London’s productivity sinks to below pre-pandemic levels

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London was the only UK region where labour productivity fell below pre-pandemic levels in 2023, official data shows, a trend that has been narrowing the capital’s efficiency lead since before the financial crisis.

Output per hour worked in London fell at an average annual rate of 0.3 per cent between 2019 and 2023, according to figures published by the Office for National Statistics on Thursday.

The UK as a whole posted 0.7 per cent average growth over the same period, with all other regions outside the capital reporting higher labour productivity in 2023 than before the Covid-19 pandemic.

Despite remaining the most productive region — with output per hour still 28.5 per cent above the UK average — London’s lead has shrunk steadily, down from 33.4 per cent in 2019 and an all-time peak of 38.7 per cent in 2007.

Economists point to a mix of factors for London’s underperformance, including post-crisis constraints in the financial sector, difficulties in attracting talent and weaker investment in high-growth areas.

Paul Swinney, of the Centre for Cities think-tank, cited “a relative decline in attracting and retaining talent, both domestically and internationally”, due to unaffordable housing in the capital and changes in migration after Brexit.

Analysts also said that lower survey response rates after the pandemic may have affected the data’s precision. Like many official indicators, Thursday’s figures were labelled “official statistics in development”, indicating a wider degree of uncertainty.

Since the 2008 financial crisis, productivity in London’s financial sector has been held back by a more cautious approach to dealmaking, tighter government regulation and a slowdown in credit expansion, according to Ron Martin, professor of economic geography at the University of Cambridge.

The rise in remote working since the pandemic “may well have contributed” to the sector’s continued underperformance, he added.

Analysis by the Centre for Cities found that London’s poor productivity was linked to investment in expensive real estate “crowding out” more productive intangible investment, such as research and development and software.

“Pandemic-related disruptions — especially in the transport sector, including public, private, and air travel — have also likely played a role,” said Bart van Ark, managing director of the Productivity Institute, a research organisation.

He added that the strong performance of the South East and East of England may suggest some longer-term benefits from so-called “doughnut” effects, where economic activity shifts from the capital to surrounding regions.

London’s “productivity malaise” was continuing with output remaining below where it was 16 years ago, said Swinney. This affected not just the prosperity of the capital but national performance too, he added.

The government’s new industrial strategy, expected next week, “will need an answer to London’s woes if the UK is to break out of its productivity stupor”, he noted.

Productivity growth is an important driver of higher living standards as businesses with higher output have more scope to raise wages.

London is the UK’s largest and richest regional economy and a key source of revenues for public finances. In the fiscal year to March 2023, the capital raised the most revenue of any region, at £216.4bn, according to official data.

UK productivity overall has largely stagnated since the financial crisis, following decades of strong growth, a trend that has weighed on living standards and is known as Britain’s productivity puzzle.

The ONS data showed that between 2019 and 2023, the North West registered the fastest annual average productivity growth rates at 2.4 per cent, followed by Northern Ireland at 1.8 per cent.

Both regions recorded average output growth of more than 1 per cent, while the number of hours worked fell. For London, output growth was a more modest 0.5 per cent, while the number of hours worked increased.