Developing the evidence base for London’s Local Industrial Strategy - Interim report August 2019 Developing the evidence base for London’s Local Industrial Strategy - Interim report copyright Greater London Authority August 2019 Published by Greater London Authority City Hall The Queens Walk London SE1 2AA www.london.gov.uk Tel 020 7983 4000 Minicom 020 7983 4000 ISBN 978-1-84781-719-8 Cover photograph © Shutterstock For more information about this publication, please contact: GLA Economics Tel 020 7983 4000 Email [email protected] GLA Economics provides expert advice and analysis on London’s economy and the economic issues facing the capital. Data and analysis from GLA Economics form a basis for the policy and investment decisions facing the Mayor of London and the GLA group. GLA 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. The GLA will not be liable for any losses suffered or liabilities incurred by a party as a result of that party relying in any way on the information contained in this report. Acknowledgements GLA Economics would like to thank all colleagues at the GLA and in other organisations who contributed to this report, including: • Members of the Analytical Working Group, especially the ONS regional statisticians (Sukriti Verma and Tom Liu) for all their work on developing London-relevant statistics; • Gerard Burgess and Jorn Peters in the GLA Planning Directorate for their very valuable comments and contributions to Chapters 7 and 8; • Professor Stephen Roper at the Enterprise Research Centre (Warwick Business School) for his valuable advice on Chapter 6; • The LIS Evidence Base Independent Expert Panel – Professor Riccardo Crescenzi, Dr. Margarethe Theseira and Professor Peter Tyler – for their extremely valuable reviewer comments on an earlier draft of this report. Developing the evidence base for London’s Local Industrial Strategy - Interim report Contents Executive summary ......................................................................................................................................... 2 1 Overview ................................................................................................................................................ 13 2 Productivity in London .......................................................................................................................... 27 3 Business Environment ............................................................................................................................ 42 4 People ................................................................................................................................................... 58 5 Infrastructure ......................................................................................................................................... 82 6 Ideas .................................................................................................................................................... 101 7 Places in London ................................................................................................................................. 127 8 London’s place in the UK .................................................................................................................... 147 Appendix to Chapter 6: London’s innovative sectors - strengths, opportunities and rationale for intervention ................................................................................................................................................ 163 GLA Economics 1 Developing the evidence base for London’s Local Industrial Strategy - Interim report Executive summary Introduction The aim of London’s Local Industrial Strategy (LIS) is inclusive growth - ensuring all of London’s places, people and communities can contribute to and benefit from the city’s growth, both today and in the future. As such, inclusive growth also requires growth to be sustainable. It is widely understood that improvements in productivity underpin increases in living standards and therefore are a necessary (although not sufficient) condition for inclusive growth. It is being increasingly recognised though (by the OECD among others) that the relationship also runs in the other direction – inequality can act as a drag on productivity. Policies that aim to address both inclusion and productivity - maximising synergies while managing potential trade-offs - are therefore needed to make progress towards the ultimate objective of inclusive growth1. In order to inform LIS development and priorities, the LIS evidence base interim report seeks to: • Reflect a wealth of evidence and analysis that the GLA has developed over the years, including for example the Economic Evidence Base for London 2016, the draft London Plan 2017 and numerous technical publications by GLA Economics. • Consider future opportunities and challenges alongside the current strengths and weaknesses of London’s economy and recent history. • Provide, where feasible, more granular geographical detail to convey the complex and diverse nature of London’s economy. • Go beyond descriptive analysis to provide clear and useful policy insights. We plan to continue to discuss our findings with external experts and to develop and refine our analysis in the next few months as we finalise the LIS Evidence Base report. As we do this, we will be able to incorporate the findings from several external research projects that have been commissioned to complement in-house analysis. Finally – and importantly – we will be doing further work on developing and refining policy insights, ensuring that there is a clear line of sight between the evidence base and the strategic policy priorities articulated in the LIS. The rest of the Executive Summary introduces the overall theme for the London LIS; supporting productivity improvements to unlock more inclusive growth. It then provides an overview of the key findings on productivity in London and on the national Industrial Strategy’s five foundations of productivity: Business Environment, People, Infrastructure, Ideas and Places. 1 See for example the blog by Gabriella Ramos (OECD Chief of Staff) for the OECD Forum 2016: http://www.oecd.org/social/productivity- equality-nexus.htm GLA Economics 2 Developing the evidence base for London’s Local Industrial Strategy - Interim report London’s economic performance London is a very successful economy; it has performed strongly over the past 20 years in terms of output and employment growth and it is pivotal to the UK economy. • London’s economic output (Gross Value Added - GVA) increased at an average rate of 3.1% per year between 1998 and 2017. In 2017 London’s GVA totalled £426.2 billion; twice the size of the economies of Scotland and Wales put together and accounting for 23.8% of UK GVA. • London’s net contribution to the Exchequer in 2017/18 was around £34.3bn. • London’s level of productivity has historically been higher than in the rest of the country – between 19% and 31% higher than the UK average over the last 20 years2. • The recession of 2008-09 was a serious hit for London’s economy given the contraction of key sectors in its economic base (especially the finance and insurance sector). On the other hand, London’s economy has shown a remarkable resilience in the post-recession years which other parts of the UK and of Europe lacked, especially in terms of employment growth3. • Employment and unemployment rates are currently at historical highs/lows respectively (although unemployment rates in London have historically and consistently been above the UK average). • Notwithstanding Brexit-related uncertainty, long-term projections still point to London as a growing economy which will continue to create new employment. However, productivity growth in London has stalled since the financial crisis, as in the rest of the country. There are big differences in productivity performance between firms within sectors and between different parts of the city. • Running at just 0.3% per year on average, real productivity growth in London between 2010 and 2017 was more or less in-line with stalling productivity in the UK as a whole. • While most industry groups in London exhibit high levels of labour productivity compared to the rest of the UK, aggregate productivity benchmarks mask large variations in productivity performance between firms (and workers) within the same sectors. • GVA per hour worked in the most productive part of the capital (Inner London West) is over 42% higher than in the least productive part of London (Outer London South). Since 2010 productivity in real terms has actually declined in some parts of the capital4. 2 Based on output per hour relative to the UK average (1997-2017). Source: ONS (2019) Industry by region estimates of labour productivity: 2017 3 See Orellana (2018), Regional, sub-regional and local gross value added estimates for London, 1997-2016, GLA Economics Current Issues Note 57. 4 Outer London South, Outer London East and North East and Inner London East. Source: ONS (2019) Regional and sub-regional productivity in the UK: February 2019 GLA Economics 3 Developing the evidence base for London’s Local Industrial Strategy - Interim report The challenge of inclusive growth in London London has a major inequality problem, whether we look at wealth or income. Housing