London economic growth to move back to long term average

The Index of London Leading Economic Indicators shows that growth in London is set to be around the 2.6% long term average in the third quarter with weak consumer and business confidence having a negative effect on growth. But low interest rates and recent signs of activity in the housing market, with prices up 7% over the past year should support the London economy.

Tim Crawford, group economist at the Bank of Scotland, said: “Economic growth in the capital is set to move back to more average rates during the second half of 2006 after strong economic performance in 2005.

“Both business and consumer confidence continue to be impacted by high energy costs and point to subdued spending trends near term. However low interest rates should support the London economy, while there have been recent signs of activity in the housing market.”

Pessimism among London businesses was recorded for the eighth successive quarter in the first quarter of 2006. However, rising from the four-year low of -45 recorded in the final quarter of 2005 to -15, the CBI business optimism balance showed that the downbeat attitude of firms was not as strong as it was towards the end of last year.

Despite improving slightly since the previous month, consumer sentiment in London remained weak at the start of 2006. The GfK NOP consumer confidence balance posted -2 in January. That was up from -9 in December, but below 0 for the seventh consecutive month.

However, lower interest rates may boost spending over the coming months. Short-term interest rates now stand at 4.55%, compared with 4.78% in the corresponding period of 2005.

New housing starts in London showed a slight annual decline during the final quarter of 2005. However, house prices rose by 6.7% in 2005 after sluggish growth in 2004.

According to the Bank of Scotland, the level of new orders received by firms is a key indicator in assessing an economy’s future performance, as it highlights potential changes in industrial production in the months ahead.

If volumes of new business rise, companies will generally need to raise output. As a result, industrial production would be likely to increase, boosting wider economic growth.

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