Are Britain’s big cities catching up with London?
The official data suggests a productivity convergence between London and other large cities for the first time in more than a decade. But there are reasons to be cautious about this trend.
The official data suggests a productivity convergence between London and other large cities for the first time in more than a decade. But there are reasons to be cautious about this trend.
The underperformance of the big cities outside of London is one of the biggest problems facing the British economy. So new data that suggests this might be starting to change is a big story.
To understand whether economic convergence is really happening, Centre for Cities’ latest briefing dives into the latest subregional productivity data to understand the trends over the past 20 years and more recently.
The productivity trajectory of London and other large cities has decoupled from the national trend since 2019. As shown in Figure 1, after limited movement since the financial crisis, productivity growth has accelerated in large cities outside the capital. London, on the other hand, remains in the stagnant state it was in before 2019, with productivity in 2023 stuck at the same level it was in 2005.
The new trend among large cities is unusual. As Figure 2 shows, seven of the nine large cities outside of the capital have faster productivity growth after 2019 than before. Leeds, Liverpool and Manchester are leading the pack with quite rapid growth.
This means that the productivity gap between London and other large cities appears to be narrowing for the first time in at least a decade. In fact, the disparity between London and other large cities is at its smallest on record.
While London’s stagnation plays a role, the growth of large cities accounts for most, about 69 per cent, of the post-2019 convergence.
This data comes with caveats. More recent data tends to be less certain and go through revisions. Local-level productivity data can also be spiky year-on-year, and “smoothed” data, a version that limits these volatilities, dampens the fast growth.
But the root cause of the new trend comes from new developments in the two components of the productivity data: economic output and labour inputs.
Economic output, as measured in gross value added (GVA), has slowed down across the country since 2019 – except in large cities. This means that the economy has simply grown faster in large cities than in London. This contributes to the accelerating productivity trends in large cities and the convergence with London.
Some research has noted uncertainty in the recent GVA data. But without the ability to identify a cause, it is not possible to completely dismiss this effect as a data problem.
The other component of productivity, labour inputs (measured in total jobs or hours worked), has also had unusual trends. Since 2019, labour inputs have stagnated, largely due to a significant drop in self-employment.
Unlike GVA, the new trend in labour inputs should raise scepticism. As shown in Figure 3, while self-employment figures dropped in surveys, they have not done so in the higher quality HMRC tax data. The result is that the data used to estimate productivity reports a million workers have dropped out of the labour force who, in reality, probably have not.
This, coupled with the known quality concern about the Labour Force Survey, means the recent decline in self-employment may be a data issue – and that some of the increase in local productivity since 2019 might be too.
It is possible to adjust the productivity data by holding self-employment in all places at the 2019 level. As shown in Figure 4, this would reduce the post-2019 productivity growth of all big cities. Importantly, this is not a set of “alternative” productivity data, but rather a stress test of the sensitivity of the official data to labour input uncertainty.
Even in this scenario, the productivity of London and other large cities are still converging. But the reason is more concerning – much more is due to London’s decline (78 per cent) than the growth in other large cities compared to the official data.
Policymakers should be cautious when using official subregional productivity data. More analysis and more time is needed for a more complete picture to become clear.
It is too early to know what the biggest driver of the productivity convergence is. But supporting the growth of the big cities outside the capital continues to be essential to achieve greater prosperity across the country. Equally, London has experienced productivity stagnation since before 2019, and addressing the capital’s economic challenges is important for the success of the national economy.
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