Review of London s Competitiveness 2012

Transcription

1 Review of London s Competitiveness 2012 Introduction London First s review of London s competitiveness 2012 identifies London as a leading international business centre and the leading international financial centre. It shows that despite increased competition, particularly from emerging markets, London continues to perform well. However, despite a recent improvement in London s position in some key indices, and a strong performance in FDI, London s position remains vulnerable, especially in certain key business sectors, such as financial services. London consistently outperforms the UK average in terms of productivity and growth and acts as a gateway to the rest of the UK for investment and tourism. Securing a strong and successful London should be the priority for a Government determined to secure the UK s economic recovery. However, government policy often does not support London s competitiveness: instability in the tax regime; immigration policy that potentially deters top business people and students; restricted capacity for expanding connections to the emerging markets; and an increasingly burdensome regulatory framework for financial services combine to put London s global standing under threat. This report follows London First s initial review of London s competitiveness, released in September 2011, and also includes an additional section which assesses how well placed London is to take advantage of the opportunities arising from the high growth emerging markets of Asia and Latin America. Data A variety of indices exist which benchmark London s international competitiveness in relation to other world cities across a range of criteria. Alongside these, are a number of reports and surveys identify specific issues or aspects of city competitiveness. Similar data exist at a national level ranking the UK s performance against other countries. Caution should be applied when using competitiveness indices due to the simplistic approach that needs to be taken in order to convert complex issues into simple numerical data 1. Further caution is necessary when attempting to compare data from different indices and reports. However, whilst the methodology applied and data samples differ across these indices and reports (see appendix 1 for a summary of the key data used here), themes can be drawn out to provide an insight into London s relative strengths and potential threats to these.

2 Page 2 London Today: Globally Despite sluggish economic conditions in the UK and continued economic uncertainties in the UK s major export markets, most notably the Eurozone, London has maintained its world city status, ranking among the top four cities in terms of GDP, competitiveness and economic power in a range of indices from across the globe. Rank Global Economic Power Index (Martin Prosperity Institue) Global City Competitivene ss Index (The Economist) Global Cities Index (AT Kearney) Global Financial Centres Index Global City GDP 2025 (McKinsey Global Institute) 1 Tokyo New York New York London New York 2 New York London London New York Tokyo 3 London Singapore Paris Hong Kong Shanghai 4 Chicago Paris (tie) Tokyo Singapore London 5 Paris Hong Kong (tie) Hong Kong Tokyo Beijing 6 Boston Tokyo Los Angeles Zurich Los Angeles 7 Hong Kong Zurich Chicago Chicago Paris 8 Osaka Washington DC Seoul Shanghai Chicago 9 Washington DC Chicago Brussels Seoul Rhine-Ruhr (tie) 10 Seoul (tie) Boston Washington DC Toronto Shenzhen Over the past year, some key reports have shown London s position improving relative to certain key competitors: the 2012 PriceWaterhouseCoopers Cities of Opportunity report 2 places London joint first with New York (up from second) following improvements in its scores across the board, ranking in the top ten in all but two indicators (sustainability and the natural environment; cost) and first in six variables 3. Additionally, both the March and September editions of the GFCI index reported London to be the top global financial centre, extending its lead over New York, Hong Kong and Singapore.

3 Page 3 However, in contrast to this positive picture, research by City UK shows that London might be losing its edge as a financial services hub as a quantitative survey of financial services firms suggested that over the last six years London has become less attractive4. There was little evidence of a loss of the UK s competitiveness in favour of traditional competitors, such as New York, Frankfurt or Paris, but instead a movement to cities with access to emerging markets. Singapore, with its supportive government and flexible immigration laws, was particularly favoured. London Today: Europe Despite reports suggesting the UK is not the most competitive country in Europe, ranking 7 th, behind Germany, the Netherlands and various Scandinavian countries 5 and data from Ernst & Young 6 ranking Germany as the most attractive country in Europe in which to invest 7, London continues to retain a substantial lead over other major European cities in the global indices. According to fdi Magazine, London maintains its title as European City of the Future 2012/13 for the third year in a row, scoring top on human resources, business friendliness and infrastructure categories. In terms of FDI, it is the largest recipient in Europe - receiving 376 greenfield FDI projects 8 in 2011, an increase of 16% on the number of projects recorded in 2010.

