Rates take toll on London economy

LONDON'S economy has borne the brunt of the recent flurry of interest rate rises from the Bank of England, it was claimed today.

The rate moves have hit the capital's debt-laden consumers and financial services sector harder than the rest of the country, pushing London from top spot to eighth in the regional growth league table since the end of last year.

Only East Anglia, the West Midlands, Scotland and the North East lag behind.

The Bank's monetary policy committee has raised rates in four quarter-point steps since November, with the most recent move, to 4.5%, last week.

The latest snapshot of the capital's economy from the Royal Bank of Scotland shows the 12th straight month of expansion in May, driven by further growth in new business.

But the pace of expansion eased for the sixth consecutive month and to its slowest since last July.

The survey's headline business activity index slipped to 57 in May, compared with a peak of 62.2 in November last year. A reading above 50 indicates expansion.

Chris Williamson at NTC Research, which compiled the report, said: 'London's consumers are beginning to be hit and financial services are suffering disproportionately. On the other side of the coin, manufacturing, which accounts for a small proportion of the capital's economy, is benefiting from the global upturn.'

But Williamson said the slowdown could be seen as a virtue. 'London was growing at an unsustainably strong pace last year,' he said.

'Provided there is no collapse in confidence because of a housing market crash, hopefully we will see a continuation of this more sustainable growth in future.'

London has also slipped to second from bottom in the employment league table.

Having embarked on a hiring spree at the start of the year, the capital's firms are still recruiting, but on a smaller scale than the rest of the country.

Backing the view was a separate survey from the London Retail Consortium showing the capital's retailers outperformed stores in the rest of Britain in May, but by a smaller margin than in recent months.

Like-for-like sales were 4.6% higher than a year ago, against a 3.7% national average.

The LRC said good weather helped bring out shoppers - particularly in the clothing sector - but cautioned that gains this year are being flattered by the weakness of last year, when retailers were hit in the run-up to the Iraq war and by the Central Tube line closure.

Meanwhile, estate agent Knight Frank says house prices in London's smartest addresses are going through the roof. The average value of £500,000-plus properties jumped 0.8% in May and by 3.6% in the year to date.

Leading the charge in May was Wellington Square, described by Knight Frank as 'a tranquil enclave off the King's Road'.

The Chelsea square, where the price of a typical home is more than £3m, saw prices rocket 5.25%.