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Sustaining and Enhancing London’s Leadership Position
Venkie Shantaram Partner McKINSEY GLOBAL INSTITUTE Presentation to the LSE March 2012 CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited
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The McKinsey Global Institute (MGI) – An overview
MGI location Overview Founded in 1990 as McKinsey’s business and economics research arm MGI research combines the disciplines of economics and management Micro-to-macro methodology examines microeconomic industry trends to better understand the broad macroeconomic forces affecting business strategy and public policy Research is funded by the partners of McKinsey independent from any business, government, or other institution MGI mission and aspirations Help leaders in the commercial, public, and social sectors develop a deeper understanding of the evolution of the global economy Provide a fact-base that contributes to decision-making on critical management and policy decisions Focus on long-term fundamental research and maintain very high standards of peer review and intellectual rigor in its work
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MGI’s core research areas
McKinsey Global Institute Global capital markets Urbanization Productivity and growth Technology and innovation The future of work Resources
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MGI’s report ‘Urban World’ highlighted the importance of 600 cities in driving future global growth
Today 1.5 billion people live in the top 600 cities – 22 percent of global population $30 trillion of GDP in 2007 – more than half of global GDP 485 million households, with average per capita GDP of $20,000 $21 trillion of GDP in 2007 generated by the top 100 cities Tomorrow 2.0 billion people will live in these 600 cities in 2025 – 25 percent of the global population $64 trillion of GDP in 2025, nearly 60 percent of global GDP 735 million households will live in these cities, with average per capita GDP of $32,000 235 million households in developing world cities will have income above $20,000 per annum With the right intelligence, you can both assess how well your business portfolio is positioned against the urban growth opportunity, as well as help identify potential hot spot opportunities that you may be missing. 1 The 600 are the top cities by contribution to global GDP growth from 2007 to 2025. SOURCE: Urban world: Mapping the economic power of cities, McKinsey Global Institute; McKinsey Global Institute Cityscope 1.0
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Successful cities will be the key to future economic growth in the UK
10 Successful cities will be the key to future economic growth in the UK 78% share of English GDP growth from urban areas in last 10 years 73% share of English population living in urban areas 26% local government share of public sector expenditure 81% of central government targets are on local spending SOURCE: ONS, DEFRA, CLG Local Government Financial Statistics England 2010, Barker Review,
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Key messages London is one of the world’s great cities – An economic and cultural powerhouse It has the potential to remain so, and generate significant economic growth over the next 20 years However, there are potential threats to London’s pre-eminence A clear strategy for London would increase the chances of it achieving its full potential
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London is the third largest city in the world by GDP
Grey italic text Developing regions Normal text Developed regions1 2007 city rankings Households with annual income over $20,0004 Rank GDP2 Total population Children3 Total households 1 Tokyo Tokyo Mexico City Tokyo Tokyo 2 New York Mumbai Mumbai Osaka Osaka 3 London Mexico City Karachi New York New York 4 Paris Sao Paulo Kolkata Shanghai London 5 Los Angeles Osaka Tokyo London Rhein-Ruhr 6 Osaka New York Sao Paulo Beijing Paris 7 Chicago Shanghai Dhaka Sao Paulo Los Angeles 8 Rhein-Ruhr Kolkata Delhi Rhein-Ruhr Moscow 9 Nagoya Beijing New York Chongqing Chicago 10 Randstad Delhi Kinshasa Paris Nagoya 11 Milan Chongqing Manila