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The city never slips...

London has seen more economic downturns than any other city — after all, it's the capital of the world's first industrialised nation. How is the city coping with the impact of the worst recession in its history? Shalini S. Dagar went there to find out.

Shalini S. Dagar | Print Edition: March 21, 2010

Feb. 11, 7 a.m., Copthall Avenue, London: It is a typical, cold London morning outside. In the heart of the City, London's financial district, the streets have yet to fill up. As I plan my return after three days of meetings, a headline in the morning papers jumps out. The $1.78-billion Travelport public offer has been called off following poor response from investors. Just three days ago, officials of the London Stock Exchange had held up Travelport as one of the big offers to expect in 2010.

That's London for you. There is the continued uncertainty of the downturn, highlighted by Travelport. And there is the bustle of a resilient city that has seen more downturns than any other, and has reinvented itself each time.

As I make my way to the airport, I recall Geoff, the cab driver I had met on the first day. He seemed to symbolise the spirit of London's services-driven economy—seeing a link between his own prosperity and that of the thousands of tourists and business travellers who flock to it every day. The UK economy thrives on professional services, of which financial services are the centrepiece. In 2008, professional services, including financial services, generated a trade surplus of more than £43 billion for the UK.

No surprise then that the UK was more severely hit by the 2008 financial crisis than any other industrialised nation. End-January had brought some cheer when the economy looked up (by 0.1 per cent) after six consecutive quarters of decline that marked the longest UK recession on record. Yet, it was the last economy in the industrialised world to make it back to growth. Feb. 10, 10.30 a.m., Bank of England: While releasing the quarterly inflation report, Bank of England Governor Mervyn King said a gradual recovery seems to be in prospect. "...it is hard to be sure how strong or sustained the recovery in spending will prove to be," King said.

FINANCIAL POWERHOUSE?

  • London's share of the UK's gross value added is 19 per cent.
  • London does 36 per cent of world foreign exchange trading.
  • The UK is Europe's largest investment banking centre (over half the activity).
  • The UK is second only to the US in fund management.
So will the UK never lose its AAA rating? King retorts: "...never is a dangerous thing to say, but I cannot think of any reason why the UK should lose it," before adding, "We're in a strong position, and it's ours to lose. All we have to do is to behave sensibly..." That statement sums up the conundrum facing the UK as it balances the challenges—slow consumption and high fiscal deficit, coupled with the fact that its economy has multiple linkages to overseas developments. Hence, as a summer election looms large, political expediency requires tough talk. And politicians are not sparing any firepower, especially in targeting banks.

Feb. 9, 2 p.m. Cabinet Office, Whitehall: As I rushed from Southhall to Westminster, the newswires were abuzz with the resignation of Hector Sants, CEO of the Financial Services Authority. The Conservatives, tipped to win the elections, believe the FSA's role should be reabsorbed in the other regulators. At Whitehall, Baroness Shriti Vadera, advisor to the G20 chair, the Republic of Korea, is now one of the most important links with the emerging world. "It is difficult if countries perceive different national agendas, but... our shared interest is our national interest," she says.

Earlier in the day, Avtar Lit, Chairman of Sunrise Radio Group, says 2010 is looking better than 2008 and 2009. But, he says, young British Asians are trying to brush up their Hindi and Chinese for the inevitable rise of the East ahead. Feb. 8, 5 p.m., Pinners Hall, Old Broad Street: Sally J. Scutt, Deputy Chief Executive, British Banks Association and MD, International Banking Federation, believes that regulatory changes for banks will need concomitant social change. Many young people were used to buying a home entirely with loans. Now, such people may have to save up.

Scutt says the obsession with bankers' pay is part of a seismic change in attitudes. The whole ethos "...will change and it will change forever. There has to be a balance between excess and real and proper remuneration for what is serious, economic activity," she adds. Naturally then, Stuart Fraser, Chairman of the Policy and Resources Committee, City of London Corporation, worries about "mistaken regulation". Currently, the EU is debating amendments to a law to regulate hedge funds, 75 per cent of which are based out of London.

Alan Jenkins, chairman of law firm Eversheds, has sensed this anxiety in many of his clients. "...funds are exploring options about relocating to what are seen to be friendlier destinations... There is enormous pressure to raise the standard of regulation." Yet the lure of London remains. Vikas Seth, MD of Investment Banking Department, Credit Suisse, says London remains "a city conducive to making deals".

Will imminent tax and regulatory changes impair London's competitiveness as an international finance centre? Fraser shrugs off such concerns as he believes that the real threats are from places such as Singapore and Shanghai, but that won't happen before another 20 years. So maybe Geoff the cab driver had got it right for the long-term.

(The travel for this story was sponsored by City of London Corporation)

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