London could bear the brunt of a post-Brexit vote downturn, according to economic indicators in the weeks since the EU referendum pointing to job cuts, falling house prices and a decline in business activity in the capital.
London’s economy was relatively unaffected by the previous downturn, compared with other UK regions, but early signs from the latest bout of turmoil suggest that it might not get off so lightly again, economists have said. This could have consequences for the government’s tax receipts and overall growth, given the city’s contribution to the UK economy.
One key concern about the impact on London of the vote to leave the EU stems from the capital’s dependence on financial services. London could lose its status as Europe’s financial capital if the UK leaves the single market and City banks are stripped of their lucrative EU “passports” that allow them to sell services to the rest of the bloc.
Samuel Tombs, the chief UK economist at consultancy Pantheon Macroeconomics, said: “London was unscathed by the last recession, but its dependence on finance now is its achilles heel.”
He highlighted a potential change of fortunes for London in a note to clients after surveys showed that companies in the capital had taken a hit from the referendum result.
London has been the UK’s growth star for the past two decades, outperforming the rest of the country, Tombs said. “Surveys since the referendum, however, indicate that the capital is at the sharp end of the post-referendum downturn,” he added.
London was the worst performer out of 12 regions on one measure of business activity for the weeks following 23 June, the day of the referendum. Companies in the capital cut jobs and suffered the sharpest fall in output since early 2009, when the UK was mired in recession, according to the Lloyds Bank regional purchasing managers’ index.
Clients appeared reluctant to commit to new contracts, London businesses said, leading to a slump in order books. “The capital was hit harder than any other UK region,” said Paul Evans, the regional director for London at Lloyds commercial banking.
Alexandra Jones, the chief executive of the Centre for Cities thinktank, said London’s mix of industries, high-skilled people and strong international connections put it in a good position to respond to any economic downturn. She too, however, said there were particular risks for the capital.
“The European Union single market has been hugely important to London’s success in recent years and lack of access to that market would have a big impact on the capital’s economy,” Jones said.
“Slower economic growth in London would also affect public spending across the UK, given the national exchequer’s increasing reliance on London’s tax revenues,” she said, referring to a recent study by the Centre for Cities, which showed that the capital generated almost as much tax as the next 37 largest UK cities combined.
Tombs said London’s medium-term fate would depend on how well the City’s interests are protected in Brexit negotiations. “We think London’s economy will underperform the rest of the UK for a couple of years, not just a few months,” he said.
In terms of property, shares in Foxtons have fallen and the London-focused estate agent has said the referendum result will depress property sales in the capital for the rest of the year.
A housing market report from the Royal Institution of Chartered Surveyors showed a slowdown across the market in July, but highlighted the fact that price falls were sharpest in London. London and East Anglia were the only areas where house prices were expected to fall over the coming year.
Richard Donnell, the insight director at the property consultancy Hometrack, said modest price falls were likely in London’s higher-value markets. “From analysis of the past 20 years, we know that events which have shocked the UK economy, such as the dotcom bubble bursting in 2000 and the Iraq war in 2003, impacted housing turnover in London far more heavily than the rest of the UK,” he said.
“Even before the EU referendum, high prices, low yields, unaffordability, tax changes for landlords and poor value for money for overseas buyers were creating strong headwinds in the London housing market, which will intensify following the vote to leave.”
Not everyone, however, expects London to face a bumpy post-Brexit vote period. Sebastian Burnside, NatWest’s senior economist, said the capital had enjoyed a 17% increase in the number of jobs since 2008 - more than double the growth in the east of England, the second-best performing region.
“That performance isn’t based only on the financial sector. London’s strengths are much broader than that. Technology, professional services and the creative industries are all strong. The things that powered the economy in London won’t have gone away overnight, even if we don’t get a good deal out of negotiations,” he said.
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