Published on 11 July 2024
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Unpacking London’s productivity problem

London's productivity slowdown since the financial crisis is concerning and has been attributed to the collapse of productivity in the capital’s finance sector itself. The assumption that finance should dominate London's economy needs questioning, as future productivity will rely on other sectors like ICT, bio-medical, and high-level professional and scientific activities. To sustain productivity growth, London may need to re-orient its economy again, writes Ron Martin.

The UK’s poor productivity growth since the financial crisis of 2008 to 2009 has been a topic of considerable concern.  The causes of this productivity  flatlining ‘puzzle’ have been much debated, with explanations that range from inadequate private sector investment following the financial crisis, the impact of more than a decade of austerity imposed by Governments in response to the crisis, a lack of diffusion of productivity raising practices, to disjointed and chaotic policy, among others.  The new chained volume constant price output series produced by the Office for National Statistics (ONS), which start in 1998, indicate that the compound annual rate of growth of GVA (Gross Value Added) per filled job from 1998 to 2007, the eve of the financial crisis, was 1.92%, itself hardly impressive.  But for the post-crisis decade, 2009-2019, this fell to a meagre 0.75% (Figure 1).

Figure 1: The slowdown in productivity growth, chained volume metric, Gross Value Added per productivity job, in 2018 prices: UK and London

Source of data: ONS

One aspect of this national decline has attracted particular attention, namely the fall in growth rate in London, widely regarded as the nation’s ‘growth engine’. London had the highest productivity growth rate in the decade prior to the financial crisis, at 3.13% per annum. In the decade after the crisis this fell substantially, to only 0.89% per annum (Figure 1). Given the size of London’s economy and its pre-crisis growth rate, this decline is viewed as a major contributor to the UK’s overall slow productivity growth problem.

Whilst not questioning this simple arithmetic fact, it is useful to look a little deeper into London’s productivity slowdown.  Productivity growth depends on the difference between the rate of growth of output (as measured, say, by gross value value) and the rate of job growth. Using the ONS data on productivity, output (gross value added) and jobs, Figures 2 and 3 show these components for London and the remaining standard (ITL1) regions of the UK, for the two periods 1998-2007 and 2009-2019.(The end year 2019 was chosen to avoid the effects of the COVID-19 pandemic of 2020-2022 in which the Government’s furlough scheme to protect jobs during the lockdowns complicate the calculation and meaning of productivity in those periods.)

Figure 2:  Growth of productivity, output and filled jobs, by region, 1998-2007

Source of data: ONS

Figure 3:  Growth of productivity, output and filled jobs, by region, 2009-2019

Source of data: ONS

What is evident across almost all of the UK’s regions is that while output growth in the 2009-2019 period was significantly reduced compared to the 1998-2007 pre-crisis period, job growth in certain regions, most notably London, was much faster in the decade after the crisis.  Thus, while output growth in London fell from a compound annual rate of 4.21% to 2.98% between the two periods, job growth increased from 1.08% to 2.13%, the highest of any of the regions. In fact, while London accounted for 17% of the net new jobs created in the UK during 1998-2007, it accounted for 30% of those created during 2009-2019. In terms of employment, London’s economy recovered more strongly from the financial crisis than any other region of the UK. But, given the slowdown in the growth of output, the upshot was that productivity growth fell from 3.13% to 0.89%.  A key question, then, must be why these new jobs were not as productive as those prior to the crisis.

To understand what has happened to London’s lacklustre productivity growth after the financial crisis thus requires more detailed analysis. The broad sectoral breakdown in the ONS data is a useful starting point. In Figure 4 those sectors above the A-B (45 degree) line actually saw their productivity growth rates increase after the crisis (namely: Administrative services; Public Administration and Defence; Arts and entertainment; Construction; Education; and Other services). But the majority of sectors experienced a fall.

Figure 4: The slowdown in productivity growth in London by major sectors, 1998-2007 and 2009-2019

Source of data: ONS

Five sectors stand out in this regard: Finance and insurance; Real estate; Information and communication services; Professional, scientific and technical; and Health and social work. In all of these, job growth exceeded productivity growth (Figure 5).

The slump in productivity growth in financial services after the crisis was especially marked, from a compound annual rate of 5.6% to -1.2%. Not surprisingly, the two areas in London where this high productivity sector is concentrated – Tower Hamlets, and Camden and the City of London – also rank among those parts of the capital that have experienced significant declines in productivity growth (Figure 6). 

Figure 5: Productivity growth and filled jobs growth by major sector, London, 2009-2019 (Sectors ranked by compound annual growth rate of productivity)

Figure 6: Productivity level in 2009 and compound annual growth rate 2009-2019, by local ITL2 areas in London

It was unlikely that the high pre-crisis growth rate of productivity in finance and insurance, based as it was on excessive, poorly regulated, high-risk lending, would have been sustainable. The crisis itself exposed the dangers of that excessive lending. Some argue the re-regulation of finance and banking following the crisis also imposed a brake on such activity; others that a decade of austerity dampened economic growth more generally, with impacts on the finance sector; while yet others argue that a slowdown in innovation and investment in the finance sector has also contributed to the drop in productivity growth.

Concern has been expressed over how to revive productivity growth in this sector, what many still regard as the ‘growth engine’ of the UK economy:

“This country’s financial services sector is the powerhouse of the British economy, driving innovation, growth and prosperity across the country… Leaving the EU gives us a golden opportunity to reshape our regulatory regime and unleash the full potential of our formidable financial services sector.”

Jeremy Hunt, Chancellor of the Exchequer, (9 December 2022), MorningStar

Accordingly, in 2022 the Government announced another ‘bonfire’ of regulations – a Big Bang 2.0 – in effect undoing and relaxing the very rules imposed after 2008. (Big Bang 1 was the historic deregulation of the financial system introduced in 1986 by the Thatcher Government. This gave banks and other financial institutions considerable freedom to embark on an unprecedented expansion of lending, securitisation and use of new financial instruments on a literally global scale.)  The 30 reforms announced included removing the cap on bankers’ bonuses, dismantling the firewall between retail and investment activities, and relaxing the capital rules introduced following the crisis.

How far such moves will revive productivity growth in London’s finance sector remains to be seen. But the presumption that finance will, or should, continue to be the ‘powerhouse’ of both London’s and the UK’s economy needs to be questioned. Given that the UK’s finance sector invests less relative to its GVA than in other G7 countries, and the fact that other major global financial centres are on the rise, perhaps London can no longer expect to be as dominant as it has been. And other sectors will be key to London’s future productivity success, including  ICT, the bio-medical sector, and a range of high-level professional and scientific activities. London has successfully re-orientated its economy before in history; it may be that it needs to do that again.

The views and opinions expressed in this post are those of the author(s) and not necessarily those of the Bennett Institute for Public Policy.


Ron Martin

Professor Ron Martin

Affiliated Researcher

Ron Martin is Emeritus Professor of Economic Geography at the University of Cambridge, UK, and Emeritus Professorial Fellow of St Catharine’s  College, Cambridge, UK. From 2015 to 2020 he was...

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