LET_Oct11

London’s Economy TodayIssue 110 | October 2011

Latest news...

Bank of England eases monetary policy as Eurozone crisis rumbles onBy Christopher Lewis, Senior Economist, and Gordon Douglass, Economist

The crisis in the Eurozone continued in October with further downgrades of Eurozone governments’ debts and problems developing in banks. Fitch and Moody’s downgraded both Italian and Spanish government debt, with both agencies noting the increasing risks in the Eurozone. Moody’s further warned France that it faced a move from a stable to negative outlook on its AAA credit rating in the next three months if the cost of bank bailouts and rescuing Eurozone members stretched its budget too far. Bond yields of a number of Eurozone countries over German government bonds (an indication of risk) remain elevated (see Figure 1).

Working Paper 49: Supporting London’s innovatorsThe social and economic context in which fi rms operate can encourage or hinder innovation, which calls for policy to get the conditions right for innovators to thrive.

London’s key strengths are its business environment and its ability to connect people and spread ideas and knowledge.

Download this paper now from: http://www.london.gov.uk/publication/working-paper-49-supporting-londons-innovators

In this issue

Bank of England eases monetary policy as Eurozone crisis rumbles on ...............1

Latest news ......................1

Economic indicators .........5

Working Paper 49Supporting London’s innovatorsBy Nick Ennis and Slawek Kozdras

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Concerns about the future solvency of some banks in the Eurozone have intensifi ed. Problems at the Franco-Belgian bank Dexia regarding its exposure to Greek debt have led to France, Belgium, and Luxemburg announcing a bailout of the bank. Many other European banks are also likely to need recapitalising in the near future. The IMF warned on 5 October that European banks need a swift recapitalisation with Antonio Borges, the IMF’s Europe director stating “the situation today is quite diffi cult” and added “we have to restore confi dence quickly. The best way to do that is to have a capital increase rather quickly”.

In the early hours of 27 October the Eurozone leaders agreed the outline to a three-pronged solution to the Eurozone sovereign debt crisis. The exact details have yet to be worked out but the plan would likely involve something like the following: recapitalising Eurozone banks by just over 100bn euros by June 2012; private sector creditors (mainly banks) agreeing to write off 50 per cent of Greek debt; and leveraging up the resources of the bailout fund (the European Financial Stability Facility) to probably in the region of 1 trillion euros. The markets reacted positively to this news on the morning of 27 October, however the devil will be in the exact technical details which have yet to be agreed upon let alone enacted. The possibility of at least some of the above agreement unravelling or taking a long time to implement is a very real one. The sovereign debt crisis in the Eurozone is therefore set to rumble on.

Moody’s has downgraded 12 UK fi nancial fi rms’ credit ratings. These fi rms include Lloyds TSB, RBS, Nationwide and Santander UK. The reason for the downgrades was Moody’s belief that the UK Government is less likely to support these fi rms in future if they were to get in to diffi culty. The ratings agency however noted that the downgrade to UK banks does not “refl ect a deterioration in the fi nancial strength of the banking system”, instead it was a refl ection of the removal of systemic support from the fi nancial system.

