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The Mayor of London The London Assembly

COVID-19: London macroeconomic scenarios (August update)

GLA Economics published its latest macroeconomic scenarios based forecast for London at the end of August[1]. This is the seventh update to be published externally, after the first set was completed for internal use in May 2020. This supplement focuses on the latest update, and the evolution of the scenarios over the pandemic.

The scenarios are part of work on the impact of the pandemic on London’s economy that began in the March of last year and which has been informed by the available literature on UK and international macroeconomic scenarios[2]. The main aim of this work is to inform multiple policy work streams across the GLA family, including the evolution of recovery strategies in London. Beyond this, stakeholders may consider this work as a common framework for understanding and quantifying possible trajectories for the capital’s economy in a situation of ongoing high uncertainty. The two outcome variables of interest in the scenarios are ‘real Gross Value Added’ (GVA) and ‘workforce jobs’ (WFJ), which are being projected over the medium-term (to the end of 2023) and, for GVA, also over the longer-term (to 2031).

In this context, three possible macroeconomic scenarios for London have been developed:

1) Fast economic recovery (an optimistic but plausible scenario)
2) Gradual return to economic growth (which is the GLA Economics reference scenario), and
3) Slow economic recovery (a more pessimistic but also plausible scenario).

It should be noted that these scenarios are not meant to represent optimal policy responses or be forecasts as they rely on the subjective modulation of several assumptions/dimensions around the effectiveness/nature of the ongoing public health response especially in relation to COVID-19 variants, the effectiveness/impact of ongoing economic support measures or the international economic context, among other factors[3]. Also the scenarios do not capture the full range of uncertainty about the future, which is likely to lie outside the range of the scenarios.

The main results are presented below:

Medium-term (2021 to 2023)

  • Under the gradual return to economic growth scenario, London’s real GVA is expected to grow quite strongly by 6.5% this year after the easing of lockdown restrictions. The economic recovery will continue next year (6.0%) before slowing in 2023 (2.9%) (Figure A1).
  • In terms of employment (workforce jobs), the impact of the recovery will take longer to be felt. Employment will continue to fall this year (-0.2%), with modest growth expected in 2022 (2.0%) and in 2023 (1.5%) (Figure A2).

Figure A1:

Figure A2:    

  • Looking at the alternative scenarios, the impact of the pandemic on output could see GVA grow by a relatively more modest 5.7% this year under the slow recovery scenario and growth can vary from 4.0% to 6.6% next year across scenarios. In terms of jobs, under the fast recovery scenario there is a very slight increase in jobs this year (by 0.0%[4]) and modest falls for the other scenarios before stronger jobs growth in 2022 at up to 2.4%, and stabilisation in 2023 at growth of around 1.5% across scenarios. 
  • Real GVA is not expected to reach its pre-crisis levels until Q4 2021 in the reference scenario (Figure A3) while WFJs only reach pre-crisis levels in Q1 2023 (Figure A4).

Figure A3:

Figure A4:

  • Focusing on the reference scenario only, GLA Economics projections for 2021 have tended to become progressively more optimistic for output and jobs in successive iterations. Indeed, the economic recovery is now expected to be faster than was expected at the start of the crisis, in large part because the economy did not suffer as much in 2020 as originally expected.The latest data is also recording a recovery in jobs from Q1 this year, which was not expected at the time of our May macroeconomic scenarios.
  • Looking at London industries, the economic impact of the recovery is likely to be heterogeneous (Table A1).
  • Accommodation and food services; Arts, entertainment and recreation; and Transport and storage are expected to see relatively sluggish output recoveries overall this year. On the other hand, Manufacturing; Public administration and defence; Information and communication; and Professional, scientific and technical activities are expected to show a strong recovery. It should be noted that the relatively sluggish growth in output for Financial and insurance activities; and Real estate activities reflects their relative resilience during the earlier parts of the pandemic.
  • In terms of WFJ, sectors particularly heavily hit by the pandemic and dependent on government support such as Accommodation and food services activities; and Arts, entertainment and recreation are likely to take longer to recover than the London average.

Table A1:

Long-term (2024 to 2031)

  • Looking at the longer term, GLA Economics projects that real GVA in London would return to its pre-crisis trend (post-Brexit counterfactual) by 2022 under the fast and gradual economic recovery scenarios; under these scenarios output scarring would only be temporary. However, under the slow economic recovery scenario, London’s trajectory would remain lower than the counterfactual even in the long term (Figure A5). As mentioned above, these scenarios do not reflect the full range of uncertainty and there is arguably more downside risk in the long term associated with the city’s future ability to remain as attractive and competitive as it was in the two decades prior to COVID-19.

Figure A5:

The scenarios results presented in this supplement should be understood within a context of continuing unprecedented uncertainty. Overall, GLA Economics continues to see many downside risks to the economic outlook for the whole scenario range (e.g., around the recovery from the COVID-19 crisis and potential dampening effects on growth from rising inflation, the international context, and adverse economic consequences from the continued spread of the virus and the potential for vaccine resistant variants). Therefore, GLA Economics will continue to track actual data in order to review the assessment of these scenario outcomes in the future. Successive updates will be released on the London Datastore when they become available for the benefit of both internal and external stakeholders in tackling the COVID-19 crisis.

[1] At GLAE macroeconomic scenarios

[2] List of GLA summaries on external research on COVID-19, which have frequently included summaries of macroeconomic scenarios and forecasts publications.

[3] For more detail on these assumptions see slides 8 to 11.

[4] 0.03% to two decimal places