London Is Dragging Down U.K. Productivity, Resolution Says

(Bloomberg) -- London is at the heart of the U.K.’s productivity problems, according to the Resolution Foundation.

The capital’s productivity has fallen over the last decade by 1 percent, compared to a 1.5 percent improvement at the national level, a report published by the think tank Wednesday said. That’s because the capital’s expansion has been driven by rising employment and hours, rather than efficiency improvements.

“London, far from racing ahead, has actually been holding the country back on productivity,” said Stephen Clarke, senior economic analyst at Resolution. “London’s economic growth is purely down to its population explosion, with hospitality replacing banking as the big growth sector in the capital. Sectors that have traditionally powered London’s productivity growth, from finance to IT, are if anything going backwards.”

Britain’s sluggish performance in productivity has baffled lawmakers and monetary policy makers for years. Possible explanations include low borrowing costs keeping so-called zombie firms alive, limits in the flow of people between companies, and the U.K.’s reliance on services, which lag manufacturing in efficiency growth.

Below Trend

In a report in April, deputy chief economist at the Office for National Statistics Richard Heys said output per hour rose just 1 percent last year, half the historic average rate. That left productivity more than 16 percent below its pre-crisis trend.

That same report said that London’s finance industry has been a major drag. The Resolution research showed that even more traditionally efficient sectors like professional services have been pulling down productivity. Gains in employment have been driven by low-paying sectors like hospitality and administrative services, the report said.

The opposition Labour party has suggested that the Bank of England’s remit should be overhauled to include a 3 percent target for productivity growth, though many economists say that policies to achieve that goal are a matter for the government rather than the central bank.

Weak income growth and “oppressively high” housing costs are also leading to an exodus of Londoners in their early 30s, the report said. Last year brought the largest net movement out of the capital since 2004 as more people left the capital.

To contact the reporter on this story: Jill Ward in London at jward98@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Brian Swint, Lucy Meakin

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