Figure 1: Ten-year government bond

spreads over German bonds, percentage

points

Last data point: 25/10/2011

Source: EcoWin

-5

0

5

10

15

20

25

02/0

1/20

08

02/0

3/20

08

02/0

5/20

08

02/0

7/20

08

02/0

9/20

08

02/1

1/20

08

02/0

1/20

09

02/0

3/20

09

02/0

5/20

09

02/0

7/20

09

02/0

9/20

09

02/1

1/20

09

02/0

1/20

10

02/0

3/20

10

02/0

5/20

10

02/0

7/20

10

02/0

9/20

10

02/1

1/20

10

02/0

1/20

11

02/0

3/20

11

02/0

5/20

11

02/0

7/20

11

02/0

9/20

11

Greece Spain Portugal Ireland Italy UK France

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Infl ation jumps higher but the weakening economic outlook leads the Bank of England to renew QEAnnual Consumer Price Index (CPI) infl ation in September rose to 5.2 per cent (see Figure 2) and annual Retail Price Index (RPI) infl ation hit a 20-year high by reaching 5.6 per cent. Higher electricity, gas, transport, and food prices caused the increase in infl ation. However, infl ation is expected to head downwards in 2012 as this year’s increase in VAT falls out of the index. Spare capacity in the economy should also weaken future price rises. High annual CPI infl ation in September is likely to be bad news for the government’s fi nances as that month’s fi gure is usually used to set the level of increase to state benefi ts in the next fi nancial year.

The Bank of England has become more concerned about the state of the UK economy, with it noting that the weak economic outlook “has made it more likely that infl ation will undershoot the 2% target in the medium term”. The minutes from the last Monetary Policy Committee (MPC) meeting showed that the Bank expects growth to be “close to zero in the fourth quarter”. The weak international economic environment especially in the Eurozone has led to the Bank launching another round of quantitative easing (QE). QE will be increased by a further £75 billion on top of the previous £200 billion. This was agreed unanimously by the MPC.

Figure 2: UK annual infl ation rates

Last data point is September 2011

Source: Offi ce for National Statistics

-2

0

2

4

6

8

10

12

Jan-

89Ju

l-89

Jan-

90Ju

l-90

Jan-

91Ju

l-91

Jan-

92Ju

l-92

Jan-

93Ju

l-93

Jan-

94Ju

l-94

Jan-

95Ju

l-95

Jan-

96Ju

l-96

Jan-

97Ju

l-97

Jan-

98Ju

l-98

Jan-

99Ju

l-99

Jan-

00Ju

l-00

Jan-

01Ju

l-01

Jan-

02Ju

l-02

Jan-

03Ju

l-03

Jan-

04Ju

l-04

Jan-

05Ju

l-05

Jan-

06Ju

l-06

Jan-

07Ju

l-07

Jan-

08Ju

l-08

Jan-

09Ju

l-09

Jan-

10Ju

l-10

Jan-

11Ju

l-11

%

RPI CPI

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Stuttering recovery for developed world economiesSurvey evidence indicates that London’s economy continues to expand, however the economic situation is considerably more precarious than at the beginning of the year. Mervyn King has warned that the current fi nancial crisis “is the most serious fi nancial crisis we’ve seen at least since the 1930s, if not ever”. Lending to private non-fi nancial companies fell for a second month in a row in August according to Bank of England data and optimism amongst fi nance directors of Britain’s largest companies has fallen to its lowest level since early 2009 according to a survey by Deloitte. Public sector job losses could be 50 per cent higher than forecast by the Offi ce for Budget Responsibility according to research undertaken by the Chartered Institute of Personnel and Development. Internationally, a number of US lenders have reported new signs that homeowners and credit card borrowers are falling behind on their payments. Within the Eurozone, a comprehensive solution to the sovereign debt crisis has yet to be implemented. With the international economic environment in developed economies in a poor state, London’s recovery is likely to continue to be relatively slow with blustery headwinds ahead.

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Economic indicatorsIncrease in moving average of passenger numbers The most recent 28 day period is from 21 August

2011 to 17 September 2011. Adjusted for odd days, London’s Underground and buses had 258.3 million passenger journeys; 174.2 million by bus and 84.1 million by Underground.

The moving average of passengers every period increased to 263.0 million from 262.9 million in the previous period. The moving average for buses was 176.7 million. The moving average for the Underground was 86.3 million.

The methodology used to calculate the number of bus passenger journeys was changed by TfL from 1 April 2007. For a detailed explanation please see LET issue 58 (June 2007).

