texas Intermediate peaked at almost $70 in late August), and rising short-term interest rates. However,