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London’s global dominance remains a safe bet

2 January 2014

Christopher Barrow, CEO of Metropolitan Safe Deposits, believes London’s extraordinary rise to global city status will become even more pronounced in the next 10-20 years.

When Metropolitan Safe Custody acquired London Safe Deposit Company last year, it cemented the company’s position as London’s largest independent safe deposit box business. Despite its desire to expand internationally, Metropolitan continues to invest heavily every year in its London-based vaults. The reason is simple. Whilst much media attention focuses on the expanding size of emerging economies, such as China and India, London continues to enjoy its position as one of only two truly global cities, the other being New York City. These two cities are pre-eminent in terms of being totally integrated with the global economy. London is the more international of the two – it is the most linguistically diverse city in the world; it is the top global financial centre; and it is the world’s most visited city. It is also a key safe haven for global investors. Wealthy families continue to move to London and invest in prime residential property. Joining the Asian, Russian and Middle Eastern buyers, the political and economic upheaval in the Eurozone has seen a rising tide of Italian, Greek and French purchases of London homes.

London’s position as a leading global city has accelerated during the past 30 years. A number of factors have had a positive impact since the 1980s. Probably the most important trends have been globalisation, the shift from manufacturing to services, the opening up of financial markets and modern communications. These, of course, are heavily inter-related. Beyond being the capital city of a country with a robust legal system and a stable economic and political environment, London was perfectly positioned geographically and strategically to become a global city. Britain’s timely deindustrialisation towards a knowledge-based economy gave London the opportunity to lead the way, made possible by its economic diversity. This diversity was fuelled by London’s free market approach, which led to a rapid expansion of industries, sectors, skills and employment levels (including, importantly, liberal policies towards immigration). A classic example was the impact of Big Bang in 1986, which resulted in London becoming the most dominant global financial services centre within two decades.

In a national context, London’s domination is today very striking. With 1% of the UK’s land area, London houses 13% of the country’s population and generates over 22% of total economic activity. London’s wages are 30% above the UK average and house prices (at an average £437,000) are nearly double the rest of the country. As for the future, the well-respected think-tank, the Centre for Economics and Business Research (CEBR), recently produced a report predicting that Britain would be the largest European economy in around 2030. By extension, London’s relative standing will surely grow.

The CEBR, in its authoritative end-of-year report on GDP in the 30 largest economies of the world, predicts that China will overtake the US as the world’s largest economy in 2028, India will overtake Japan to become the third largest economy in 2028, and the UK will leapfrog Germany two years later. In the meantime, the UK is forecast to become the world’s 5th largest economy in 2018 by overtaking France.

The assumptions underlying CEBR’s predictions make important reading. The UK’s major advantages versus its European neighbours are (i) its positive demographics with continuing immigration, (ii) less exposure to Eurozone problems and (iii) relatively low taxes to encourage faster growth. On the other hand, Germany’s aging population, the prospect of future Eurozone bailouts and a weak euro will combine to hamper the country’s future growth. France’s problems (on top of Eurozone-related issues) are mainly attributed to its high tax regime, weak exports and a bloated public sector.

These forecasts assume that the euro will survive another 15-16 years. Germany’s export sector should remain reasonably strong, but its deteriorating demographics will almost certainly act as a major constraint to growth. France is in the unenviable position of being “one of the worst performing of the Western economies”. The unpopular François Hollande could be replaced by a free-marketeer, but they are a rare breed in France and, in any case, a turnaround would be slow. In the meantime, Italy and Spain are forecast to remain embroiled in debt, joblessness, social discontent and weak government.

The CEBR paints a bleak picture of emerging Eastern economies eclipsing a struggling Eurozone. The UK clearly cannot escape from the fact that EU countries still account for nearly half of the country’s exports (albeit declining). In addition, the UK has undoubted structural problems in having excessive capital tied up in real estate and financial services. The UK also has a well-known shortage of skills, especially in engineering and electronics. Furthermore, Britain is regionally very lopsided with an overcrowded London and South-East England accounting for nearly 40% of the UK economy.

That said, the recent recovery in the UK economy has not only been remarkably strong, but almost all of the key indicators are pointing simultaneously in the right direction. Optimism about the economy has improved significantly and businesses have become much more upbeat about prospects for growth. This improving confidence is particularly prevalent in London across a broad range of sectors. Importantly, London has a median age of 34 compared with a UK national average of 40 (and 45 in Germany). The capital is not just pulling in workers from other British regions, but it continues to attract talent from Europe. Not only does the UK have a flexible labour market, which makes UK businesses more efficient and encourages foreign direct investment, but the relatively low tax rates will continue to persuade large numbers of bright, young Europeans to move to London. For the next few decades, London will face many challenges, not least its relationship with Europe, but its world-class city status looks assured. That is why Metropolitan Safe Deposits continues to invest heavily in its home market.