Services fuel London's recovery

A BOUNCEBACK in confidence and the burgeoning business services sector will see London's economy grow faster than expected next year, a leading economics think-tank has said.

The Centre for Economics and Business Research now thinks the capital's economy will expand by 2.4% this year rather than the 2.3% it predicted in September. Its forecast for next year has been raised to 3% from 2.2%.

But it cautioned that house price growth in the capital next year could drop to less than a quarter of its current rate.

The economic growth forecasts mean London is set to outstrip growth in Britain as a whole this year and next.

The capital is forecast to step up a gear after 2004, albeit falling short of the 4%-plus growth enjoyed during the boom of the late 1990s. It is forecast to expand by 3.3% in 2005 and 2006 and by 3.5% in 2007.

The CEBR said the City would benefit from the revival in world economic activity, a rally in stock markets and an increase in general City business. The think-tank is looking for 1.1% growth in the Square Mile this year and 4.2% in 2004. City firms are also expected to step up recruitment.

'The buoyant economic news from other countries - particularly the US - has improved the prospects for London's growth,' said CEBR economist Andrij Halushka, co-author of the report.

The business services sector, ranging from photocopier maintenance to accountancy, is seen expanding by 3.6% this year and next following 0.9% growth last year. Company spending on marketing and advertising in particular is expected to rebound.

But consumer spending is expected to slow, reflecting weaker confidence amid a housing market slowdown, higher taxes and also the absence of another leap in mortgage equity withdrawal. The CEBR has forecast 2.1% growth in next year compared with 2.8% this year.

It also predicts that the Bank of England's recent interest rate rise and expectations of further increases will dampen London's property market. It expects house price growth to slow from 10.7% this year to 2.4% in 2004, 1.4% in 2005 and 0.5% in 2006.

'Underlying demand pressures will prevent a 1989-92 style collapse in prices,' the report said. 'However, with price-earnings ratios in property high, the housing market remains vulnerable to a sudden loss of confidence among owners and purchasers.'

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