The London Economy

Introduction

The global economic climate is very uncertain at the moment in the aftermath of the financial crisis. Although most economies have returned to growth after rare falls in world output in 2009, there are significant doubts about the future of the euro, the impact of necessary fiscal retrenchment, the potential for commodity price inflation to constrain growth and several other factors. Against that background, London's ability to compete successfully in a global marketplace is critical for the UK economy to achieve a return to more typical growth rates. This report, a development in the latest series of annual reports commissioned by the City of London looking at London's place in the UK economy, therefore places particular emphasis on competitiveness and the global economy, alongside an updated assessment of trends in London's economy and its role in the UK.

Has London been more successful economically than the rest of the UK over the last twenty years?

A major dynamo of London's growth is its trade with the rest of the country and with the world. Over the past 20 years, the business services sectors have dominated employment growth, providing an ever more diverse and specialised set of services tailored to the global economy. Globalisation has been a major asset to global centres such as London, leading to high levels of growth and high incomes. London has become a magnet for inward investment and talent, a hub of entrepreneurialism and innovation.

London's capacity for growth across a range of businesses and sectors has created a well-established central agglomeration of economic activities. The concentration of activity in central London and its associated high land values show the premium that businesses are willing to pay to locate near the other firms with whom they both collaborate and compete. They pay to have unrivalled access to markets, labour and complementary businesses. They benefit from knowledge spilling over from firm to firm and from sector to sector, adding greatly to the centre's higher productivity. London, with its long traditions of trading, offers an open and enabling environment for business. Its tax regimes are relatively favourable to business, though this advantage has been eroded by taxation increases. In an age of intense competition between cities, a business-friendly environment must be safeguarded.

Hand in hand with its ability to reach across the world is London's tradition of innovation. The city has always shown a capacity to re-invent its role to meet change and new opportunities. Past decades have witnessed the decline of much of its manufacturing and dockland industries: manufacturing accounted for more than 23 per cent of employment in 1971 and less than five per cent in 2007 (7). Great energy and initiative has been shown in shifting the orientation of the economy towards the financial, business and other services sectors. For the last two decades, high value added business services have been the driver of London's economic growth. Business start-up rates have been higher than any other region in the UK (8). Successful innovation is strongly identified with ...