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London’s Economy Today editorial – April 2023

Inflation still in double digits as doubts arise about persistent price pressures

The UK continues to face inflation above 10% according to the latest figures by the Office for National Statistics (ONS). Consumer Price Index (CPI) inflation slowed in March 2023 but still came in at 10.1% year on year. While energy prices remain the single largest inflationary pressure, food prices are accelerating to an increasingly alarming pace. The average price of a UK consumer’s monthly food spending was 19.6% higher than a year ago, representing the fastest pace of food inflation in over 45 years.

Global energy costs are set to drag the headline rate of inflation down over the coming months. Already, fuel prices are falling as global oil costs hold well below their highs after Russia’s invasion of Ukraine. And while household energy costs remain at eye-watering levels, figures from next month onwards are likely to show a much smaller contribution to inflation, as we compare with already-high bills in spring 2022.

Yet outside the relief from a plateau in energy costs, many other pressures have yet to peak. Even excluding the remarkably high rates of food and energy price inflation, ‘core’ CPI grew 6.2% year on year for a second month. Figures like this are driving concerns that high inflation could become embedded in the UK economy, even once energy costs fall. In the LET supplement this month, we highlight our article published with the Economics Observatory about how inflation is playing out across London. Using our measure of ‘shelf-front’ inflation built up from ONS micro-data, we find London may have faced high inflation sooner than the UK average, and that many core cost pressures are yet to peak.

Figure 1:

UK economy avoids recession, but growth momentum is weak

The UK economy escaped recession at the end of last year, but only by a narrow margin. Final figures for UK GDP in the last three months of 2022 showed economic activity rose 0.1% in Q4, after a contraction in Q3 2022. Initial estimates suggested no growth, so the final estimates are an improvement at the headline level. But more detailed figures offer a note of caution. While UK consumer spending was revised up a little, investment and exports were revised down. Another key source of the upward revision to GDP was a cut in import estimates. This means less spending was sent abroad, but it also suggests UK households and businesses spent less than initially estimated.

Meanwhile, the monthly estimate of UK GDP showed signs that early 2023 would continue the pattern of low, but positive, growth. February saw UK GDP make no growth on the month, though January was revised up slightly to 0.4% growth. Service sector output fell 0.1% in February, as public sector strikes continued to have an impact. Manufacturing remained weak, down 0.2%, and construction grew at a strong 2.4% in February after a weak January. Overall, the three months to February 2023 saw output grow 0.1% – in line with the momentum from Q4 2022.

Within the service sector, monthly GDP growth was mixed. Consumer-facing sectors picked up for a second successive month, though activity in this area of the economy is still below its pre-pandemic level, and has trended downwards overall since July 2022. The advanced services that underpin London’s economy were mostly weak at the national level. Real Estate, Professional services and IT all dragged on service sector output in February, while Finance offered a moderate boost. Yet recent quarters have seen London’s services sector prove more resilient than the national picture, so these figures may understate the scope for growth in the capital.

Unless momentum sharply deteriorates later this year, overall economic activity has proven surprisingly resilient to the cost of living crisis. The UK looks set to avoid a recession, even if growth momentum is only just above zero. Data from the British Chambers of Commerce also showed that firms across the UK are more optimistic about conditions in the next 12 months than over the last three months. 52% of UK firms believe their business turnover will increase in the next year. But a range of triggers, from delayed impacts of monetary policy tightening to global financial sector struggles, could yet worsen the outlook.

UK joins Indo-Pacific partners in trade agreement

On 31 March the UK Government reached an agreement to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) as its 12th member. This is an important milestone in establishing new trade partnerships after leaving the EU, but is unlikely to be significant in economic terms. The UK already has trade agreements with nine of the partnership members, and the government estimates the long-run increase in GDP from joining at 0.08%. This compares with an estimated long-term loss of 4% of output from leaving the European Union.

Currently, the ONS reports that UK trade has nearly recovered to its pre-pandemic levels. Service exports have exceeded pre-pandemic levels, and goods and service imports are at or near former levels. The exception is goods exports which remain subdued, (Figure 2). These developments are likely to have been of benefit to London’s economy given its orientation to service exports. It is consistent with analysis over a year ago by the Department for International Trade that there would be expansion in world trade in business services over the coming years, and that the UK (and so, London) is well positioned to take advantage. What the chart does not indicate, though, is how much higher trade might have been in the absence of Brexit.

Figure 2:

UK gets an IMF forecast upgrade, but still lags the global pack

The International Monetary Fund (IMF) published its latest forecasts this month, with a moderate global growth outlook, similar to its previous projections in January. Globally, economic activity is set to slow from growth of 3.4% in 2022 to 2.8% in 2023 and 3% in 2024 (Figure 3). The IMF is more pessimistic about global growth in the medium term (in five years’ time) than it has been since 1990.

