GLA Economics forecasts subdued economic growth for London

GLA Economics has recently published its latest economic forecasts for London. This uses our bespoke forecasting model to estimate London’s economic output (as measured by gross value added or GVA), workforce jobs[1], household income and household spending up to 2020.

At the headline level, we forecast:

• London’s economy is expected to grow by 1.6% in 2018 in real terms (i.e. after accounting for inflation). This rate of real GVA growth is then expected to increase slightly in 2019 to 1.9%, before picking up to 2.2% in 2020.
• The number of jobs is expected to increase 0.6% in 2018. We then expect the rate of employment growth to slow to 0.3% in 2019 before rebounding to 0.7% in 2020.
• Household income and spending are expected to also grow over the three-year forecast period after accounting for inflation. That said, the rates of growth are expected to be slow by historical standards.

Putting these forecasts in the context of historic data (see Figures 1 and 2), we can see that the forecasted rates of growth for output and employment are more subdued than previous years. This can be partly linked to the continued uncertainty caused by the UK’s decision to leave the European Union (EU). For example, business surveys like the Purchasing Managers’ Index (PMI) have rebounded from their post-referendum falls, but they point to growth which is at a more moderate level. Anecdotally, these business surveys suggested that the uncertainty caused by Brexit has dampened some business investment among other business decisions.

We can also compare our forecasts for London with those from independent and external organisations[2]. Generally, our forecasts for GVA are within the range of independent forecasters (Figure 1), though lower when looking at workforce jobs (Figure 2). That said, our forecasts generally follow the same underlying trends of subdued GVA growth and relatively slow jobs growth.

Our forecasts are also available by broad industry group. We expect the fastest overall rates of output growth to be in the Financial and business services industry between 2018 and 2020 (Figure 3). However, a number of other sectors of London’s economy are expected not to experience any significant growth such as Distribution, accommodation and food service activities (Figure 4) or see falls such as Transport and storage which sees declines in all three years, and Manufacturing which we expect to see declines in 2019 and 2020.

There are risks to our forecasts, however. Several of these risks relate to the ongoing uncertainty around the impact of the Brexit process. For instance, what the future trading relationship between the UK and EU will look like and whether there is any long-term reputational damage to the UK. However, it is not yet possible to fully understand these Brexit impacts, though things should become clearer as the year progresses. Given this, it should be noted that we currently follow the same assumption as the Bank of England in our modelling; mainly that there will be a smooth adjustment to the future trading relationship[3].

Other risks include the prospects of a full-blown trade war or the negative impact of increased protectionist sentiment in major trading partners. The prospect of further interest rates have receded a touch with inflation dropping back and sluggish UK growth in Q1 2018 but most commentators still expect further rises. There is also some concern about the resilience of the housing market, as well as pressures on government spending. That said, some risks have waned like the strength of the global economy which appears to have continued to improve.

Altogether, these risks mean that there is some degree of uncertainty over our economic forecasts for London. The actual figures may be better or worse than those presented here. They nonetheless represent our best estimates based on currently available information. Given this, we constantly monitor and report on new information and how they can affect our forecasts in our monthly economic overview – London’s Economy Today – and in our working papers and current issues notes. These can be downloaded from our publications webpage.

For more information about our economic forecasts, please see London’s Economic Outlook 32: Spring 2018. Our next set of forecasts for London’s economy will be in Q4 2018.

[1] This is separate from our labour market projections which estimates the number of jobs by sector and borough to 2041.

[2] This includes Cambridge Econometrics, Cebr, Experian Economics and Oxford Economics.

[3] Bank of England (2017). ‘Inflation report’, November 2017.