The London EconomyJustine Lovatt - LCCI Economist

19 February 2003

LCCI Economic Research

• London Economy Research Programme – NIESR econometric model forecasts and quarterly London Economic Review

• London Monitor business confidence surveys

London’s GDP in 2002

• London’s GDP is forecast to have risen by 2.4% in 2002.

• This is above the latest Office for National Statistics (ONS) figure for the UK economy of 1.7% for 2002.

• Like the UK London has only moderate growth but is not in recession.

London/UK GDP 1998-2005

Annual Change in London and UK GDP 1998-2005 (1995 Prices)

0%

1%

2%

3%

4%

5%

6%

7%

1998 1999 2000 2001 2002 2003 2004 2005

London GDP - Workplace UK GDP

Effect of Stock Market Falls

• The FTSE 100 fell to a 7 year low to 3,481 on 27 January – half its peak.

• Over 3 years of Stock Market falls has led to extensive job losses in the City.

• Companies have been affected via final salary pension schemes.

• Difficulty raising money via the Stock Market has contributed to low business investment.

Manufacturing Recession

• London manufacturing is in recession, as in the UK, with output forecast to have fallen 4.5% in 2002 in London.

• The manufacturing sector accounts for half the share of GDP as in the UK.

• Therefore the recession has less overall effect on London economy.

Strong Sectors of Economy (1)

• Construction is forecast to have grown by 7.6% in 2002.

• The sector is strong due to the property market boom.

• House prices rose by 19.4% in the year to Q4 2002 according to the Halifax. They have doubled in the past 5 years.

Strong Sectors of Economy (2)

• Wholesale and retail is forecast to have grown by 4.1% in 2002. Consumption is high due to record low interest rates and high property prices.

• Hotels and catering and public sector also performed well in 2002

Unemployment in London

• In the past year London unemployment has fallen joint fastest in the UK.

• But unemployment in London is still the second highest in the UK.

• Since the mid-1990s unemployment has fallen in both the UK and London.

Change in Unemployment

0.6%0.5%

0.3%0.2% 0.2%

0.1%

-0.1%

-0.4%-0.5%

-0.6%-0.7%

-0.7%

-0.8%

-0.6%

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

South

Eas

t

South

Wes

t

North

Eas

t

East M

idlan

dsEas

t

Wes

t Midl

ands

York

s & H

umbe

r

North

ern

Irelan

d

North

Wes

t

Scotla

nd

Wale

s

Lond

on

Change in ILO Unemployment Rate Year to Oct-Dec 2002

Unemployment By UK Region

6.9%6.6%

5.9%5.5% 5.5%

5.2% 4.8% 4.8% 4.6%

4.0% 3.9% 3.9%

0%

1%

2%

3%

4%

5%

6%

7%

N. Eas

t

Lond

on

Scotla

nd

W. M

idlan

ds

N. Ire

land

Wale

s

N. Wes

t

York

s & H

umbe

r

E. Midl

ands

S. Wes

tEas

t

S. Eas

t

ILO Unemployment by Region October-December 2002

London Growth in 2003

• London is forecast to grow by 2.8% in 2003 compared to 2.4% in 2002.

• But there are threats to London’s economic growth . . .

Threats To The Economy

• House price falls which would impact economy via reduced consumer spending.

• Continued Stock Market falls again via reduced consumer spending.

• War with Iraq via oil prices, uncertainty.

Housing Market Fall Scenario

A scenario was run to show the impact of a 20% fall in house prices by Q4 2003:

• Consumption would be 0.8% lower in London than base forecast in 2003.

• GDP growth in London would be 0.5% lower in 2003 and a further 0.5% lower in 2004 than the base forecast.

The London Monitor

• The London Monitor is an LCCI monthly survey of business confidence.

• Quarterly surveys are conducted in conjunction with the British Chamber of Commerce.

• Balances show % of respondents expecting an improvement less % expecting things to worsen.

UK Economy Predictions

Q4 2002 survey predictions for next year:

• A balance of +12% expect UK economic growth to improve.

• The balances for UK inflation (-25%), interest rates (-32%) and unemployment (-52%) are all negative (negative denotes to worsen/rise).

UK Economy Predictions

+5%

+12%

-23% -25%

-12%

-32%

-44% -52%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

Economic Grow th Inflation Interest Rates Unemployment

Expectations for the UK Economy for next 12 months - Q3 2002 and Q4 2002 Balances

Q3 2002 Q4 2002

London Economy Today

Q4 2002 survey showed economic improvement:

• A balance of +22% said that their company’s output has increased over the past month.

• This is up from +5% in the Q3 survey.

London Economy Predictions

Q4 2002 survey predicts improvement in the short to medium term:

• A balance of +15% expected growth to improve in London.

• A balance of +39% expected their business to improve.

Conclusions

• 2002 growth was moderate in London at 2.4%. Manufacturing and finance had a bad year but other sectors had strong growth.

• Growth is forecast to be 2.8% in 2003. • Possible threats to the economy are

housing market/Stock Market falls or a war with Iraq.