Capital economy on the rebound

LONDON'S economy has burst into life, expanding in June for the first time in five months, a new report shows today. But despite the welcome bounce-back, firms in the capital are sceptical whether the improvement can be sustained.

The Royal Bank of Scotland London poll, based on the respected CIPS/Reuters national purchasing managers' report, revealed the rebound was driven by an increase in output and new orders for the first time since the start of the Iraq war. Although London firms continued to axe staff, the job-shedding was much less severe.

The survey's headline business activity index registered 53.1 in June, a healthy improvement on the previous month's 48.8. A reading above 50 indicates expansion. The figure for the UK in June was 52.7, suggesting growth in London outstripped that for Britain as a whole.

Incoming new business increased for the first time since January, as demand recovered following the easing of geopolitical tensions. Although order books increased at only a modest rate, this still represented a significant improvement of market conditions compared to those during the Iraq war.

Stuart Porteous, senior economist at RBS, said: 'This is great news for the economy. London has been lagging the rest of the UK in the months following the end of the war in Iraq, but the sharp rebound in activity means London is back in the usual position as one of the fastest growing regions in the UK. If trends across the rest of the UK are anything to go by, this recovery looks increasingly sustainable.'

But despite the pick-up over the past months, London firms' optimism over their own future performance is sinking. And they believe the capital will soon be trailing behind the rest of Britain again.

A separate report from the London Chamber of Commerce and Industry shows a net 21% of firms expect their performance to improve over the next 12 months, down from 29% three months ago.

Firms in the capital now believe London's economic prospects are significantly worse than those of the rest of Britain. A net 2% predict that the capital's economic growth will pick up over the next 12 months, compared with the 16% who are upbeat about prospects for the UK economy as a whole.