London at risk of sliding into recession, says study

London could slide into recession next year, paving the way for a narrowing of the North-South divide, according to a new study.

The report, by the research group Business Strategies, says London's greater exposure to former "hot spot" sectors such as banking, tourism and business services, will make it more vulnerable. A marked slowdown in household spending is also expected to drag down growth in the capital and other southern regions in the next 12 months. The report says the capital's greater reliance on these sectors makes it more exposed to the impact of the terrorist attacks of 11 September.

"All this will mean a temporary halt to growth in the South's share of output and jobs," said Dr Neil Blake, research director at Business Strategies. "In the North, where industry is more heavily represented, growth has already suffered as manufacturing has slipped into recession this year, though an upturn is in prospect from 2002."

However, the South-east is still expected to grow faster than the rest of the country over the next five years.

Business Strategies says the global downswing is forecast to push economic growth down to 1.7 per cent next year, compared to the 2.7 per cent the consultancy was predicting eight months ago. This is in line with the International Monetary Fund, which at the weekend trimmed its 2002 growth forecast for the UK from 2.4 per cent to 1.8 per cent. But Business Strategies adds that in the worst case UK growth might dwindle to only 0.4 per cent.

Nevertheless, the consultancy predicts that the South will continue to grow faster than the North, and so continue to become relatively richer. Business Strategies says that the South should grow by 2.3 per cent this year, compared with the North's 1.1 per cent. That will narrow to 1.9 per cent and 1.6 per cent in 2002.

Dr Blake adds: "London today is in better shape to deal with an economic shock than it was at the beginning of the last decade. Interest rates are low, consumers are not saddled with rising debt and falling house prices, and public spending is stronger.

"Consequently, although we expect a marked slowdown in growth to end London's long boom next year, recession is unlikely."