Latest release: October 2011Next release: November 2011

Source: Transport for London

Passenger numbersjourneys (millions) adjusted for odd days

40

60

80

100

120

140

160

180

200

1992

/93

1993

/94

1994

/95

1995

/96

1996

/97

1997

/98

1998

/99

1999

/00

2000

/01

2001

/02

2002

/03

2003

/04

2004

/05

2005

/06

2006

/07

2007

/08

2008

/09

2009

/10

2010

/11

2011

/12

London Underground Bus (pre 1 April '07 method) Bus (new method)London Underground moving average Bus moving average (pre 1 April '07 method) Bus moving average (new method)

millions

Source: Transport for London

Decline in the average annual growth rate of passengersThe moving average annual rate of growth in

passenger journeys fell to 2.0% from 2.1% in the previous period.

The moving average annual rate of growth in bus passenger journey numbers decreased to 1.5% from 1.6% in the previous period.

The moving average annual rate of growth in Underground passenger journey numbers has remained constant at 3.2% from the previous period.


Annual % change in passengers using London Underground and busesadjusted for odd days

-12

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

14

16

18

20

1994/95

1995/96

1996/97

1997/98

1998/99

1999/00

2000/01

2001/02

2002/03

2003/04

2004/05

2005/06

2006/07

2007/08

2008/09

2009/10

2010/11

2011/12

London Underground BusesUnderground plus bus London Underground moving averageBuses moving average LU and buses moving average

%

Source: Claimant Count, Nomis

Claimant count unemployment The percentage of the resident working age

population who are unemployed and claiming Jobseekers’ Allowance (seasonally adjusted) in London was 4.4% in September 2011.

There were 235,400 seasonally adjusted unemployment claimants in London in September 2011 compared with a downwardly revised 233,800 in August 2011.

There were 1,597,200 seasonally adjusted unemployment claimants in the UK in September 2011 compared with a downwardly revised 1,579,700 in August 2011.


Claimant count unemployment % of working age population, seasonally adjusted

0

1

2

3

4

5

6

7

8

1997

Jan

1998

Jan

1999

Jan

2000

Jan

2001

Jan

2002

Jan

2003

Jan

2004

Jan

2005

Jan

2006

Jan

2007

Jan

2008

Jan

2009

Jan

2010

Jan

2011

Jan

%

London UK

6

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Source: Experian Economics

Annual output growth in London slowed in Q1 2011 London’s annual growth in output

decreased to 2.5% in Q1 2011 from 2.7% in Q4 2010.

Annual output growth in the South East increased to 3.0% in Q1 2011 from 2.7% in Q4 2010.

Annual output growth in the Eastern region increased to 4.4% in Q1 2011 from 2.8% in Q4 2010.

Latest release: August 2011Next release: November 2011

Real GVA growth in London, South East and Eastern Regions year-on-year change

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

1983

q1

1984

q1

1985

q1

1986

q1

1987

q1

1988

q1

1989

q1

1990

q1

1991

q1

1992

q1

1993

q1

1994

q1

1995

q1

1996

q1

1997

q1

1998

q1

1999

q1

2000

q1

2001

q1

2002

q1

2003

q1

2004

q1

2005

q1

2006

q1

2007

q1

2008

q1

2009

q1

2010

q1

2011

q1

%

London South East Eastern

Source: Experian Economics

Negative annual employment growth in London in Q1 2011 London’s annual employment growth

increased to -0.6% in Q1 2011 from -1.0% in Q4 2010.

Annual employment growth in the South East increased to 2.1% in Q1 2011 from 1.2% in Q4 2010.

Annual employment growth in the Eastern region increased to 2.1% in Q1 2011 from 0.5% in Q4 2010.

