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London business confidence battles economic drag

15 January 2021: The current ICAEW business confidence monitor highlighted several issues for London in 2021. How does it look on this side of the New Year?

For the first time since 2010, domestic sales are in negative territory in the UK. Just before Christmas, however, businesses had some confidence for the new year. Now, with the UK back in lockdown, that confidence is under strain. 

For London, tighter restrictions have been in place since before Christmas, when it went into tier four. According to ICAEW’s Business Confidence Monitor, in London confidence is significantly worse than the national average; -28.7 versus the national level of -19. The capital has long been the powerhouse of the UK economy, driving forward economic growth, at times to the detriment of other regions, while at others to the benefit of the nation as a whole. The south east, by contrast, is slightly more confident than the national average, perhaps benefiting from the exodus of commuters from London as the pandemic raged. 

“Remote working and not commuting into the office has had a massive drag on London's economic performance,” said ICAEW’s Director of Business and Industrial Strategy Iain Wright at the ICAEW London and South East Economic Forum. “The London economy relies very much upon people meeting, interacting, and the cultural economy. None of that has happened. So that's why confidence in London is so much lower than the national average.” 

London is also the UK’s business window to the rest of the world, with a strong reliance on international financial and professional services. With the lack of provisions for services in the free trade agreement between the UK and the EU, the capital is facing additional uncertainty and potentially a significant loss of business. 

The uncertainty caused by the pandemic has encouraged businesses to reduce their spending. “Customer demand is very low,” said Wright. “And that is going to act as a real drag on economic performance in the next few years. Late payment is emerging as a real problem.”

Rob Elder, the Bank of England’s agent for Greater London, added that according to the Bank’s sentiment research, a lot of businesses will fail this year. 

“The great fear of that is as businesses fail, it causes unemployment to rise further, which hits spending and we get a bit of a downward negative spiral. I think all policymakers are very focused on that particular risk; that negative spiral from business failure to unemployment to spend and then back again.”

There is a tricky balance that needs to be struck between reducing public spending and maintaining enough business support. With cases running and restrictions at their tightest since last March, that balance is looking more and more precarious. 

“The big challenge for policymakers is how to fade out support in a way that allows the public finances to be sustainable, while at the same time not doing it so quickly that it causes this negative spiral of failure unemployment and weaker demand,” said Elder. “That, I think, is the great policy question for economics.”

The picture is not altogether gloomy for London, however. Elder explained that large areas of the UK economy are quietly holding up very well. 

“London has got great extremes. Something like 40% of the London economy is professional services, and that has held up very well. It's not more dependent than the rest of the country on retailing or on hospitality as a share of its GDP, but of course, it has got a very big hospitality sector because the London economy is massive, and those sectors are clearly doing a lot worse than anywhere else in the country. So it's the visible bits of the London economy that are suffering and the invisible bits, driven by working from home, are actually pretty resilient.”

Click here for notes and recordings from the London and South East Economic Summit