4 Page 4 Sustainability of London s lead position: factors affecting London s global city status There are three broad three categories of factors that influence a city s success: fixed factors, which are not susceptible to change, at least in the short term, such as time zone and language; market factors, which are a function of history and the interaction of the mixed and policy factors, such as proximity to markets, depth of skills pool and levels of agglomeration benefits; and policy factors, which are determined by government and can change rapidly. Market Factors Historically, proximity and connectivity to the Western markets of Europe and the US have been important drivers of a city s attractiveness to business. London s position as the leading global city in Europe has made it the natural choice for non-eu businesses looking to establish EU operations, and its strong ties with the US combined with its helpful geography and timezone have made London a conduit for trade between East and West. However, as the Eurozone crisis deepens 9 and with the US predicted to have low growth (2 to 3%) over the next year, business is increasingly looking to new markets, particularly the high growth markets of Asia and Latin America. This shift is noted by Ernst & Young in its data on the most attractive places to establish operations: in 2005 Western Europe was the most attractive location (mentioned by 63% of respondents) but in the 2011 survey, China pushed Western Europe into second place with Western Europe only mentioned by 35% of respondents. However, it is also interesting to note from the data the accompanying reduction in the percentage of respondents mentioning China, as India, Brazil and Russia increase in popularity. What are the most attractive places on which to establish operations? China 52% 38% Western Europe 63% 35% Central and Eastern Europe 55% 29% USA 45% 23% India 18% 23% Brazil 6% 16% Russia 7% 11% Respondents gave three responses(this graph shows responses since 2005). Total respondents: 812. Source: Ernst & Young's 2011 European attractiveness survey While London is a major global city and is likely to remain a key player in the short to medium term in the Citi/Frank Knight Wealth Report 2012 respondents from all regions bar one voted London the city that matters most to their clients both now and in 10 years time its current position as the leading European city and a leading global city cannot be taken for granted. If London is to continue to perform its role as a global hub, it needs not only to maintain its existing trading alliances but also increasingly to develop and deepen its ties with the emerging economies (see separate report).

5 Page 5 Policy factors The key policy factors determining London s success in this increasingly global world remain its openness to international talent and investment, and the competitiveness of its business environment. In our 2011 report we noted the adverse effects of the increase in the top rate of tax, the introduction of the bank levy and the potential damage of the introduction of an immigration cap. Over the past year there has been some movement to address these policy factors but more still needs to be done. Tax Total Tax Rate Paris 23rd 25th 17th 16th New York 14th 15th 11th 8th London 8th 7th 7th 5th Singapore 3rd 4th 4th 2nd Hong Kong 2nd 2nd 2nd 3rd Leading cities ranking for tax-friendliness. Data from PWC Cities of Opportunity reports The Government acknowledged early in its term the importance of a stable and competitive tax environment in supporting London (and the UK s) international comptitiveness 10. However, subsequent tax shocks (50% top rate of income tax, bank levy and most recently changes to stamp duty land tax SDLT ) have undermined the message and the latest data show London slipping down one place from its position last year. The focus of the Government s tax policy has been on corporation tax, where positive steps have been made both in regard to the stability of the regime and the rate of the tax. The Government s road map on corporation tax 11 gave a clear direction of travel which was welcomed by business and the recent and planned reductions in the headline rate mean that by 2014, the UK will have the lowest corporation tax rate in the G7 and the fourth lowest in the G20 (22%). However, changes in other business taxes, such as the introduction of the bank levy, have brought uncertainty into the business tax regime and, in this example, place an additional tax burden on a globally mobile sector that is critical to the future success of the London (and the UK) 12. The most recent example of an unexpected business tax was the introduction in the March 2012 budget of the 15% SDLT for non-natural persons purchasing properties over the value of 2 million. This tax, intended to penalise stamp duty avoidance, was drafted in such a way as to penalise the legitimate business activities of property developers and other property investment companies. With the majority of the properties valued over 2 million located in London and the South East, this tax was a particular concern to property companies operating within the city. London First has worked with its members on this topic 13. On personal taxation, following a period of uncertainty surrounding the tenure of the 50% tax the announcements in the March 2012 Budget that the top rate would be reduced to 45% from 1 April 2013 were welcome. The 50% rate meant that the UK had, with Japan, the highest rate of income tax in the G20, placed London at a clear disadvantage relative to its main competitors and had a marked impact on the hedge fund industry in London 14. While a rate of 45% will improve London s position relative to its key European competitors, as both Frankfurt and Paris 15 currently have top rates of 45%, London will still be less competitive than other leading global cities such as New York and Singapore.

