Keeping London at the forefront of global business
working with and for the whole UK
COVID-19’s toll on London’s economic sectors
3 August 2020
Over the last 50 years, London has successfully adapted to technological change and globalization, making it the major driver of the UK economy. In a new King’s College London paper by Dylan Anderson, Rachel Hesketh, and Jonathan Portes and myself, data is applied to evaluate the impact of the pandemic on London. Through our analysis, we identify seven key trends likely to have significant medium ‑to long-term economic impacts on London and other global cities. Our findings suggest that COVID-19 may further accentuate the existing divide between globally competitive advanced services, such as professional services, technology companies; and more locally focused sectors providing lower-value personal and household services.
Since February, nine sectors of the UK economy reported GDP declines of more than 10%, with the highest drop coming from accommodation and food services. In London, these nine very negatively impacted sectors represent about 3.2 million jobs, or 53% of the city’s total workforce. The data suggests that between 1.1 million and 1.25 million London jobs have been furloughed.
In some cases, the spread of the virus and the measures necessary to contain it have accelerated already existing trends, such as e‑commerce and remote working. These economic and social shifts are likely to be long-term. In other instances, there have been severe short-term disruptions that might be reversed relatively quickly. Underlying both sets of impacts are the as-yet-unknown changes in behaviour of consumers, entrepreneurs, business managers and investors.
We have categorised these trends into seven broad types:
Government non-pharmaceutical intervention (NPI) policies (short-medium term) – Government lockdowns and NPI policies have closed non-essential workplaces, restricted movement, required individuals to stay at home and controlled international travel.
Demand impacts (short-medium term) – In the short-term, the potential supply of the economy will start recovering as restrictions are lifted, but there is considerable uncertainty about the path of demand. Suggestions of ‘pent up’ demand have been equally met by 45% of Londoners seeing a decline in disposable income.
Structural reductions in growth (medium-long term) – The short-term economic impacts, in particular job loss and business failures, may also reduce the potential level of output over the medium term.
Changes in the entrepreneurial environment (medium term)– Prior to COVID-19, investment in new companies was at an all-time high, with almost a third of European investment in new technology companies flowing to the UK and specifically to London. Industry data suggests a considerable fall in equity or venture debt funding for start-ups and fast-growing businesses in the UK over the past 4 months, with new, non-funded start-ups being particularly impacted.
Reduced labour mobility (short-long term) – In the short term, immigration, emigration and business travel have largely ceased, but longer-term impacts on labour mobility remain unclear.
Changing consumer behaviour (long term)– In addition to greater familiarity with e‑commerce, consumers will worry more about people-facing services, like taking transport or going into shops. Adjusting to these new realities could be particularly problematic for entertainment, major events and sports sectors.
New workplace environment (long term) – Demand for office space will lessen as a result of increased home working, while social distancing measures reduce the effective supply (and hence increase the price per worker) of office space. Overall, as we move towards a hybrid system of remote working and going to the office, the future of commercial real estate and office space may rest on which locations, landlords and owners can adapt their offer quickly.
The professional services, information and communication sectors, who were already shifting to more online and remote working, have adapted more seamlessly during the pandemic. Largely publicly funded services, such as healthcare and social services, are also less adversely affected. Other sectors appear vulnerable to a combination of lower demand and increased costs, including accommodation, food services, wholesale and retail trade, the arts and entertainment sectors, and transport.
The pandemic has had an unequal effect, leaving people-facing companies with major financial and personnel barriers, while firms in other sectors have been able to adapt and grow more easily. We expect this to continue with increased online consumer behaviour, reduced overall demand and a re-shaping of workplace environments. Without a return in demand, lower-wage workers in London (and other cities) will be disproportionately affected, creating further economic inequality, and increased reliance on the welfare system. That said, London has the durability and the economic diversity to adapt and recover, but doing so in an equitable way will require significant and targeted interventions from national and local government.
Become a member
Our members include over 200 of the capital’s leading employers across a wide range of sectors, with a common commitment to our capital.