Latest release: August 2011Next release: November 2011

Full-time equivalent employment in London, South East and Eastern Regionsyear-on-year growth from quarterly figures

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

1989

q1

1990

q1

1991

q1

1992

q1

1993

q1

1994

q1

1995

q1

1996

q1

1997

q1

1998

q1

1999

q1

2000

q1

2001

q1

2002

q1

2003

q1

2004

q1

2005

q1

2006

q1

2007

q1

2008

q1

2009

q1

2010

q1

2011

q1

%

London South East Eastern

Source: Nationwide

Annual house price infl ation falling in LondonHouse prices, as measured by Nationwide,

were higher in Q3 2011 than in Q3 2010 in London but not in the UK.

Annual house price infl ation in London was 0.5% in Q3 2011, down from 2.9% in Q2 2011.

Annual house price infl ation in the UK was -0.5% in Q3 2011, up from -1.2% in Q2 2011.

Latest release: October 2011Next release: January 2012

House prices, UK and Londonyear-on-year growth from quarterly figures, seasonally adjusted data

-20

-10

0

10

20

30

40

1989

q1

1989

q3

1990

q1

1990

q3

1991

q1

1991

q3

1992

q1

1992

q3

1993

q1

1993

q3

1994

q1

1994

q3

1995

q1

1995

q3

1996

q1

1996

q3

1997

q1

1997

q3

1998

q1

1998

q3

1999

q1

1999

q3

2000

q1

2000

q3

2001

q1

2001

q3

2002

q1

2002

q3

2003

q1

2003

q3

2004

q1

2004

q3

2005

q1

2005

q3

2006

q1

2006

q3

2007

q1

2007

q3

2008

q1

2008

q3

2009

q1

2009

q3

2010

q1

2010

q3

2011

q1

2011

q3

London UK

%

7

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Source: Markit Economics

London’s business activity increasingLondon fi rms increased their output of

goods and services in September 2011.The Purchasing Managers’ Index (PMI)

of business activity recorded 54.4 in September 2011 compared to 53.7 in August 2011.

A rate of above 50 on the index indicates an increase in business activity from the previous month.


Business activity in Londonseasonally adjusted index (50 indicates no change on previous month)

40

45

50

55

60

65

70

Jan-

97

May

-97

Sep-

97

Jan-

98

May

-98

Sep-

98

Jan-

99

May

-99

Sep-

99

Jan-

00

May

-00

Sep-

00

Jan-

01

May

-01

Sep-

01

Jan-

02

May

-02

Sep-

02

Jan-

03

May

-03

Sep-

03

Jan-

04

May

-04

Sep-

04

Jan-

05

May

-05

Sep-

05

Jan-

06

May

-06

Sep-

06

Jan-

07

May

-07

Sep-

07

Jan-

08

May

-08

Sep-

08

Jan-

09

May

-09

Sep-

09

Jan-

10

May

-10

Sep-

10

Jan-

11

May

-11

Sep-

11

index

London


New orders in London risingSeptember 2011 saw an increase in new

orders for London fi rms.The PMI for new orders recorded 56.8

in September 2011 compared to 55.9 in August 2011.

A rate of above 50 on the index indicates an increase in new orders from the previous month.


New orders in Londonseasonally adjusted index (50 indicates no change on previous month)

35

40

45

50

55

60

65

70

Jan-

97M

ay-9

7Se

p-97

Jan-

98M

ay-9

8Se

p-98

Jan-

99M

ay-9

9Se

p-99

Jan-

00M

ay-0

0Se

p-00

Jan-

01M

ay-0

1Se

p-01

Jan-

02M

ay-0

2Se

p-02

Jan-

03M

ay-0

3Se

p-03

Jan-

04M

ay-0

4Se

p-04

Jan-

05M

ay-0

5Se

p-05

Jan-

06M

ay-0

6Se

p-06

Jan-

07M

ay-0

7Se

p-07

Jan-

08M

ay-0

8Se

p-08

Jan-

09M

ay-0

9Se

p-09

Jan-

10M

ay-1

0Se

p-10

Jan-

11M

ay-1

1Se

p-11

index

London


Businesses report slightly higher employment in SeptemberThe PMI shows that the level of

employment in London fi rms increased in September 2011.

