London’s slowdown to blame for weak UK productivity, says think-tank

London’s slowdown is the root cause of the UK’s weak productivity, according to research published on Thursday showing that the capital has lagged the rest of the country and similar global cities over the past 15 years.

In a report, the Centre for Cities think-tank said the value of output per hour worked in London since 2007 had trailed that of Paris, New York and Brussels, and argued more devolution by central government would help ease post-Brexit and post-coronavirus challenges that have hit output.

London’s weight in the national economy meant UK gross domestic product would have been £54bn higher in 2019 if its productivity had grown in line with that of Paris, New York, Brussels and Stockholm since the 2008-09 financial crisis, the think-tank said. Tax receipts, it added, would have been £17bn higher.

Instead, analysis of official data found that the capital’s annual growth in productivity — defined as the value of output per hour worked — had averaged just 0.2 per cent since 2007, slightly below the already feeble national average of 0.3 per cent.

Over the same period, productivity growth averaged 0.9 per cent in Paris — almost twice the average for France — and 1.4 per cent in New York, against an average of 1 per cent for the US.

Such underperformance matters because productivity remains far higher in London, with its economy based on “superstar” companies in the professional services, IT and banking sectors, than in other regions. Employment has also grown faster in the capital, meaning it increasingly determines national trends.

Prime minister Rishi Sunak’s government and the Labour party under Sir Keir Starmer both see boosting productivity as crucial to reviving the fortunes of the economy. Over the long term, higher productivity is necessary if wages are to rise, and living standards improve, without this feeding higher inflation.

The report said the main reason for London’s slowdown was the stuttering performance of the most productive businesses at the heart of the capital, while productivity in emerging areas on its fringes grew fastest.

Noting that this sharp slowdown predated Brexit, the Centre for Cities said it could not be explained by macroeconomic trends — such as the long period of ultra-loose monetary policy — because it had not happened in other global financial centres.

Instead, it suggested the rise could be the result of increasing commercial property costs, which had crowded out more productive intangible investment. It added that high housing costs and a weaker pound made London less attractive to highly skilled overseas professionals.

Paul Swinney, Centre for Cities policy director, said London’s selling point was that “it offers benefits above the costs”, so that “if its benefits are eroded and its costs are increasing, then it is less attractive”.

He added that, if it continued, subpar productivity risked compounding the challenges of Brexit and homeworking, which would cause further decline.

The think-tank said planning reforms could lower the costs of housing and office space, while new fiscal powers could enable the mayor to levy a payroll tax or introduce a city sales or tourist tax.

It added that other ministerial priorities should be to spur high-skilled migration and pursue better arrangements with the EU for trade in financial services, on which London’s fortunes still hinged.

HM Treasury said the chancellor had set out a plan to boost productivity, and the government had also set out “ambitious” financial services reforms, while also reviewing EU-derived rules in other critical growth sectors.