The first blog of this series shows that London’s moved from leader to laggard in terms of the UK’s productivity growth, costing billions to the national economy.
Improving people’s standards of living depends on increasing productivity over the long term, and since the financial crisis the UK’s productivity has flatlined. The country moved from having the second fastest productivity growth in the G7 (1997-2007) to the second lowest, only ahead of Italy (2009-2019).
Government policy and the broader debate on the UK’s productivity puzzle often misses the geography of the observed stagnant productivity. Our latest report Capital losses: The role of London in the UK’s productivity puzzle shows that London plays a key role in explaining the productivity slowdown since 2007.
London has been both the driver of the UK’s strong performance in the years before the financial crisis and the main contribution to its slowdown since.
As Figure 1 shows, London’s productivity was growing around 3.1 per cent a year (1998-2007) – almost twice the pace of the rest of the country. After the financial crisis, productivity growth was nearly zero and below the national average.
Source: ONS, Output per job at constant Price (CVM) by region (ITL). London defined as Greater London.
The result is that London has played a disproportionate role in the UK’s productivity slowdown. The Capital accounts for 15 per cent of the population and 25 per cent of the economy, but 42 per cent of the national productivity gap that has emerged since 2007.
London underperforms other global cities (selection criteria in Figure 2) in at least two ways. First, Figure 2 shows that productivity growth has been weaker than global competitors like Paris, New York, Brussels, and Stockholm. Of this group only Milan performed more poorly.
Source: ONS and OECD. Methodology: Greater London definition for London and the remaining cities is the OECD metropolitan area definition. International peers calculated using GDP per worker in USD, constant prices, constant PPP, base year 2015. The cities were selected by using OECD metropolitan areas, based on the following criteria: being at least 15 per cent more productive than the national average; have at least 1 million residents.
Second, from the peers analysed above, London is the only city where productivity growth has been weaker than the national average. For instance, annual productivity growth in Paris was 0.9 per cent – nearly twice as high as France’s average of 0.5 per cent. Even Milan outperformed the respective national average.
This underperformance costs billions to the national economy. If London’s productivity was closer to the global cities like Paris and Stockholm, London would be £54 billion larger in 2019 alone. This would be approximately £17 billion in additional tax, more than the Levelling Up Fund and City Region Sustainable Transport Settlements combined (£11 billion).
London’s productivity performance in the last decade is sometimes characterised by being almost entirely driven by finance. Finance was a major driver of productivity before 2008 and it accounts for a quarter of the observed slowdown but the slowdown has happened across London’s service exporting industries, which also includes communications and professional services. This is concerning because these activities are the ones expected to drive innovation and productivity over the long term.
The productivity slowdown in those sectors made London comparatively less competitive in the global economy since 2007. As illustrated in Figure 3, London was highly productive in ‘finance and insurance’ in 2008 and relatively productive in ‘information and communication’ services. But between 2008 and 2018 the four cities analysed either converge or surpass London’s in those two activities.
Source: ONS and OECD. Geographies based on ITL regions. Greater London; Brussels Capital Region; Stockholm Region; Île-de-France and New York-Newark-Bridgeport. Dashed lines: London’s productivity level.
By taking high productivity levels as a proxy for having a competitive advantage, this means that London is becoming globally less competitive in several areas.
The Bank of England found that the productivity puzzle at the national level was driven by the most productive (‘superstar’) firms. While there is no data available for London prior to 2008, the Capital’s weak productivity growth is likely to be driven by its ‘superstar’ (10 per cent most productive) firms, which typically locate in central London due to the inherent benefits these areas offer.
Figure 4 shows that London’s superstar firms had stagnant productivity growth since 2008 and they simultaneously lagged behind less productive exporting businesses in London, and superstar firms elsewhere in the rest of the UK.
Source: ONS, Annual Business Survey. Due to data unavailability, finance and insurance sectors not included.
London is often seen as the economic superstar of Britain, but when it comes to the national productivity puzzle the opposite is the case. Ignoring London’s issues will not make the UK’s economic policy easier. The report published today and the next blogs of this series will focus on the potential reasons behind London’s productivity slowdown; emerging issues coming from recent shocks like the pandemic; and policy recommendations.
Join Centre for Cities and EC BID for the launch of a new report exploring London's productivity.
London’s productivity growth has plummeted in comparison to its international competitors, costing the UK economy tens of billions of pounds a year.
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.
Leave a comment
Be the first to add a comment.