We should worry about what is happening to London. Our capital is, after all, the country’s economic powerhouse. It accounts for just under a quarter of Britain’s GDP. In fact, three of its now most deserted locations — the City, the West End and Canary Wharf — account collectively for an eighth of the nation’s output. There is a danger that short-term damage to London’s economy could become permanent unless the right steps are taken.
This was supposed to be the week when things would start returning to some sort of normality, as the government encouraged more people to go back to the office. Yet uncertainty prevails. The announcement last week that Greater Manchester and parts of Lancashire and West Yorkshire would be put under tighter restrictions with little warning has led to speculation that London could be locked down again. This would be bizarre given that cases in London are running at around 75 a day, compared with 1,073 at the peak, and that there are only 150 or so calls per day to 111 from Londoners with possible Covid symptoms, in contrast to more than 3,000 per day in late March.
Public confidence is not helped by lockdowns being openly discussed. Speculative fear can remove the spontaneity from shopping, discourage firms from investing and deter people from returning to the office. While I do believe that the lockdown in March was initially necessary, the government should now rule out another lockdown nationally or in London, given its population and economic might. To view this pandemic as a binary of health vs economics would be misguided. We now know that lockdown causes severe economic and wider health costs.
But as long as localised outbreaks are inevitable, how can we make sure London stays out of lockdown? Work I carried out with Professor Paul Ormerod of UCL in April showed that three things are essential if the virus is to be managed: testing; track and trace; and behaviours need to be different to before the crisis, including avoiding large gatherings, adhering to social distancing and wearing masks.
These restrictions to normal life will lead to short-term economic pain, yet if any city possesses the ability to re-emerge once a vaccine is found, it is surely London. It has the greatest proportion of highly skilled workers of any city globally. London specialises in services, with many firms reporting-higher productivity as people work from home. In many key sectors the city has embraced the virtual economy, with online meetings, and firms bringing forward their technology plans. There is talk of this being a permanent shift, though it is not guaranteed. A vaccine may allow offices to fill, although the office week may become shorter as employers and employees adjust to the flexibility of working from home. Crucially, while it is positive for many people that they have been able to work remotely during the pandemic, it is hard to see this being beneficial for the wider London ecosystem if it becomes the norm.
The slump in travel has led to a financial crisis in public transport. Transport for London has a huge funding gap, while the rail system has effectively been nationalised. Commuting has collapsed. Of London’s 6.1 million workforce, 800,000 commute in from outside the capital in normal times. Thanks to Covid, that number has fallen dramatically. If people do not return in large numbers soon there will be irrevocable damage. Many of the outlets and food chains that service commuters and shoppers won’t survive. The hollowing out that has blighted so many industrial areas would be evident in the heart of our capital city.
Uncertainty may have a detrimental effect on London’s commercial real estate prices, but while this will pose problems for some, it is unlikely that this would set off a broader economic crash. One of London’s growing challenges in recent years has been the high cost of doing business or living there. Lower rents and possibly lower house prices may help minimise economic pain.
In a globalised economy, skilled workers and firms with international reach can move with ease if taxes rise or circumstances change. After the pandemic, perhaps other countries will be more cautious about welcoming foreign workers. If so, this will be another opportunity for London to ensure that it is receptive to skilled workers or entrepreneurs who wish to come here. The proportion of London’s population that was born overseas rose from 15 per cent in 1971 to 37 per cent in the 2011 census. When I worked with Boris Johnson in City Hall as his economic adviser, I found that proportion had crept up further. London is the global city. This must still be the case when the pandemic is over.
If we are going to prevent long-term damage to London and the UK’s future economic potential, we need to understand the reasons for the capital’s success. It has long been my view that successful economies need at least one of three Cs: cash, commodities or creativity. That is, in turn, financial, natural or human resources. The UK is lucky that London leads globally in two of these: the City’s financial know-how and the capital’s creative and cultural uniqueness.
The creative industries are-economically important but, more importantly, they enhance London’s appeal as an exciting place to live, work and visit. It is essential that London does not lose this defining part of its character. As long as social distancing remains necessary, many parts of the creative sector cannot return to commercial normality. Live music venues were already disappearing before the pandemic. Now more may slip away.
Financial support for the arts must be boosted and extended to grassroots organisations and local theatres, with rent holidays. Current efforts to save London’s performing spaces, such as the Mayor’s music venues rescue plan, need strengthening. National planning policy guidelines, which local authorities would have to adhere to, should offer protection to these places. The UK should follow France’s lead and protect the income of actors, performers, musicians, technicians and other creatives until at least August next year.
A big reason for the success of the City and London’s creative industries is their ‘cluster effect’ — namely, that having a vast array of interconnected sectors and-talented workers creates a dynamic that is hard to replicate. London’s leading cluster is the City, led by banking, finance and insurance. Its influence is helped too by the cluster of law firms, and the experience found in a host of other professional services, from consultancy to communications.
Other vibrant economic clusters in London include life sciences, universities, technology and tourism. People’s skills are vital to all of these. One of the boosts to the plans for-Brexit following the 2016 referendum was the decision of tech firms to proceed with their investments in London, establishing it as a global tech leader.
The end of the Brexit transition period in December of course adds to the mood of uncertainty. I am optimistic about global Britain, but even those who are less so would probably accept that much of the City’s appeal is Brexit-proof, given the English language, English Common Law and the skills, knowledge and institutional infra-structure embedded here. Last year’s European Commission competitiveness index noted that of its 268 regions, three of the five most competitive were in the south of England, with London second only to Stockholm.
The City will prove resilient. Financial centres depend on where clients want to do business and upon the right regulatory environment. Quality of life matters too. In recent research, the Policy Exchange think tank highlighted that ‘amenity value’ should influence infrastructure plans post-pandemic, with projects that would yield material social benefit and improve health outcomes, including green spaces, swimming pools and cycle lanes, being prioritised. After the establishment of the euro, there was much talk of the City’s possible demise, with many firms boosting their trading operations in Frankfurt. Within a few years they had returned to London. It was not only where the market was, but also where people wanted to live. This is why London’s second ‘C’ is so important. If London’s culture goes — its bars, theatres, comedy clubs, restaurants and galleries — the City will take a substantial hit.
This pandemic has already displayed an important economic concept: revealed preference. People’s actions tell you a lot. The fact so many are still working from home reinforces the need for clarity about how to keep the virus under control in order to minimise fears about returning to the office; and it strengthens the case for upgrading broadband. Another vital economic lesson is the importance of incentives. The government needs to do all it can to encourage people and firms to behave in a desirable way. Downing Street should dismiss talk of tax increases and aim to cut taxes where possible. The government should reduce regulation while improving its quality.
There may be those who feel some schadenfreude at the prospect of the downfall of London and its ‘metropolitan elites’. This would be misguided. Research last year from the Greater London Authority highlighted the interdependence of London and the UK economy. For every pound consumed or invested in the capital, 24 per cent of production is generated elsewhere in the country. The government must remain committed to its ‘levelling-up agenda’, since Britain has a very imbalanced economy, but the focus needs to be less on redistribution and subsidy, and more on measures to increase the competitiveness of all regions.
Britain needs a three-arrowed, pro-growth economic strategy. First, credible fiscal activism aimed at reducing debt-to-GDP gradually. Second, monetary and financial stability. Third, a supply-side agenda to minimise inequality and to maximise investment and innovation. But it is hard to see how any government economic strategy can succeed if the motor of the UK economy remains stuck in second gear. The government needs to get London moving again.
Dr Gerard Lyons is chief economic strategist at Netwealth.