The PMI for the level of employment was 51.0 in September 2011 compared to 50.0 in August 2011.

A rate of above 50 on the index indicates an increase in the level of employment from the previous month.


Level of employment in Londonseasonally adjusted index (50 indicates no change on previous month)

35

40

45

50

55

60

65

Jan-

97M

ay-9

7Se

p-97

Jan-

98M

ay-9

8Se

p-98

Jan-

99M

ay-9

9Se

p-99

Jan-

00M

ay-0

0Se

p-00

Jan-

01M

ay-0

1Se

p-01

Jan-

02M

ay-0

2Se

p-02

Jan-

03M

ay-0

3Se

p-03

Jan-

04M

ay-0

4Se

p-04

Jan-

05M

ay-0

5Se

p-05

Jan-

06M

ay-0

6Se

p-06

Jan-

07M

ay-0

7Se

p-07

Jan-

08M

ay-0

8Se

p-08

Jan-

09M

ay-0

9Se

p-09

Jan-

10M

ay-1

0Se

p-10

Jan-

11M

ay-1

1Se

p-11

index

London

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Source: Royal Institution of Chartered Surveyors

Surveyors report that house prices are rising in London The RICS survey shows a positive net

balance of 25 for London house prices over the three months to September 2011.

Surveyors reported a negative net house price balance for England and Wales of -23 over the three months to September 2011.

London’s net house price balance is higher than that of England and Wales.


RICS housing market survey net balance in London and in England and Wales; seasonally adjusted data

-100

-80

-60

-40

-20

0

20

40

60

80

100

Jan

-00

Ap

r-0

0

Jul-

00

Oct

-00

Jan

-01

Ap

r-0

1

Jul-

01

Oct

-01

Jan

-02

Ap

r-0

2

Jul-

02

Oct

-02

Jan

-03

Ap

r-0

3

Jul-

03

Oct

-03

Jan

-04

Ap

r-0

4

Jul-

04

Oct

-04

Jan

-05

Ap

r-0

5

Jul-

05

Oct

-05

Jan

-06

Ap

r-0

6

Jul-

06

Oct

-06

Jan

-07

Ap

r-0

7

Jul-

07

Oct

-07

Jan

-08

Ap

r-0

8

Jul-

08

Oct

-08

Jan

-09

Ap

r-0

9

Jul-

09

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

London net balance England and Wales net balance

Source: Royal Institution of Chartered Surveyors

Surveyors expect house prices to fall The RICS survey shows that surveyors

expect house prices to fall over the next three months in London and in England and Wales.

The net house price expectations balance in London was -4 in September 2011.

For England and Wales, the net house price expectations balance was -23 in September 2011.


RICS housing market survey house price expectations; net balance in London, and in England and Wales;

seasonally adjusted data

-100

-80

-60

-40

-20

0

20

40

60

80

100

Jan

-00

Ap

r-0

0

Jul-

00

Oct

-00

Jan

-01

Ap

r-0

1

Jul-

01

Oct

-01

Jan

-02

Ap

r-0

2

Jul-

02

Oct

-02

Jan

-03

Ap

r-0

3

Jul-

03

Oct

-03

Jan

-04

Ap

r-0

4

Jul-

04

Oct

-04

Jan

-05

Ap

r-0

5

Jul-

05

Oct

-05

Jan

-06

Ap

r-0

6

Jul-

06

Oct

-06

Jan

-07

Ap

r-0

7

Jul-

07

Oct

-07

Jan

-08

Ap

r-0

8

Jul-

08

Oct

-08

Jan

-09

Ap

r-0

9

Jul-

09

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

London net balance England and Wales net balance

Source: Civil Aviation Authority

Small increase in year-on-year airport passenger numbers12.6 million passengers travelled through

London’s airports in August 2011.The number of passengers using London’s

airports increased by 0.6% from August 2010 to August 2011.

