Capital to lead rebound in economy

GOOD times in the City will ensure London enjoys a much better year than the rest of the economy. After slowing in response to higher interest rates and weakening business confidence, the capital will spring back to life in the autumn.

The bounceback will ensure the economy expands almost 4% this year, well above the 2.5% expected for Britain as a whole, according to a report from Bank of Scotland.

The bank's chief economist, Martin Ellis, put London's superior performance down to ongoing strength in the financial and business services sectors. 'Those sectors which are doing well are those that London is dependent on,' he said. 'The outlook is very good.'

The upbeat forecast is based on a new London leading indicator that aims to predict turning points in the capital's business cycle. It puts a variety of recent economic statistics, including housing starts, consumer confidence, business optimism and interest rates, into a blender to see where the economy is heading. Most of the components have improved over the past month.

Ellis said: 'We expect London's growth rate to slow during the first three quarters of 2005 from a peak of 4.7% in the final quarter of 2004, reflecting past interest rate hikes and weaker sentiment in the business community.

'Improving consumer confidence and indications of increased expectations that interest rates may have peaked could help the economy to quicken in late 2005, with growth reaching an annual rate of just under 4% by the end of the year.'

London has been the fastest-growing region in the country since 1997, averaging 3.8% a year against 2.8% for Britain as a whole. It has not all been plain sailing, with the City badly hit in 2001 by the global financial downturn as the dotcom bubble burst. But the capital has generally been bolstered by the Square Mile, as well as its vibrant service sector.

A recent report from the Royal Bank of Scotland showed London remained the strongest performing UK region last month. The London Retail Consortium reported a 3% rise in like-for-like sales in April compared with a 4.7% slump nationally.

Doug McWilliams of the Centre for Economics and Business Research, which tracks the capital's performance, said he also expects London to do better than the rest of the country this year.

THE Office for National Statistics is this week expected to say the economy grew less than previously thought in the first quarter of the year. It publishes the second estimate of gross domestic product for the January to March period on Wednesday. The preliminary estimate showed the economy expanded 0.6% but subsequent data revealed a 1.6% slump in manufacturing output in March. That should drag GDP growth down to 0.5% - the slowest for almost two years.

Philip Shaw at Investec said: 'If the current state of play turns out to be the trend for the remainder of the year, there is a good chance the Bank of England will cut interest rates over the next six months.'