London will bear the brunt of the economic shock from the UK’s decision to leave the European Union, and will lag behind the rest of the country in terms of growth for the next few years.
So says Samuel Tombs, the chief UK economist at Pantheon Macroeconomics, in his latest UK economic monitor, circulated on Monday.
Monday also saw the release of regional Purchasing Managers Index data for Britain’s 12 regions.
The PMIs illustrated that since the referendum result, activity in the London economy has contracted more sharply than in any of the 11 other areas of the country surveyed. Pantheon notes that recruitment consultants in the capital saw new jobs filled fall at the fastest rate in more than seven years.
Here’s Pantheon’s chart of PMI activity:
“London has been the U.K.’s growth star for the last two decades. Between 1997 and 2014, year-over-year growth in nominal Gross Value Added averaged 5.4% in London, greatly exceeding the 4% rate across the rest of the country. Surveys since the referendum, however, indicate that the capital is at the sharp end of the post-referendum downturn,” Tombs wrote on Monday.
One of the biggest problems facing the capital is the minimal benefit that London will see from the Bank of England’s interest rate cut last week, in comparison to other regions of the UK. Here’s the key extract from Pantheon’s research (emphasis ours):
“London benefited disproportionately during the recession, however, from the sharp fall in interest rates. Mortgage interest payments equalled 8.2% of all households’ disposable incomes in 2007, compared to 6.6% across the rest of the country. The strong revival in house prices in the capital has meant the proportion of households’ incomes devoted to mortgage interest payments remains higher in London than in the rest of Britain, as our next chart shows. But with the MPC signalling last week that it will not reduce Bank Rate below zero, mortgage rates are now near a floor.”
And here’s the chart:
London is also heavily reliant on the financial sector for economic prosperity. As Tombs argues, the gross valued added by the financial services sector in the city is roughly 20%, while in the rest of the country it is just 8%.
If, as is widely speculated, London loses the EU’s financial services passport following a Brexit, that could spark a widespread exodus of financial firms — as illustrated by a leaked Deutsche Bank document obtained by BI’s Ben Moshinsky. This, in turn would lead to substantially lowered GVA for the financial sector, and put a huge squeeze on the capital.
On the flip side, London’s economic prosperity is far less linked to the manufacturing sector than the rest of the country. Pantheon notes that the country’s manufacturers will likely get a boost going forward, helped by the persistent weakness of the pound that is expected in coming months and years. Here’s the extract:
“London has continued to outperform in recent years because it is much less dependent than the rest of the U.K. on manufacturing, which has struggled against sterling’s strength, and on public spending, which has been cut. Now, though, the structure of London’s economy will be disadvantageous. Manufacturing will benefit from the weaker pound and public spending potentially will be increased in the Autumn Statement.”
Londoners voted overwhelmingly to remain in the European Union in June, but somewhat ironically, it looks like they’re going to be the ones to suffer the most as a result of Brexit.
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