Mumbai Mexico City 12 Washington, D.C. London Lagos Mexico City Seoul 13 Houston Dhaka Buenos Aires Los Angeles Milan 14 Dallas Buenos Aires Cairo Moscow Randstad 15 Philadelphia Los Angeles Chongqing Seoul Istanbul 16 Belgian central metro Karachi Los Angeles Buenos Aires Fukuoka 17 San Francisco Paris Istanbul Delhi Philadelphia 18 Boston Manila London Kolkata Taipei 19 Moscow Rio de Janeiro Osaka Rio de Janeiro Sao Paulo 20 Sao Paulo Rhein-Ruhr Lahore Chicago Hong Kong 21 Madrid Istanbul Rio de Janeiro Nagoya Miami 22 Mexico City Cairo Paris Milan Dallas 23 Atlanta Moscow Baghdad Tianjin Washington, D.C. 24 Cityscope is flexible by design and allows you to identify the top urban markets by a number of different cuts—not just population that has been the standard approach in the past. For example, take our ranking of cities by the number of households with annual income above $20,000 at purchasing power (last column). By 2025, both Mexico City and Moscow are expected to have more households in this category than Chicago. In this presentation, we focus on one grouping of cities in particular: the top 600 cities ranked by their contribution to global GDP growth to 2025, which we call the City 600. Miami Seoul Jakarta Istanbul Madrid 25 Rhein-Main Bangkok Lima Randstad Belgian central metro 1 Developed regions comprise the United States and Canada, Western Europe, Australasia, Japan, and South Korea 2 GDP 2007 in predicted real exchange rate 3 Population below age 15 4 Households with annual incomes greater than $20,000 in purchasing power parity (PPP) terms 5 Mexico City Metropolitan Region NOTE: For metropolitan regions, we use the first name of the region: e.g., New York for New York-Newark SOURCE: McKinsey Global Institute Cityscope 1.3 6 6
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… and the largest in Europe
Grey italic text Eastern Europe Normal text Western Europe 2007 city rankings Households with annual income over $70,000 Rank GDP Total population Share of retirees1 Children 1 London Trieste 2 Paris Genoa 3 Rhein-Ruhr Chemnitz 4 Randstad Milan Ravenna 5 Milan Randstad Livorno 6 Belgian central metro Madrid Parma 7 Madrid Barcelona (ESP) Salamanca Lille 8 Rhein-Main Belgian central metro Florence 9 Munich Upper Silesian metro Perugia Barcelona (ESP) Athens 10 Barcelona (ESP) Lille Lubeck Naples Munich 11 Rome Rhein-Main Nice Upper Silesian metro 12 Vienna Athens Turin Rhein-Main Lille 13 Hamburg Rome Leipzig Birmingham Vienna 14 Stuttgart Naples Rostock Rome 15 Lille Berlin Oviedo Athens Birmingham 16 Athens Vienna Hannover Belgian central metro 17 Stockholm Munich Toulon Rhein-Neckar 18 Birmingham Warsaw Dresden Stuttgart Luxembourg 19 Oresund Stuttgart Braunschweig Manchester Venice 20 Oslo Hamburg Modena Budapest Gelderland 21 Dublin Birmingham Burgos Warsaw Manchester 22 Rhein-Neckar Budapest Limoges Hamburg 23 Berlin Lisbon Bremen Noord 24 Noord Rhein-Neckar Kassel Stockholm Cityscope is flexible by design and allows you to identify the top urban markets by a number of different cuts—not just population that has been the standard approach in the past. For example, take our ranking of cities by the number of households with annual income above $20,000 at purchasing power (last column). By 2025, both Mexico City and Moscow are expected to have more households in this category than Chicago. In this presentation, we focus on one grouping of cities in particular: the top 600 cities ranked by their contribution to global GDP growth to 2025, which we call the City 600. 25 Venice Corunna Liverpool West Yorkshire 1 Share of population aged 65 and above. 2 Households with annual incomes greater than €70,000 in PPP terms. SOURCE: McKinsey Global Institute Cityscope 1.3 7 7
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The 3 largest economies in Europe have different profiles – UK is unusually dependent on London
Small cities & Rural areas Middleweights Number of cities Top city Share of GDP % Share of population % Per capita GDP gap to country Indexed, country = 100 43 46 31 49 33 44 33 29 24 18 15 14 United KingdomUnited Kingdom France Germany United KingdomUnited Kingdom France Germany United KingdomUnited Kingdom France Germany 33 26 29 SOURCE: McKinsey Global Institute Cityscope 1.2
