GLA Economics published its latest macroeconomic scenarios-based forecast for London on 17^th December. The two main outcome variables are real Gross Value Added (GVA) – a measure of London’s output – and workforce jobs (WFJ) – a measure of employment. We project both variables over the medium term (to the end of 2026). Further, we have developed three main macroeconomic scenarios for London founded on three sets of plausible narratives for the economy.

• Fast recovery (an optimistic but plausible scenario)
• Gradual economic recovery (the GLA Economics baseline reference scenario)
• Slow recovery (a plausible downside scenario)

These scenarios are not definite predictions about the only possible paths for the economy, nor do they necessarily incorporate optimal policy responses. Instead, they use judgements around several key assumptions. The key dimensions of variation focus on resilience to external shocks, such as geopolitical tensions, energy price volatility, and disruptions to global trade, as well as the timing and scale of rate cuts as inflation stabilises and economic conditions improve. The scenarios do not capture the full range of uncertainty about the future, which is likely to be much wider.

The gradual economic recovery scenario is our baseline, involving a gradual return to sustained economic growth. Following moderate growth in 2023, this scenario anticipates a bumpy path for output throughout 2024, reflecting persistent economic challenges despite easing inflation. Inflation fell to the Bank of England’s 2% target in May 2024, alleviating some cost-of-living pressures. However, global instability—including the war in Ukraine, ongoing geopolitical conflicts in the Middle East, and uncertainty following the 2024 USA elections—continues to weigh on sentiment and disrupt trade. Domestically, the UK has struggled with the persistent effects of the cost-of-living crisis, where higher prices and lagging wage growth have eroded household incomes despite recent improvements in inflation.

Nevertheless, the UK economy has shown resilience to these shocks, and London’s economy is expected to outperform the national average, driven by its robust service sector, resilient labour market, and higher levels of business activity. While elevated interest rates continue to weigh on consumer spending and business investment, the capital’s economic advantages—such as its strong knowledge economy and higher aggregate incomes—provide a buffer, supporting a more optimistic outlook compared to the wider UK. Despite ongoing pressures, London’s strength offers a foundation for continued recovery.

While London’s economy faces a slow recovery, the labour market has proven notably resilient. Workforce participation rates have surpassed pre-pandemic levels, and job growth continues across key sectors. This ongoing strength in employment underpins economic activity, mitigating some of the broader challenges and supporting London’s gradual return to growth

The baseline scenario anticipates output recovering to modest but historically slow rates, reflecting a more cautious economic outlook amid lingering uncertainties. London’s labour market remains strong, with workforce participation rates staying high and job numbers holding steady across core sectors, stabilising economic activity. Compared to the wider UK, stronger consumer and business confidence in London  continues to lend support to growth. However, while average incomes in London are relatively high, offering a buffer against cost-of-living pressures, lower-income residents remain more exposed to economic vulnerabilities, highlighting persistent inequalities.

Our forecast indicates that London’s output will remain below pre-pandemic projections for an extended period. Enduring economic scarring from the pandemic, including disrupted supply chains, reduced business investment, and workforce skill erosion, continues to hinder recovery. Structural challenges, such as high housing costs, subdued productivity growth, and infrastructure limitations, further weigh on London’s economic performance and long-term growth potential.

In the medium term, output is expected to grow at a moderate pace. Stabilising labour market conditions and gradual improvements in business confidence will drive recovery in key sectors. However, cost-of-living pressures and elevated borrowing costs will continue to constrain consumer spending and investment, particularly in goods-producing industries.

In the long term, London’s economy is projected to return to its historical average growth rate. The economic scarring caused by the pandemic and structural challenges is expected to diminish gradually, supported by improving productivity, renewed business investment, and a more skilled workforce.

The fast recovery scenarios, a plausible upside, envisions a faster economic recovery as inflation stabilises at lower levels, enabling the Bank of England to accelerate the pace of interest rate cuts. London’s stronger aggregate incomes and higher consumer confidence compared to the rest of the UK provide a buffer against protracted cost-of-living challenges, while wealthier households sustain spending by drawing on their savings. The faster decrease in interest rates reduces borrowing costs for businesses and households, supporting consumer spending and boosting demand across key sectors. This creates a reinforcing cycle of sustained economic recovery, driving London’s output upward and eliminating long-term output scarring.

The slow recovery scenario, a plausible downside, assumes that London experiences a subdued economic rebound. Prolonged geopolitical uncertainty, weaker global demand, and sluggish productivity gains weigh heavily on the economy, keeping growth well below historical averages. Under this scenario, consumer demand is restrained as real incomes remain squeezed and households, particularly lower-income ones, face persistent cost-of-living pressures. High borrowing costs, elevated inflation expectations, and tighter financial conditions limit spending and prompt businesses to scale back investment and hiring plans.