6 Page 6 Top rate of tax 2012 Threshold ( ) London 50% (annouced to reduce to 45% 150,000 from 1 April 2013) New York 35% 388,350 Paris 45% (proposed new top rate of 75% 56,200** for earnings over 780,000) Frankfurt 45% 199,000 ** Singapore 20% 160,000 **for single taxpayer double that amount if married It is also interesting to note that the threshold at which the top rate of tax takes effect. The table above shows that while London, post 1 April 2013, will have the same top rate of tax as Frankfurt, it will take effect at a much lower income level. Immigration The introduction of the immigration cap in 2011, caused concerns both in regard to businesses being able to recruit the talent they needed and the cap s damage to London s reputation for being open for business. While concerns still exist in regard to some key elements of the cap (such as the 12 month cooling off period which will stop an employee who comes into the UK as an intra-company transferee from switching within the same employer to become a "local employee") the announcements in April this year that the cap would remain at its current level for the next two years and that intra-company transfers and high earners (those above 150,000) would remain exempt were welcome. A key area of continued controversy on the immigration cap relates to students. London is a centre of excellence in higher education, attracting talented individuals from across the globe to our leading institutions. These international students not only contribute to the funding of the institutions they study at, but also make a substantial contribution to the wider economy if the international market fell by 30% the cost to the UK economy would be around 1.5 billion 16. Restricting non-eu students from studying in London (or the UK), or presenting an image of not welcoming top students from across the world, not only undermines the continued international standing of our top universities but also limits the potential future benefit gained from international business people choosing to work with London (or the UK) because of the positive relationships they established through their student years. Although there has been movement by the Government in this regard by developing a new way of measuring student migration in and out of the UK, more needs to be done and London First continues to campaign for students to be exempted from the cap 17. Connectivity London scores highly in the PWC data for connectivity. This is because the indicator used measures the number of air traffic movements and the number of passenger flows. While it is true that London s airports are busy, this is not to say that all demand is being met. It is important for London, as a world city, to be connected to the rest of the globe. While London s links to its key trading partners of today (e.g. Europe, US and limited emerging

7 Page 7 cities) may be well served, the UK s hub airport, London Heathrow, is operating at capacity making the opportunity for opening up more routes, at least from the hub, severely restricted. Emerging Cities Outlook 2012 The UK needs to reach emerging markets (see the special report) in 2011 London was at a competitive disadvantage to many of its competitor world cities. It has fewer weekly flights than its European rivals to half of the emerging market economies, and seven of the eight growth economies identified by the IMF. It has no direct air links to the emerging economies of Chile, Colombia, Peru, Venezuela, Indonesia and the Philippines links that other European cities possess. Liveability Number of flights per week from London (LHR) Number of flights per week from Paris (CDG) Quality of Living Singapore London Hong Kong 7 7 Paris 4 4 New York Number of flights per week from Frankfurt (FRT) Beijing Shanghai Taipei Guangzhou Bogota Dhaka Ho Chi Minh City Bangalore Data from PWC Cities of Opportunity reports Number of flights per week from Amsterdam (AMS) London scores well on economic measures and is a lead tourist city 18 scoring well in the surveys on metrics such as museums and theatres (coming top in the World Cities Culture report), cultural vibrancy (2nd to New York) and sports and leisure (1 st ). However, on wider liveability measures London performs less well. While liveability criteria are difficult to measure and tend to be subject to bias difficulties, it is important not to dismiss these as over time they have the potential to undermine competitiveness. London is notoriously expensive, ranked 25th for cost of living the most expensive city in the UK and ahead of Paris and New York 19 - and does poorly on quality of life, coming 32nd out of 64 cities, behind Singapore (ranked 5th), Sydney (16th), and New York (18th) 20. It also does relatively badly on security - ranked 68th for personal safety (Mercer Quality of Life Index), behind Frankfurt and Paris, possibly as a result of international media coverage of the 2011 urban riots.

8 Page 8 Special Report: London s links with the Importance of the emerging economies emerging economies London is currently dependent on the rest of the UK and Europe for the bulk of its trade (most recent figures suggest London imports 108bn from, and exports 124 billion to, the rest of the UK, and around 50% of the UK s trade is currently with Europe). Low, or no, growth is expected over the coming years in the UK and Europe. The IMF expects UK growth of 0.2%, HMT puts it at -0.2% and the OECD forecasts 0.5% growth; similarly the OECD has revised down its forecasts for German growth this year to 0.8 per cent from 1.2 per cent and cut France s outlook to 0.1 per cent from 0.6 per cent. London therefore needs to extend its reach into the emerging, high growth economies (China is currently growing by 7.6%, Russia by 4%, and India by 5.5% 21 ). In the Citi report, Hot Spots: Benchmarking Global City Competitiveness, Asian cities dominate the economic strength category of the competitiveness index, the most highly weighted category; all but five of the top 20 cities are Asian. London by contrast comes 29 th22. Cities in 2010 and 2025 by GDP, Source: McKinsey 23 The increasing importance of Asian cities is a trend expected to continue over coming years 24 : the above maps show by 2025 the number of cities in the east with high GDPs will increase. The IMF predicts that over the next decade approximately half of all the economic growth in the world will be in the eight largest emerging market countries (including China, Indonesia, Korea, Russia and Brazil) and emerging market economies are forecast to overtake advanced economies share of global GDP by around The next section will assess London s success in exporting, attracting FDI, and getting visitors and students from these increasingly important BRIC countries.

