London is sliding towards recession, but public spending may save the day

Cocktail of Central Line, congestion charge and war problems has dealt a lethal blow to Oxford Street sales

IF YOU want to know about the London economy ask a cabbie. "It's a nightmare, it's so quiet," one said last week. "Goldman Sachs usually takes 10,000 cabs a month but now there's nothing."

If you want to know about the London economy ask a cabbie. "It's a nightmare, it's so quiet," one said last week. "Goldman Sachs usually takes 10,000 cabs a month but now there's nothing."

Even allowing for a taxi driver's exaggeration about the transport demands of the famous investment bank, this hammers home the scale of the downturn in the City of London and the importance of the Square Mile to the capital's economy.

The slump on the stock market and the drought in merger and acquisition work have fed through to a sharp drop in bonuses.

In 2001 City banks cut the bonus poll by a staggering £1bn and financial workers are on track for a similar drop for their 2002 pay packets.

Certainly one does not have to search too hard to find anecdotal evidence that the capital is in the grips of a pronounced slowdown.

Any Londoner will have their own example – streets full of cabs with their lights on, available tables at restaurants that once had a month-long waiting list or a neighbour cutting the sale price of their house.

The Oxford Street Association, which represents more than 80 companies on London's golden shopping mile, yesterday said trade was down by between 8 and 15 per cent so far this year. It blamed a combination of the closure of the Central Line of the London Underground, the introduction of the congestion charge and increased security and tension surrounding the build-up and outbreak of war.

"There is no incentive to come up to London," Sally Humphreys, the association's director, said. She was echoing gloomy reports from some of the big names that are studded along Oxford Street.

John Lewis said its flagship store had suffered a 12 per cent drop in sales, mainly because of the Tube chaos. The Liberty department store, near Oxford Circus, said it had seen a 10 per cent fall, in particular blaming the anti-war demonstrations that brought the West End to a halt.

Manufacturing in the capital has followed the national downturn into recession and this week the Mayor of London, Ken Livingstone, said there had been a "significant" fall in hotel bookings by business travellers since the Middle East tension started to rise.

This is hardly surprising given the reports from US airlines that transatlantic bookings are down by as much as a third since the Iraqi crisis blew up.

Unemployment in London is now 6.6 per cent, the highest in the UK, but it has fallen by 0.5 percentage points over the past year.

In the City, office market annual take-up was at its lowest level for 18 years in 2002, according to King Sturge, at 235,400 square metres, a fall of 34 per cent on total demand for 2001.

In other words there are a lot of businesses in the capital feeling the pain and, as the old saying goes, if it sounds like a duck and walks like a duck then it probably is a duck.

So are Londoners in the grip of a recession? Well – yes and no. Large swaths of the capital's business sector are suffering their worst times since the last recession in the early 1990s.

The Centre for Economics and Business Research believes that the City suffered a 6 per cent slump last year and is on track for a 3 per cent decline in 2003. It expected another 21,000 jobs to be cut this year after 17,000 in 2002.

Manufacturing will contract at up to 5 per cent this year while hotels and restaurants will suffer a 1.8 per cent fall.

Overall, economists are unanimous that the capital and the country's engine of growth has escaped recession and is likely to lead Britain back into recovery once the hiatus caused by the Iraqi war has passed.

The CEBR believes the capital's economy will grow by 1.6 per cent. The London Chamber of Commerce, which uses forecasts from the National Institute of Economic and Social Research, is more ambitious with growth of 2.8 per cent although that will be revised down in the next few days.

Justine Lovatt, the chamber's chief economist, said: "I don't think we have recession although growth is weak. Manufacturing is in recession but the rest of the economy is not."

London's salvation will come from two sources – business services and the Chancellor.

Andrij Halushka, an economist at the CEBR, said: "London will be saved from recession by the hell-for-leather expansion of the public sector."

Mr Halushka said government spending made up more than a sixth of the capital's economy, "significantly" greater than any other region of the UK.

Simon Kirby, at the National Institute, said: "Even if we assume spending in London grows in line with the UK average, it has such a large share of the London economy thanks to the number of centralised departments and so on."

But the largest contribution to economic growth in London is business services, a sprawling mass of activities such as law, accountancy, advertising, public relations and consultancy that together make up a third of the city's economy, according to the National Institute. This compared with a fifth for the UK as a whole.

Bridget Rosewell, consultant chief economist for the Greater London Authority, said that while the City employed about 300,000 people, business services firms had a payroll of more than 1 million. "These businesses are not collapsing," she said. "It would be foolish to say that everything is all brightness and light but they are not having massive redundancies."

But there are two worries that could still trip up the London economy. The first is the current tensions and insecurity created by the war with Iraq.

"There are wobbles over the war and that creates a hiatus – how big depends on whether it is quick and clean or long and dirty," Ms Rosewell said. "The assumption is that it will be closer to [the Gulf War in] 1991 than 1939 to 1945."

London First, which represents almost 350 of London's most significant businesses, said the impact of the Central Line closure was currently more dominant. Andrew Marre, its communications director, said: "It is simply too early to make a judgement about the impact of the war but we are monitoring."

The other threat comes from the housing market. Surveys of estate agents are reporting that prices are falling at their fastest rate for eight years after a boom that saw house prices in the capital quadruple over the past 20 years.

The CEBR believes the average price of a home will drop almost 6 per cent next year and 4 per cent in 2005 although it does not predict a 1990s-style crash.

For Ms Rosewell that is one of the key differences between London's fortunes after the current war and the experience of 1991 when property prices crashed and the UK and London slumped into recession.

"The story is about the underlying dynamics of the economy," she said. "Back in 1991 interest rates were rising to cool the economy and as a result there was a collapse in house prices and investment.

"This time the economy has already bottomed out in the middle of last year and is in recovery mode, interest rates and unemployment are low and house prices are moderating."