A comparison with Paris highlights the weaknesses that emerged in London since the financial crisis
After the financial crisis, developed economies experienced a sharp slowdown in productivity growth. London, and the UK as a whole, has been particularly affected by this.
Comparing London and Paris, Western Europe’s two megacities, helps us understand some of the potential drivers behind London’s underperformance.
Despite the weak productivity growth in recent years, analysed in our latest report, London’s economic growth has been stronger than Paris’. In 2019, London’s economy was 25 per cent (1.4 per cent a year) larger than in 2007, compared to 19 per cent (0.9 per cent a year) in the French Capital.
Source: OCDE, Metropolitan areas. GDP and productivity: Millions USD, constant prices, constant PPP, base year 2015.
London’s mismatch between overall growth and productivity is explained by different job creation patterns, as Figure 2 shows. While London’s economic growth was associated with 1.3 million extra jobs (2007-2019), Paris’ slightly lower economic growth was characterised by a combination of lower employment gains (0.4 million) and higher productivity growth.
Source: OCDE, Metropolitan areas. Productivity: Millions USD, constant prices, constant PPP, base year 2015. Employment at work.
Economic growth driven by employment is positive, but there are at least two associated factors that also need to be considered. First, sustained wage growth is unlikely to happen in an environment of low productivity growth. Second, employment (and population) growth creates further challenges like rising demand for housing without rising wages.
Stronger job growth and weaker housing starts made London’s residential house prices rise much faster than in Paris. Figure 3 shows that house prices grew at a similar pace before the financial crisis. Since 2007, both cities started performing very differently: London’s house prices rose 68 per cent in London and 33 per cent in Paris (Île-de-France).
Source: OECD.
Not addressing the costs of growth, such as rising real estate costs, make it harder for London to compete with other global cities. After the financial crisis – a period where London’s productivity growth was weaker than Paris but not house price inflation – London may have become less attractive to the French. Figure 4 shows that the share of French living in London rose significantly until the financial crisis, from 0.5 per cent to 0.9 per cent. Since then, it has flatlined.
Source: ONS.
Comparing London and Paris shows that London has become relatively less competitive than the French Capital, despite the ‘job miracle’. Among other factors, housing affordability seems to be one reason behind this underperformance. Therefore, policy needs to address the shortages in London’s housing market. Planning reform and changes to the London’s plan could make development of both residential and commercial more certain and ease densification of existing areas.
A comparatively more expensive London is ultimately a less attractive one to work and innovate.
London's productivity growth has stalled since 2007, explaining a large part of the UK's 'productivity puzzle' and leaving it trailing behind its global peers.
A discussion surrounding the UK's productivity struggles and what role London plays in national productivity slowdown.
London’s productivity growth has plummeted in comparison to its international competitors, costing the UK economy tens of billions of pounds a year.
While London’s stuttering presents an additional productivity challenge, it should be possible for policy makers to deal with two separate productivity problems simultaneously.
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