9 Page 9 Exports Currently, the UK's largest export market is the United States, at 17% of the total, followed by countries in Western Europe 25 and it exports more to the Irish Republic, a country that had a growth rate of -1.1% in Q2 2012, than to Brazil, Russia and China combined. Exports from the UK (numbers inside bars indicate growth rates) The latest export figures released by the ONS show that the deficit on trade in goods with non-eu countries widened by 2.0 billion to 5.0 billion in August compared with a deficit of 2.9 billion in July. Exports decreased by 1.0 billion (7.2 per cent) to 12.3 billion 26. Exports from UK, Germany and France to BRIC countries Exports From UK From Germany From France To China To Brazil To Russian Federation To India Total BRIC Source: Thomson Reuters Datastream In contrast, Germany s export market is geared up to China and other BRIC nations since 2011 exports to China outstripped those to the US and in 2011 Germany accounted for about a third of China's total trade with the European Union 27. China's Premier Wen Jiabao has explicitly stated that he would like trade with Germany to increase by 50 per cent over

10 Page 10 the next three years. While data shows the UK to be underperforming, particularly relative to Germany, it is important to note that the nature of the demand from China has focussed on items such machinery and vehicles 28 and other manufactured articles 29, areas which are not the biggest drivers of the UK, or London, economy 30. FDI Last year the UK attracted the greatest proportion of FDI available in Europe (17%) 31 and London maintained its title as Europe s largest recipient of FDI.. However, there is no room for complacency: the UK is dependent on a very small number of countries, especially the US, and sectors, such as financial services, for the majority of its projects. In the 2011 London First review of indices, there was a concern that Germany and smaller cost-competitive countries such as Poland, Hungary and the Baltics, might be a threat to the UK s share of the lucrative Chinese FDI market. Since then Germany has been twice as successful as the UK in attracting the number of investors from the BRIC countries 32 Visitors Numbers of Chinese Visas issued Brazil UK 193,000 Around 200,000 Schengen 609,000 visit visas in mainland China. Of this - number, 159,000 were issued by France in figures not out yet Australia 545,300 (2010 figures) - USA 33 1,000,000 U.S. visas for Chinese applicants - 160,000 for student visas 820,000 It is difficult to benchmark how the UK is doing against other nations as the data are often unclear 34 and not always comparable. However, what is clear is that the UK is getting fewer visits from high spending Chinese tourists than the Schengen region. The potential provided by these tourists is being capitalised on by other jurisdictions. For example, the USA introduced an executive order January this year to make it easier for Chinese tourists to get visas and to increase visa processing capacity in China and Brazil, a change that is anticipated to add $850 billion to the economy by The UK needs to consider what more it can do to ensure it, and London in particular, does not miss out on this opportunity.

11 Page 11 Students London is a centre of excellence for higher education as shown by the Times Higher Education ranking which reported London to have 4 of the top 10 universities in the UK (6 if the definition is broadened to the wider South East). London s universities have global reputations and attract the top students from across the world - it was ranked the best place in the world to for education in Pakistan (59%), the Middle East and North Africa (40% across the region overall), and second behind only the US in China (56%) 36. In 2011, London had 108,710 international students (more than New York, Melbourne and Sydney) 37. China is the leading international student market in London, registering a 128% increase in student numbers in the last five years. Given the global nature of London s top universities and the long-term success an international student base brings to London and the UK it is essential that the immigration cap is amended to prevent unnecessary restrictions on London s and the UK s ability to attract the best and the brightest students 38.

