Sunday, 9 January 2011

Why did London suffer less during the recession?

I'm looking forward to this lecture by Henry Overman of the LSE analysing why London's economy was generally not as badly affected by the financial crisis and subsequent recession as many (including myself) expected, given the importance here of financial services.

Prof Overman will obviously have his own take but I'd suggest that the chart below explains a good deal.

It shows the importance to each region's economy in 2007 (i.e. pre-recession) of manufacturing and construction. London had by far the lowest reliance on each sector, with 5% of its Gross Value Added coming from manufacturing and 4% from construction.

Why does this matter? Well, as this ONS report (pdf) shows, these sectors were each very badly hit in 2008-09. For construction this was due to both demand and supply factors: demand fell because of the usual cyclical reasons but also because mortgage lending terms suddenly became much stricter, but supply also fell because developers realised they had over-built in some areas and couldn't get finance to build in the places they hadn't. The big drop in manufacturing activity was an international phenomenon and seems to have been caused by similar factors of falling demand for durable goods and sudden unavailability of credit for producers and traders.

So London's 'post-industrial' economy and, perhaps, its relative lack of development opportunities, seem to have helped it avoid the worst of the recession. We'll have to see whether it will also miss out on some 'rebound' growth as manufacturing and construction recover some or all of their losses.

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