Even within the slower group of advanced economies, the UK stands out as a laggard in the projections. The world’s richest countries are set to average growth of just 1.3% this year and 1.4% next year. Yet, the IMF expects UK GDP to fall 0.3% across 2023, and to grow only 1% in 2024. Despite being an upgrade on previous projections of a 0.6% contraction in 2023, these figures mean the UK is projected to have the weakest growth in the G7 group of major advanced economies this year. Germany is the only other major economy set for a contraction this year (down 0.1%), and the UK’s growth projections are significantly slower than even sanctions-hit Russia (set for 0.7% growth). While London should be among the more resilient parts of the UK in macroeconomic terms, its position as a centre for UK exports means the weak medium-term global prospects offer cause for concern.

Figure 3:

Among the world’s largest economies, the US is projected to grow 1.6% this year and 1.1% in 2024. The IMF expects the Chinese economy to expand 5.2% in 2023 and 5.1% next year. As the world’s second-largest economy emerges from tough COVID-19 control measures in place all the way through to late last year, its economic activity is already out-performing expectations. China’s GDP grew 4.5% year-on-year in Q1 2023, up from 2.9% in the last three months of 2022, and faster than a forecaster consensus of 4% according to Trading Economics. While the improving outlook for China’s growth should help support global growth, it may also put further upward pressure on inflation as demand rises for energy and other manufacturing inputs.

Meanwhile, at the same time as China’s economy showed signs of a firm recovery, estimates suggest its population may not be the world’s largest for much longer. New projections from the United Nations Population Fund (UNFPA) found that India’s population is set to overtake China’s by the middle of 2023. The gap of 2.9 million people on its own represents over 4% of the UK’s projected population in 2023 (67.7 million). The figures are only estimates, as the pandemic prompted China to defer its census by three years to 2024. But they offer a reminder that the world’s second-largest economy may soon have to face up to structural headwinds from a plateauing population and a long-term trend towards slower global trade growth.

Immigrant numbers in London’s workforce have been rising

HM Revenue and Customs has updated its statistics on payrolled employments (excluding the self-employed who are not owner managers) in the UK by region, industry and nationality, and GLA Economics has published an analysis for London. Immigrants to London in work have been rising strongly, thanks to liberalisation of the immigration regime making it easier for non-EU nationals to reside here. The main trends are:

  • In June 2016 (at the time of the Brexit referendum) there were almost the same number of both EU and non-EU nationals working in London at 780,000 for each group
  • By December 2019 (and prior to the pandemic) the populations of both groups had risen to around 855,000, and subsequently there has been a divergence in trends
  • EU nationals fell to 747,000 by January 2021 (the time of the introduction of the new immigration regime) before rising slightly to 765,000 by December 2022
  • Non-EU nationals fell to 823,000 by January 2021, before rising to 1,050,000 by December 2022, (Figure 4).

The total share of employments in London held by non-UK nationals has increased from 35.1% in July 2014 to 39.5% in December 2022.

Figure 4: Employment by nationality within London, count of total payrolled employments, June 2014 to December 2022

Source: GLA Economics analysis of HMRC data – Pay As You Earn Real Time Information (non-seasonally adjusted) and Migrant Worker Scan

Note: Estimates are based on where employees live. Vertical lines indicate Brexit vote of June 2016, beginning of lockdown in March 2020, and the end of free movement in January 2021

Migrant workers are relatively more populous in the London economy than at the national level. In December 2022, 16.6% of resident payrolled employments in London were held by EU nationals and 22.9% were held by non-EU nationals. The corresponding figures for the UK are 7.8% and 9.3% respectively. That said, the UK has experienced a higher rate of growth in employments held by non-EU workers than London in recent years.

Outlook for London’s economy may be less negative

Over two in five businesses (43%) think that London’s economy will shrink over the next 12 months, according to the London Chamber of Commerce and Industry (LLCI) Q1 2023 Quarterly Economic Survey. This, though, is a marked improvement from Q4 2022 when the corresponding figure was 52%. 25% of London’s businesses now expect the capital’s economy to improve over the next 12 months (up from 21% three months ago).

Businesses were slightly more confident about their own profitability than not, with 36% expecting an increase in the coming 12 months, and 31% who anticipate a decline. That said, businesses continued to face enormous cost pressures – 74% reported that their energy costs had increased in Q1 2023, 49% had higher domestic raw material costs, and 47% faced greater pressures to raise wages.

Looking at the challenges faced by retail, on 1 April business rate revaluations came into effect with some relief for the retail sector especially in London. The Local Data Company reports that 42 of the 269 shops in Oxford Street stood empty, a vacancy rate of 16%, and more than the average British high street. More in depth analysis from them focused on fashion and general clothing shops for 110 high streets over 94 towns in England and Wales. This category has seen a net loss of 5,927 units over the years 2018-23. London locations will see the biggest decreases in business rates. For Oxford Street this is £164,000 on average, and the next biggest decreases are on Regent Street, Long Acre, George Street (Richmond), and the Strand. In terms of magnitude only eight high streets across England and Wales will see business rates fall by 40% or more in April 2023, compared to April 2019 when 19 high streets saw their rates rise by 40% or more.

GLA Economics will continue to monitor economic events of interest to the capital over the coming months in our analysis and publications, which can be found on our publications page and on the London Datastore.