12 Page 12 Appendix 1: Summary of Data The following table sets out the key features of the main indices used in this report (selected primarily based on the insight they provide on business environment and their ability to provide trend data). Survey Produced by Coverage Sample Details Global Z/Yen Group 75 financial 1970 survey Financial centres respondents Centres across the plus 75 Index world external Cities of Opportunity PWC/Partnership for New York City 26 Cities; centres of finance, commerce and culture sources Collation of data from 382 sources (reports and articles) Time Series 11 editions monthly 5 reports Qual/Quant Both Both In terms of providing a clear insight into London s competitiveness the GFCI draws on a good combination of economic data sources and substantial survey evidence. However, its focus on financial centres means the analysis is skewed to reflect the attributes of financial cities rather than providing a wider overview of the attractiveness of London. The Cities of Opportunity data were produced with the Partnership for New York City. The data come from a combination of quantitative and qualitative sources such as global organisations (e.g. the World Bank), national statistics providers and commercial data providers and present information across a large range of business environment factors. This report provides a broader analysis of London s position across economic, social and environmental factors. In addition to the reports set out above we have drawn on data from the following reports: Ernst & Young s European and UK Attractiveness surveys: These are new surveys and focus on FDI activity. Mercer's Quality of Living Survey: released annually and compares 221 cities based on 39 criteria. New York is given a baseline score of 100 and other cities are rated in comparison. Important criteria are safety, education, hygiene, health care, culture, environment, recreation, political-economic stability and public transportation. McKinsey Urban World: Mapping the economic power of cities: A one-off forward looking report which provides some interesting assessment regarding London s and other current lead cities economic positioning in TheCityUK s Competitiveness Report which used data analysed by McKinsey & Company to assess 147 actual location decisions by global financial services firms between 2006 and We have also looked at some of the quality of life indicators to give a broader context to purely economic measures. We used Mercer Quality of Living Index: This survey covers a range of measures such as education, recreation, political and social environment, health, and climate.

13 Page 13 Economist Intelligence Unit s Liveability analysis: This relies on data from the Mercer consulting group. A rating of relative comfort for 30 indicators is assigned across five broad categories: stability; healthcare; culture and environment; education; and infrastructure. Where possible, this report compares London against Paris, Frankfurt, New York, Hong Kong and Singapore.

14 Page 14 1 See GLA Economics City ranking indices - handle with care report, July Variables where London is ranked first are: research performance of top universities, international tourists, incoming/outgoing passenger flows, public transport systems, end of life care and flexibility of visa travel 4 E.g. out of the 147 location decisions analysed, they found 83 were made against the UK, 37 were made in favour of the UK and 27 resulted in a hold decision as in TheCity UK, Competitiveness Report, November problems with youth unemployment and perceptions after the riots are still bringing its score down; from The Europe 2020 Competitiveness Report: Building a More Competitive Europe 6 Growth Actually: Ernst and Young s 2012 Attractiveness Survey 7 The UK is in third place (although interesting to note that in terms of project flows Germany it still had around 2% less than the UK in fdi Markets data 9 The forecasts for the Eurozone vary between a contraction of 0.1% (OECD) and 0.3% (IMF) in 2012 and a small amount of growth in 2013) 10 The Coalition Agreement: Our Programme for Government, HM Government, May Part I: The Corporate Tax Road Map, Corporate Tax Reform: delivering a more competitive system, HMT, 9 Dec In 2011, financial and insurance services contributed billion in gross value added to the UK economy, 9.4% of the UK's total GVA (as per Financial Services: contribution to the UK economy, House of Commons Briefing Note, August 2012) 13 See London First website for the London First submission to HM Treasury 14 C.f. City UK, Competitiveness Report, November This does not take into account the anticipated increases in France, where a proposed new higher tax rate of 75 per cent on all earnings over 780,000 has been proposed but not yet introduced 16 The impact of universities on the UK economy 17 See for more detail: 18 In 2011 London was the most visited city in the world with 20.1 million visitors 19 Mercer Cost of Living Survey Global Liveable Cities Index Hot spots: Benchmarking global city competitiveness, Citi /Economist Intelligence Unit, Jan quarterly.com%2fcities_the_next_frontier_for_global_growth_2758%3fpagenum%3d1%23interactive&pgn=ci ne11_exhibit 24 Respondents in the GFCI 11 think that Asian centres will continue to become increasingly more significant UK Trade, August October 2012, ONS Machinery and vehicles accounted for 60% of EU27 exports to China in the first ten months of One sixth of EU27 exports to China in the first ten months of 2011 were other manufactured items Ernst and Young UK attractiveness survey Ernst and Young Growth Actually Aug-2012_F.pdf 37 Currently there are more than 405,000 international students at UK campuses this is significantly more than Germany ( 250,000) in 2011 and less than Australia (560,000) 38 One university has already reported it has seen applications from non-eu students drop by 40% this year.