The size of the capital's output is forecast to break through the pounds 200bn barrier in 2002, by which time it will be growing at 4 per cent against 2.45 per cent for the whole of the UK.
But the report, from the Centre for Economics and Business Research, warned there was a huge gulf between the different economic sectors.
CEBR has revised its growth forecasts for London this year to 2.8 per cent from 2.2 per cent, and for 2000 to 3.7 per cent from 2.4 per cent. GDP is then forecast to rise to 4.1 per cent in 2001 before slowing to 3.25 per cent in 2002.
It said its revision was based on the recent surge in house prices. CEBR forecast that house prices would rise 16 per cent this year, 10 per cent next year before slowing to 8 per cent in 2001 and 5.4 per cent in 2002.
CEBR economist Paul Bryant said: "Housebuilding in London is likely to rise 41 per cent by 2003 to meet rising demand." CEBR said this would feed through to 10 per cent GDP growth in the construction sector this year compared with a 0.7 per cent fall in manufacturing and growth of 2.7 per cent in the services sector.
The report highlights the dilemma faced by the Monetary Policy Committee over interest rates, in controlling a boom in the southern services sector and in house prices, while taking account of difficulties caused to northern manufacturers by the strong pound.
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