Headline: London Faces Economic Crunch

Source: BBC News, 31 August 2001

URL: http://news.bbc.co.uk/hi/english/business/newsid_1518000/1518713.stm

Some 144,000 jobs in London could be lost by the end of the next year as the capital's economy stalls, according to a new forecast from the Centre for Economics & Business Research (CEBR).

The CEBR predicts London's economy will grow by just 1.8% this year, compared with 2.1% for the UK as a whole.

This would be the first time since 1992 that the capital's output growth has fallen behind the national average.

The London economy is being dragged down by sluggish performance in the crucial financial services sector, as well as by the natural constraint of its high cost of living - especially property prices.

The finance business, whose prolonged boom has largely underpinned the capital's bubbly housing market, is growing at just 0.7% this year, compared with an annual rate of 6% in 2000.

Services slump

The financial slowdown is part of a wider retrenchment in the business services sector, which accounts for close to one-third of London's economic output.

Total output growth in business services, including the consulting, accountancy and advertising industries, has fallen from 4.6% in 2000 to just 1.6% this year, the CEBR found.

A slump in tourism - related primarily to worries over food safety following the foot-and-mouth disease outbreak - has also had a disproportionate effect on the capital.

The CEBR was still tentatively optimistic that these factors may prove only temporary. "At this stage we still think that a slowdown is more likely than a full-blown recession," said Kevin McCauley, who prepared the report.

Policy challenge

But news of a slowdown of any kind will still trouble policy-makers in the city, which has enjoyed a spectacular economic boom over the past five years.

The government is increasingly concerned that London's infrastructure has not kept pace with growth in its economy.

Property prices in London are twice the national average, the cost of living is among the highest in the world, and the transportation network is notoriously inefficient.

This has led to extraordinary difficulties in attracting low-paid but crucial workers such as teachers, police officers and medical staff.

London's population has grown sharply over the past few years, swollen by a strong influx from the rest of the UK and overseas. But high prices, and the migration of a few key employers, could already be reversing the trend.

Capital losses

The Office for National Statistics recently reported that London recorded a net population fall of 70,000 people in the year to June 2000, the highest net outflow on record.

In all, almost one-quarter of a million people moved out of London last year.

A broad economic slowdown, led by a slump among high earners, should help cool the housing market, making the city more affordable.

But it will also knock sentiment, and could lead to a debt crunch among Londoners with hefty mortgages.

-- Andre Weltman (aweltman@state.pa.us), August 31, 2001

Answers

And here's the shocking, shocking corollary report to go with the above, also from today's BBC News:

UK sentiment at three-year low

URL: http://news.bbc.co.uk/hi/english/business/newsid_1518000/1518180.stm

Consumer optimism in the UK has dropped to a three-year low in August, according to a Mori poll published in the Times newspaper.

Mori's economic optimism index, which measures how people expect the economy to perform over the next 12 months, has dropped to minus 31, a 16-point fall since the end of July.

But the indications of waning optimism do not seem to be mirrored in British behaviour.

The poll comes only the day after figures from the Bank of England showed that lending to individuals through mortgages, credit cards and other loans grew by a record £6.1bn in July - indicating buoyant consumer spending.

Two-speed economy

According to Mori, the people most worried about the economy are professionals and managers, and people who live in the Midlands and Wales - areas which have been hardest hit by the slowdown in the manufacturing sector.

The news is yet another indication that Britain's current economic health, largely dependent on consumer spending, may be on the wane. So far, the slump in the manufacturing sector has been balanced by buoyant consumer markets, reflected in robust demand for housing and consumer credit.

But at the same time, talk of a recession has been getting louder, fuelled rather than soothed by repeated cuts in interest rates in the UK, the United States and Europe.

Mori's index has only twice dropped lower than August's figure during the past decade:

· In 1998, when financial markets crashed after the Russian financial crisis.

· And in 1992, after the pound slumped out of the European exchange rate mechanism

-- Andre Weltman (aweltman@state.pa.us), August 31, 2001.