Four months on from the EU referendum, and uncertainty continues to surround the future of London’s economy – with the British Bankers’ Association warning recently that large banks are preparing to leave the UK because of fears around Brexit, and a leaked tape of a pre-referendum Theresa May speech revealing the now-Prime Minister’s concerns about a potential exodus of businesses.
Inevitably speculation has persisted about which of London’s European competitors might benefit from this uncertainty, with Paris, Amsterdam and Frankfurt all regularly cited as potential winners if Brexit brings a downturn in the capital’s fortunes.
Our recent report Competing with the Continent sheds some light on the likelihood of this happening by comparing London’s economy with that of it nearest rivals – and the evidence suggests that despite the strengths of continental competitors, London’s economy is well placed to remain the envy of Europe in the years ahead.
The report shows that the capital is by some way the biggest economy in the continent, with an economic output of £343 billion in 2011 – comfortably ahead of Paris (£305 billion), and much bigger than that of Milan (£117 billion), the third biggest economy in Europe.
Crucially, the research also shows that London is home to a high-skilled workforce that far outstrips its rivals, with 2.3 million high-skilled people living in the capital – half a million more than in Paris, eight times more than in Amsterdam and 14 times more than Frankfurt. This gives London a distinct edge when it comes to providing the right labour force for the kinds of knowledge-intensive businesses which offer the best prospects of long-term growth and prosperity.
Take, for example, a firm in the financial industry that needs to hire someone with very specific quantitative skills. In a large, diverse and specialised market like London, such skills can be found relatively easily: there is a profusion of specialised university degrees in finance, and the existence of similarly specialised firms means such skills, although rare, are available.
The company could even draw from the pool of workers in other sectors and hire a scientist or an engineer, whose related-yet-different knowledge could be used to create new ideas, innovations and practices. The larger the market, the easier it is to find the right talent, and the more this productive “cross-fertilisation” between industries can happen.
In other words, London can provide a favourable “ecosystem” for high-skilled, highly-specialised businesses. Add to that picture the 166,000 high-value businesses already based in London, its many top universities and research centres, and its continuing desirability as a place to live, and it’s clear that the capital provides a business environment that its rivals will struggle to match in the near future.
Yet the report also shows there is no room for complacency. London falls outside the European Top 20 when it comes to productivity, with an economic output of £68,896 per worker – lower than Amsterdam, Frankfurt, Paris and Dublin (another widely cited potential threat to the capital’s economy).
Surprisingly, it also lags behind when it comes to innovation, generating only 8 patents for every 100,000 residents in 2011 – below the European urban average (14), and far behind Frankfurt (43) Paris (24), and Amsterdam (13).
These findings emphasise that for London’s economy to continue to be the largest in Europe in the years ahead, politicians and business leaders must demonstrate that the capital is open for trade, investment and talent. The Government’s mooted plans to make British firms compile lists of foreign employees (which it has since dropped) were thus unhelpful to say the least, as the Mayor of London Sadiq Khan was quick to point out.
Above all, however, London’s continued economic dominance depends on what deal the Government strikes in the Brexit negotiations – whether it includes access to the single market, and what arrangements it makes for migration and ‘passporting’ for financial services. Restrictions on any of these will have a huge impact on the capital’s economy, especially given London’s reliance on highly skilled workers from around the world – hence the Mayor’s continued push for London-specific visas to be part of the deal.
What happens to London also affects the UK because the capital’s tax revenues make up nearly 30 per cent of the total national intake. Any downturn in the capital’s economy will have a major impact on public spending and investment across the country.
While speculation continues to mount about what kind of Brexit deal the Government will secure, no one knows yet what will emerge from negotiations. What is certain, however, is that securing a deal that makes the most of London’s strengths will be vital in delivering growth for the whole of the UK economy in the years ahead.