London's Great Economic Escape....

In my Money Week column last week, I looked at how London escaped the recession, and what lessons we should learn from that. Here's a taster.

The classic 1960s war film ‘The Great Escape’ was based on the break-out of a group of Allied prisoners from a camp in the town of Zagen, in what was then Germany but is now Poland. But if you wanted to re-make it, with a financial rather than military escape, you’d probably set it in London.
At the height of the credit crunch, everyone was forecasting that London’s economy was doomed. The City, and the ancillary industries that fed off it, would come crashing down to earth. The rich would flee, and the bankers would soon be applying for jobs at MacDonald’s.
It hasn’t happened. The financial services sector has recovered sharply. London has emerged from the recession in better shape than the rest of Britain. Employment is stronger, growth is better, and house prices have bounced back. If anything the gulf between London and rest of the UK has grown wider.
There are important lessons in that. If the rest of the British economy was anything like as strong as London and the South-East, the whole country would be roaring ahead. Instead of talking about re-balancing the UK economy, we should be learning the lessons of London’s success, and trying to get the rest of the country to perform as well as it does.
The figures make it quite clear that, of all the regions in the UK, London and the South-East, have emerged best from the downturn. A CBI report released on Monday showed that financial services firms expanded strongly in the latest quarter. The big banks such as HSBC and Barclays are making huge profits again, and the City is doing well. A study by the London School of Economics, led by Henry Overman, the director of its Spatial Economics Research Centre, concluded that London had comes back stronger from the recession than any other region, and it suffered less in the downturn as well.
For example, London’s income per capita fell by 2.5% between 2008 and 2009, while it fell by 2.9% in England as a whole – and of course London was already a lot richer before the recession began. There were fewer job losses as well. The UK saw peak-to-trough falls in employment of 3.9%, whereas London saw only a 2.6% fall. And house prices bounced back quicker than anywhere else in the country. Indeed, Savills reports that prime London properties grew in value by 5% this year, whilst prices were still stagnant or falling in the rest of the country.
True, London benefited a little from government policy. The Olympics is a massive building project. The bail-out of the banks primarily helped the London economy rather than anywhere else. Against that, the massive run up in government spending did nothing for London. The South-East has far lower government spending as a percentage of the economy than other regions: in Wales for example, state spending accounts for more than 70% of the economy, whereas in the South-East it is around half that, at an estimated 36%. And of course London is harder hit by the tax rises than other parts of Britain – the new 50% rate will hit a lot of Londoners but not many people elsewhere.
In fact, the evidence of the recession is that London and the South-East have a hyper-resilient, hugely competitive economy. What we need to do is try and make the rest of Britain more like London.
There are four important lessons from the capital’s success.
First, and most obviously, London is plugged into the global economy far more than any other part of the UK economy. What happens to the rest of Britain or indeed Europe doesn’t matter that much. London’s bankers, lawyers, consultants and accountants are servicing the BRIC economies more than anything else. Russian and Far Eastern companies are flocking to raise capital on London’s markets, and that means paying lots of expensive fees. London had connected itself into booming markets – not locked itself into declining ones.
Next, London has specialised in professional services, and made itself a world-leader in selling those to the rest of the world. There is a lot of talk about reviving specialist manufacturing or creating other new industries for the UK. But the truth is, we don’t have many sectors where we can compete with Germany on quality, nor where we can compete with Eastern Europe on manufacturing costs. Maybe the best policy would be to recognize where our strengths lie – and get the rest of the country to try and do more of the things that London does so well.
Thirdly, London has a highly-skilled and hyper-flexible labour market. According to the Labour Force Survey, for England as a whole, professional and service occupations were hit less badly by the recession than administrative, trade and basic occupations. That was good for London, since professional occupations account for a larger proportion of its labour force – nearly 50%, compared with under 40% in the Midlands and the North. There was more flexibility on wages as well, partly because bonuses (which go down as well as up) are a bigger part of pay. That helped London’s workers keep their jobs through the downturn.
Finally, the state accounts for a far lower share of the London and South-East economy than it does for the rest of the country. Working for the government may be relatively secure during a recession, and that provides some protection for the regions. But the state sector also has low productivity, low growth, and it doesn’t export anything. It consumes rather than generates wealth – and it is only in London and South-East that it is small enough to allow the rest of the economy to flourish.
Forget everything you read a couple of years ago about how this would be a middle-class recession that hit London harder than anywhere else. It just hasn’t happened. Instead, London is pulling further ahead – and as the government spending cuts start to bite, that will become more and more obvious. But there is nothing that special about London. It is part of the same country as Manchester and Cardiff and Birmingham. If those regions could learn where the capital was doing so well, the UK would be doing a lot better than it is.

The Demise of London's Bling Economy....

In my Money Week column this week, I've been writing about how the sale of Harrods marks the deminse of London's bling economy. Here's a taster....