While the labour market remains relatively resilient in some sectors, others face challenges, leading to slower job creation. Disrupted supply chains and reduced business investment, enduring effects of the pandemic, continue to drag on productivity, though gains in technology and services offer modest support for recovery. Housing affordability challenges, exacerbated by elevated interest rates, place additional pressure on household spending, limiting London’s capacity for stronger growth. Additionally, inflation risks rebounding above target due to renewed pressures from energy price volatility, wage growth exceeding productivity, or external supply disruptions. Under this prolonged period of subdued expansion, London’s output grows slowly, delaying a return to its pre-pandemic trajectory.

Figures A1 and A2 show the estimated scenario paths for London’s output and jobs over the medium term.

Figure A1: Scenario paths for London’s output over the medium term

Source: GLA Economics projections, built on ONS historical data; Note: level of output indexed to Q4 2019 100

Figure A2: Scenario paths for London’s workforce jobs over the medium term

Source: GLA Economics projections, built on ONS historical data; Note: level of output indexed to Q4 2019 100

The main results are presented below:

Headline recovery in the medium term (2024 to 2026)

• Under the gradual return to economic growth scenario, our baseline, London’s real GVA is set to grow at a moderate 1.2% in 2024. Growth is expected to pick up in 2025 to 1.9%, with a further acceleration to 2.2% in 2026 (Figure A3).
• The number of workforce jobs in London is forecast to rise by 1.3% in 2024, with further moderate increases in 2025 and 2026, reaching 1.5% and 1.6%, respectively (Figure A4).
• GLA Economics forecast for output in 2024 is an improvement from the Summer 2024 LEO[1] projection, while the forecasts for 2025 and 2026 remain the same. The jobs outlook has been revised upward, reflecting the better-than-anticipated performance of the labour market and higher immigration levels during the first half of 2024.

Figure A3: Medium-term real GVA projections, annual growth rates

Source: GLA Economics, ONS

Figure A4: Medium-term real Workforce jobs projections, annual growth rates

Source: GLA Economics, ONS

Sectoral output recoveries in the medium term (2024 to 2025)

• London’s real GVA growth is set to vary across sectors, reflecting ongoing structural shifts and macroeconomic conditions (Table A1).
• Service-based sectors continue to drive growth, with strong performances expected in Accommodation and food services, Administrative and support services, and Arts, entertainment, and recreation. These industries are supported by resilient demand and recovering discretionary spending.
• London’s key knowledge-intensive industries, such as Professional, scientific, and technical services and Information and communication, are set to expand steadily, reinforcing their role as core drivers of the capital’s economic output.
• Goods-producing industries are set on divergent trajectories. While Manufacturing is likely to remain weak into 2025, Construction is expected to grow, supported by infrastructure projects, investment in commercial development, and stronger demand for residential housing.
• Transportation and storage is poised for recovery, with stronger momentum projected in 2025, driven by improving trade flows, rising demand for e-commerce logistics, the return-to-office plans, a rebound in tourism, and renewed investment in transport infrastructure projects across London.
• Public services, including Education and Health, maintain moderate but stable output growth.
• Real estate output is showing signs of recovery, with steady growth expected through 2024 and stronger momentum anticipated in 2025, supported by improving market confidence and stabilising interest rates.
• Overall, London’s GVA growth in the medium term reflects strong contributions from service sectors and consumer-oriented activities, balancing the ongoing weaknesses in goods industries.

Table A1: Real GVA projections, annual growth rates

Source: GLA Economics

Sectoral employment growth in the medium term (2024 to 2025)

• Workforce job projections highlight broad-based growth in London’s labour market in 2024 and 2025, though performance varies across sectors (Table A2).
• Goods industries continue to face challenges, with ongoing weaknesses in Manufacturing and related sectors.
• Wholesale and retail trade is expected to contract. This decline reflects subdued consumer spending due to persistent cost-of-living pressures and elevated borrowing costs, limiting household budgets. Additionally, structural shifts toward e-commerce continue to challenge traditional retail outlets, further weighing on employment in this sector.
• In contrast, energy-related sectors are expected to perform strongly, reflecting increased investment and improved demand.
• London’s core specialist service sectors, including Professional services and Information and communication, maintain steady expansion.
• Public sector-driven areas, such as education and healthcare, remain stable, contributing to employment growth.

Table A2: Workforce jobs projections, annual growth rates

Source: GLA Economics

The scenario results presented in this supplement come from continuing unprecedented uncertainty. Overall, GLA Economics judges that risks are tilted to the downside. Structural challenges such as high housing costs, limited infrastructure capacity and skills mismatches in the labour market continue to weigh on London’s economy. Rising rents and elevated mortgage rates reduce household affordability and constrain consumer spending, while businesses face higher costs and productivity bottlenecks. The global economic environment with weaker growth, supply chain disruptions and shifting trade patterns puts pressure on London’s export sectors and investment climate. Geopolitical uncertainties, driven by energy price volatility, trade protectionism and ongoing conflicts, increase costs and disrupt economic stability. GLA Economics will continue to track the economic data to review these forecasts in the future. Updates will be released on the London Datastore.

---

[1] GLA Economics (2024), ‘London’s Economic Outlook: Summer 2024’, July 2024