Lockdowns Thwart Recovery
The economic agenda of levelling up the economic disparities across the UK continues to be a central piece of government policy. With the pandemic taking a hard toll on London and the uncertainty of how Brexit will affect the financial service industry, it is important to remember the significant role our capital plays in supporting economic growth across the UK. Policy initiatives need to recognise that London too, is at a critical juncture. testing
Crucially the number of people coming into London fell dramatically in 2020 with so many now working from home. Passenger journeys on London public transport in the summer were running at about 50% below pre-Covid levels. (In the period 23rd August-19th September the number of London passenger journeys recorded was 131 million which compares to 271 million for a comparable period pre-Covid). The tube has suffered an even higher contraction in passenger numbers.
It isn’t just commuters who are not travelling but tourists too. This has prompted a deep and prolonged fall in consumer activity across London. Whilst both commuter and tourist income are critical to London, recent analysis from the GLA suggests that the loss of tourism income far outweighs the loss of commuter income.
The GLA numbers suggest that the loss of worker expenditure (£1.9bn) in 2020, compared to a no-Covid scenario, is significantly lower than the estimated loss of tourism expenditure (£10.9bn). London needs commuters and travellers to return. With the UK taking the lead on Covid-vaccinations, we can hope to see numbers start to rise from the spring onwards but that means at least a few more months of businesses being in survival mode.
While shopping and recreation trips were suppressed across the capital, reductions were much greater in the city centre. The City of London, Westminster, Camden and Islington, saw the largest declines in retail trips.
The service sector dominates the London jobs market accounting for 92% of all jobs. London service sector jobs in Q2 saw the largest quarterly contraction in jobs since 1996. ‘Accommodation and food services’ was one of the sectors to see largest declines.
These job losses are despite the government’s efforts to support the jobs market (with furlough extended to March 2021). There is likely to be more bad news forthcoming given the fall in job opportunities in London (job postings on search website Indeed are 50 per cent below their pre-virus baseline) and the looming impact of business failures like Topshop and Debenhams.
There may be tentative signs that the business environment is stabilising at least. The latest CBI/PWC business optimism survey (Q3) showed a tentative shoring up of business activity and optimism, although notably with risks attached to the outlook.
The financial service sector appeared increasingly nervous of the potential outcome of the Brexit negotiations. A few more high profiles names have chosen to dual list their entities on a European based stock exchange as insurance.
For the UK economy, the third quarter produced a strong rebound in GDP of +15.5%, a marked turnaround from the -19.8% fall in the second quarter. Whilst the rebound helped pull back some of the economic value lost, at the end of September GDP was still 10% below its pre-Covid end 2019 level. The fall in GDP has been greater than during the Global Financial Crisis (GFC) in 2008 when the peak to trough decline in GDP was -6%. Whilst the scale of the fall has been sharper there are reasons to suggest the bounce back could be sharper too.
Forecasts for the economy remain very mixed. The consensus across the 50 or so economists tracked by the Treasury Consensus forecast series suggests a bounce back to +5.7% GDP growth next year and +4.3% beyond that. There has been much talk of a ‘k shaped recovery’ as different sectors recover at different speeds dependent on how they have been impacted through the course of the pandemic.
With such risks to the economic outlook, interest rates are unlikely to rise any time soon. There is now a need for a period of ultra-low interest rates to manage the nation’s debt. Another factor which supports the housing market by enabling mortgages but also by ensuring that capital should not be left to languish as cash.
Also, more optimistically, the news of a vaccine roll-out has helped boost stock market performance, with November 2020 the strongest monthly performance since 1989. Whilst admittedly coming off a low base the FTSE-100 increased +12.4%. The FTSE-100 is a good leading indicator for the health of the economy and the London residential market alike.
Whilst it is easy to understand a temporary shift in people’s attitudes towards urban living, it is difficult to foresee a wholesale permanent shift. Cities have so much to offer their residents and visitors and offices still have a central role to play in working life. Whilst there will be some aspects that change forever, and a lower proportion of workers coming into London every day is one of these, offices are likely to evolve towards a format that better enhances collaboration and innovation. Offices will still be important but used in a smarter way. Whilst there will be subtle shifts to our way of life there is nothing in the data yet to undermine the pre-eminence of central London as a place to work, visit and enjoy and the worst of 2020 will soon be consigned to history.