Airport passenger numbers fell during the recession and are still below pre-recession levels.


London's airports passenger numbers

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

10,000,000

11,000,000

12,000,000

13,000,000

14,000,000

15,000,000

16,000,000

19

98

Jan

19

98

Ju

ly

19

99

Jan

19

99

Ju

ly

20

00

Jan

20

00

Ju

ly

20

01

Jan

20

01

Ju

ly

20

02

Jan

20

02

Ju

ly

20

03

Jan

20

03

Ju

ly

20

04

Jan

20

04

Ju

ly

20

05

Jan

20

05

Ju

ly

20

06

Jan

20

06

Ju

ly

20

07

Jan

20

07

Ju

ly

20

08

Jan

20

08

Ju

ly

20

09

Jan

20

09

Ju

ly

20

10

Jan

20

10

Ju

ly

20

11

Jan

20

11

Ju

ly

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

35

Total passengers Annual % change in passengers

%Passengers

Lond

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9

Additional information

AcronymsABI Annual Business InquiryBAA British Airports AuthorityBCC British Chamber of CommerceCAA Civil Aviation AuthorityCBI Confederation of British IndustryCLG Communities and Local GovernmentGDP Gross domestic productGVA Gross value addedILO International Labour Organisation

IMF International Monetary FundLCCI London Chamber of Commerce and IndustryLET London’s Economy TodayMPC Monetary Policy CommitteeONS Offi ce for National StatisticsPMI Purchasing Managers’ IndexPWC PricewaterhouseCoopersRICS Royal Institution of Chartered Surveyors

Data sourcesTube and bus ridership Transport for London on 020 7222 5600 or email: enquire@tfl .gov.ukGVA growth Experian Economics on 020 7746 8260Unemployment rates www.statistics.gov.uk

GlossaryCivilian workforce jobs Measures jobs at the workplace rather than where workers live. This indicator captures total

employment in the London economy, including commuters.Claimant count unemployment Unemployment based on the number of people claiming unemployment benefi ts.Employee jobs Civilian jobs, including employees paid by employers running a PAYE scheme. Government

employees and people on training schemes are included if they have a contract of employment. Armed forces are excluded.

Gross domestic product (GDP) A measure of the total economic activity in the economy.Gross value added (GVA) Used in the estimation of GDP. The link between GVA and GDP is that GVA plus taxes on

products minus subsidies on products is equal to GDP.Tube ridership Transport for London’s measure of the number of passengers using London Underground in a

given period. There are 13 periods in a year. In 2011/12 there are eleven 28-day periods, one 27-day period and one 30-day period. Period 1 started on 1 April 2011.

Bus ridership Transport for London’s measure of the number of passengers using buses in London in a given period. There are 13 periods in a year. In 2011/12 there are eleven 28-day periods, one 27-day period and one 30-day period. Period 1 started on 1 April 2011.

GLA EconomicsCity HallThe Queen’s WalkLondon SE1 2AA

Tel 020 7983 4922 Email [email protected] 020 7983 4137 Internet www.london.gov.uk

© Greater London AuthorityOctober 2011

ISSN 1740-9136 (print) ISSN 1740-9195 (online) ISSN 1740-9144 (email)

London’s Economy Today is published by email and on www.london.gov.uk towards the end of every month. It provides an overview of the current state of the London economy, and a selection of the most up-to-date data available. It tracks cyclical economic conditions to ensure they are not moving outside the parameters of the underlying assumptions of the GLA group.

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DisclaimerGLA Economics uses a wide range of information and data sourced from third party suppliers within its analysis and reports. GLA Economics cannot be held responsible for the accuracy or timeliness of this information and data.

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About GLA EconomicsGLA Economics provides expert advice and analysis on London’s economy and the economic issues facing the capital. Data and analysis from GLA Economics provide a sound basis for the policy and investment decisions facing the Mayor of London and the GLA group. The unit was set up in May 2002.

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