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In terms of growth, while London outpaced the UK comfortably, Paris and Rhein-Ruhr were unable to outpace middleweights CAGR, , % Share of country GDP growth by city type % Small cities & Rural areas Middleweights Megacities United Kingdom France Germany 2.5 1.8 1.6 22 2.3 38 1.7 40 1.7 Middleweights (examples): Birmingham Manchester 39 Middleweights (examples): Lyon Lille Middleweights (examples): Munich Stuttgart 2.2 33 46 2.0 1.5 London 39 3.0 Paris 29 1.9 Rhein-Ruhr 14 1.5 SOURCE: McKinsey Global Institute Cityscope 1.2
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Key messages London is one of the world’s great cities – An economic and cultural powerhouse It has the potential to remain so, and generate significant economic growth over the next 20 years However, there are potential threats to London’s pre-eminence A clear strategy for London would increase the chances of it achieving its full potential
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Top 25 hot spots in 2025 from MGI Cityscope
Grey italic text Developing regions Normal text Developed regions1 2025 city rankings GDP growth Total population Total households Households with annual income over $20,0004 Rank GDP2 Children3 1 Tokyo Shanghai Kinshasa 2 New York Beijing Mumbai Karachi Shanghai Osaka 3 London Shenzhen Shanghai Lagos Beijing New York 4 Los Angeles Guangzhou Beijing Mumbai Chongqing London 5 Shanghai Tianjin Delhi Dhaka Osaka Beijing 6 Paris Chongqing Calcutta New York Shanghai 7 Beijing Los Angeles Mexico City5 Mumbai Paris 8 Osaka New York São Paulo Delhi London Rhein-Ruhr 9 Rhein-Ruhr São Paulo Dhaka Manila Los Angeles 10 Chicago Wuhan Chongqing Tokyo Delhi São Paulo 11 São Paulo Moscow New York Paris 12 Shenzhen Shenyang Karachi Los Angeles Lagos Mexico City5 13 Moscow London Osaka São Paulo Rhein-Ruhr Seoul 14 Houston Hangzhou London Cairo Mexico City5 Nagoya 15 Dallas Chengdu Lagos Lahore Calcutta Chicago 16 Guangzhou Singapore Manila Buenos Aires Tianjin Milan 17 Washington, D.C. Dallas Kinshasa London Shenzhen Mumbai 18 Tianjin Nanjing Los Angeles Baghdad Hangzhou Istanbul 19 Randstad Tokyo Shenzhen Kabul Chengdu Hong Kong 20 Mexico City5 Foshan Buenos Aires Luanda Los Angeles Dallas 21 Seoul Bangkok Cairo Istanbul Moscow Randstad 22 Nagoya Istanbul Khartoum Wuhan Bangkok 23 Singapore Paris Dhaka Shenzhen 24 Hong Kong Houston Tianjin Nairobi Buenos Aires Taipei Cityscope is flexible by design and allows you to identify the top urban markets by a number of different cuts—not just population that has been the standard approach in the past. For example, take our ranking of cities by the number of households with annual income above $20,000 at purchasing power (last column). By 2025, both Mexico City and Moscow are expected to have more households in this category than Chicago. In this presentation, we focus on one grouping of cities in particular: the top 600 cities ranked by their contribution to global GDP growth to 2025, which we call the City 600. 25 Atlanta Seoul Bangkok Dar es Salaam Houston 1 Developed regions comprise the United States and Canada, Western Europe, Australasia, Japan, and South Korea. 2 GDP 2007 to 2025 in predicted real exchange rate. 3 Population below age 15. 4 Households with annual incomes greater than $20,000 in purchasing power parity (PPP) terms. 5 Mexico City Metropolitan Region. NOTE: For metropolitan regions, we use the first name of the region: e.g., New York for New York-Newark. SOURCE: McKinsey Global Institute Cityscope 1.3 11 11
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London is expected to both grow substantially in absolute size and increase it’s GDP/Capita above the European median … Megacities (>10 mn inhabitants) Large middleweights (5-10 mn inhabitants) Mid-sized middleweights (2-5 mn inhabitants Small middleweights (<2 mn inhabitants) Bubble size indicative of GDP/Cap, 2007 GDP/Capita growth USD ‘000 Oslo Munich Rhein-Ruhr Randstad London Paris Median=9.5 Milan Madrid Barcelona 100 1,000 10,000 100,000 1,000,000 GDP growth USD million NOTE 1: Only European Cities shown NOTE 2: All figures relate to real exchange rate calculations SOURCE: McKinsey Global Institute Cityscope 1.3
