Debt will slow capital's growth

DEBT-LADEN Londoners will put the brakes on the capital's economic growth this year. Despite a solid start to the year, consumer spending will slow sharply as fears of higher taxes and uncertainty over the housing market take their toll, the Centre for Economics and Business Research predicted today.

In its latest quarterly forecasts, it sees London's economy expanding a modest 2.8% this year compared with an average of 3.8% since 1997. Growth is seen weakening to 2.6% in 2006, and unemployment edging up by 11,000.

'The main difference Londoners will notice, compared to recent years, is that consumer spending will be much more sluggish,' said the CEBR, headed by former CBI chief economist Doug McWilliams. 'We see households in the capital expanding their outlays by around 1% in 2005 and 2006, way down on the 4%-plus figures of the early new millennium years.'

Surveys have shown London bucking the national trend of a High Street meltdown. Retail sales were up an annual 3% in April compared with a 4.7% fall nationally, according to the London Retail Consortium.

However, the CEBR said ongoing property market jitters would make consumers increasingly reluctant to spend. It reckons London house prices will fall by 0.6% this year and by 2.2% in 2006, but there will be lingering worries the downturn could be more severe.

'Another inhibiting factor is likely to be fear of higher taxes,' it added. 'Gordon Brown's post-election Budget is not due until spring 2006, and in the meantime households will fret about the possibility of higher National Insurance.'

The City will be a bright spot this year, expanding by 3.8% as merger and acquisition activity picks up. This should lead to increased hiring in the Square Mile. Also performing well will be the wide-ranging business services sector, in particular advertising, IT, legal activities and market research.

Construction output is forecast to continue growing in the capital, but at a decelerating pace as the end of the housing boom depresses new building and refurbishment.

McWilliams said: 'The capital is no longer sprinting ahead of the rest of the country...as it was in the late Nineties. However, we think that it should be able to outperform in a modest way in 2005 and 2006, with its growth rate around 0.1 percentage points ahead of the UK average.'