Money Week: Mohamed Al-Fayed Is Selling Out of Bling London. So Should You.

Mohamed Al-Fayed always said he’d never sell Harrods. It was the prize in his portfolio, the one asset he’d take to the grave with him. That, however, was before Qatar Holdings came along and offered him £1.5 billion for one of the world’s most famous shops. There aren’t many people who wouldn’t change their mind when that kind of money was on the table - and al-Fayed is not among them.
The Egyptian-born grocer has never been a popular figure in his adopted country. His brash, money-drenched lifestyle endeared him to no one. Turning a traditional British department store into something about as classy as a Dubai gift shop didn’t do his reputation any good. Nor did encouraging conspiracy theorists to focus on the Royal Family after his son Dodi died alongside Princess Diana.
But he has always been a brilliant street trader – and he has a street traders’ inner sense for when to buy and sell. From 1985 to 2010 he brilliantly rode the emergence of London as the headquarters of the ‘Bling Economy’. He knew how to mint a fortune from that more than almost any other entrepreneur. But now he almost certainly senses that era is coming to a close. There are plenty of bling assets on the London market. If al-Fayed is selling out, then so should you.
Fayed’s colourful career has always been rich fodder for conspiracy theorists. The acquisition of Harrods involved a long and bitter battle with another flamboyant tycoon, Tiny Rowland. He was immersed in controversy over his application for a British passport, as well as Princess Diana’s death. He made enemies everywhere.
None of that stopped him making money. He paid just over £600 million for Harrods back in 1985, and had taken out huge dividends in the years he has owned it. He owns the Ritz in Paris, as well as Fulham football club. Overall, his fortune is estimated at more than £600 million.
Plenty has been written about how he wants to spend less time on the business. And a lot has been said about how sovereign wealth funds such as Qatar Holdings are snapping up trophy assets at fancy prices. And while there is no doubt truth in both those points, the reality is that a man as smart as Al-Fayed, and with as keen an eye for what was cheap and what was expensive, wouldn’t be getting out now unless he felt it was the top of the market.
His talent was to see how London was changing. When he bought Harrods in 1985, the London economy was still emerging slowly from the gloom and depression of the 1970s. There hadn’t been any Big Bang in the City. Barrow boys still sold fruit and veg, not credit swaps and derivatives. The word non-dom didn’t mean anything. There weren’t any Russian billionaires – anyone in Russia interested in making money was more likely to end up in Siberia than the King’s Road. Getting credit still meant knowing your bank manager, and convincing him you wouldn’t fritter away any money he lent you.
Over the next quarter century, that changed dramatically. The ‘Bling Economy’ emerged, and London was its epicentre. The deregulated financial markets were minting millionaire by the minute. London became the tax-friendly home of half the Russian oligarchs and Middle Eastern oil sheiks. Everybody was piling up easy credit on their cards, with no meaningful checks on whether they were allowing their debts to spiral out of control.
Harrods was precisely the place to spend all that easy money. It was showy, snobby, expensive and tacky. In short, it was ‘Bling Central’ - a place to spend the money you hadn’t really earned, and didn’t mind wasting.
But in the next decade all those trends are likely to go into reverse.
First, there isn’t going to be nearly so much easy money around. The City may have returned to paying itself big bonuses. But, to use the markets own phase, it’s a dead-cat bounce. Over time, heavier regulation is gradually going to chip away at the fantastic way the financial markets pay themselves. On top of that, credit is going to be tighter across the whole of the developed world. People won’t be bashing the plastic the way they were. That is going to impact most heavily on companies selling luxuries and indulgences – such as Harrods.
Next, the non-doms are not going to be around in the same kind of numbers. As the UK goes though a massive fiscal crunch, a lot of extra tax revenue will have to be raised from somewhere. Rich foreigners are always going to be an easy target. Expect them to face higher and higher levies – which will prompt many of them to base themselves somewhere else.
Finally, the centre of economic gravity is moving east. Most of the Europe – and the UK is no exception – faces a decade of retrenchment as it tries to make its economy competitive once again. The money is moving to different centres – Mumbai, Shanghai, Hong Kong and Singapore. London isn’t going to be the centre of anything very much – and there won’t be a lot of money to be made from servicing its rich.
Harrods is just one example of the ‘Bling Economy’, although an emblematic one. The London market is full of companies that depend on wealthy foreigners. Think of upmarket department store chains such as Debenhams, Selfridges and Liberty. There are plenty of luxury goods companies such as Burberry. And there are dozens of retailers that depended on the easy availability of credit. They are all going to find business a lot tougher in the next decade.
There will still be money to made in the UK. But it will be done in a far more down-to-earth way. It will be engineers and exporters who make the fortunes – not retailers courting celebrities and the super-rich. Al-Fayed was smart enough to see that he’d had a good innings, but that the game had changed, and that now was the time to depart. Investors should follow that lead.