GLA Economics forecasts subdued economic growth for London

By Mark Wingham

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 2019.

At the headline level, we forecast:

  • London’s economy is expected to grow by 2.1 per cent in 2017 in real terms (i.e. after accounting for inflation). This rate of real GVA growth is then expected to slow slightly in 2018 to 1.8 per cent, before picking up to 2.6 per cent in 2019.
  • The number of jobs is expected to increase 1.4 per cent in 2017. We then expect the rate of employment growth to slow to 0.3 per cent and 0.5 per cent in 2018 and 2019 respectively.
  • 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 slow in 2018 before picking up in 2019.

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 uncertainty caused by the UK’s decision to leave the European Union (EU). For example, following the EU referendum result, there was a large depreciation in sterling and this has contributed to higher rates of inflation because of higher import prices. This has caused pressures on real household incomes and, consequently, household spending. Similarly, 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 higher than the average for the independent organisations (Figure 3), though lower when looking at workforce jobs (Figure 4). That said, our forecasts generally follow the same underlying trends of subdued GVA growth and slowing 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 2017 and 2019. In fact, we expect most of the sectors of London’s economy to grow over the forecast period. The exceptions being Manufacturing with falls in all three years, and Transport and storage which we expect to decline slightly in 2018 only.

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 Brexit negotiations continue. 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 further interest rates (with the first rise in rates in a decade happening in November) and relatively high inflation which can affect real household income. 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 improved.

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 31: Autumn 2017. Our next set of forecasts for London’s economy will be in Q2 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.