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… the growth rate figures are in the mid tier of even the largest cities due to London’s high initial size GDP/Cap growth rate, Percent CAGR GDP 2007 USD billion GDP growth rate, Percent CAGR GDP/Cap 2007 USD ‘000 Warsaw 112 5.2% Warsaw 5.1% Budapest 66 3.9% Upper Silesian metro 4.0% Upper Silesian metro 52 3.7% Budapest 3.5% Munich 115 2.5% Stuttgart 2.2% Hamburg 87 2.4% Rhein-Ruhr 2.2% Rhein-Neckar 59 2.2% Rhein-Main 2.0% Rhein-Ruhr 215 2.1% Rhein-Neckar 1.9% Stuttgart 68 2.0% Munich 1.8% Rhein-Main 96 2.0% Hamburg 1.7% Berlin 47 1.9% Berlin 1.6% Vienna 65 1.8% Randstad 1.3% Randstad 128 1.7% Vienna 1.2% Belgian central metro 91 1.6% Lille 1.2% London 300 1.6% Belgian central metro 1.0% Paris 233 1.5% Paris 0.9% Manchester 25 1.2% London 0.9% Lille 37 1.2% Manchester 0.7% Barcelona (ESP) 42 1.1% Birmingham 0.6% Birmingham 27 1.0% Lisbon 0.5% Madrid 44 0.9% Athens 0.2% Lisbon 14 0.9% Venice 0.2% Milan 43 0.6% Naples 0.2% Venice 12 0.6% Rome 0.2% Rome 17 0.5% Milan 0.2% Athens 12 0.5% Barcelona (ESP) 0.1% Naples 4 0.2% Madrid 0.1% NOTE 1: Only European Megacities, large- and midsized middleweights shown NOTE 2: All figures relate to real exchange rate calculations SOURCE: McKinsey Global Institute Cityscope 1.3
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However, there are potential threats to London’s pre-eminence
Key messages London is one of the world’s great cities – An economic and cultural powerhouse It has the potential to remain so, and generate significant economic growth over the next 20 years However, there are potential threats to London’s pre-eminence A clear strategy for London would increase the chances of it achieving its full potential
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Potential threats to London’s pre-eminence
1 Reduced open-ness to skilled immigrants and international students 2 Loss of competitiveness in global financial services due to ‘super-equivalent’ regulation 3 Restrictions on London’s physical expansion 4 Reduced attractiveness as a HQ location due to poor infrastructure, uncompetitive tax regimes and restrictions on skilled immigration 5 Under-investment in London’s cultural and artistic heritage – a major driver of quality of life and essential to under-pin its attractiveness to global talent 6 Under-investment in primary, secondary and tertiary education in London
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Despite the crisis, London remains the leading international financial centre
Financial services contribute 3-6X more to the overall balance of payments in the UK than they do in other countries EUR billions 2008 2007 2006 UK Luxembourg Switzerland Ireland US Germany Japan France Hong Kong Mexico China Financial services net exports EUR billions Banks Securities dealers Contribution of Banks to financial services net exports EUR billions Other exports FISIM2 Fee income Spread earnings Fund Managers Baltic Exchange Insurance Other financial services CAGR1 % CAGR1 % 00-05 05-09 00-05 05-09 50,557 9 15 31,049 16 14 40,426 41,849 16 14 24,431 25,336 24 8 29,893 18,265 28 16 24,914 26,692 22,195 24,283 -10 52 13,148 14,929 15,784 19,307 12,150 15,881 -7 -11 9,559 18 19 8,754 6,841 6,958 20 38 4 12 6 3 12 -15 1999 2000 01 02 03 04 05 06 07 08 2009 1999 2000 01 02 03 04 05 06 07 08 2009 1 Compounded Annual Growth Rate FISIM stands for Financial Intermediation Services Indirectly Measured SOURCE: ONS Balance of Payments – Pink Book, IMF, The CityUK research
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Multiple factors drive London’s competitive success
37 Multiple factors drive London’s competitive success Overall context Benign corporate tax rates Historically predictable tax regime Favourable personal tax rates Noninvasive approach of tax authorities Regulatory system and reputation Commercially minded employment laws Openness to foreign ownership Open migration Stable legal framework People and culture English speaking Deep local talent pool Cost of living Strong arts and culture Low crime rate Magnet for global talent Culture of innovation Customer cluster Welcome to foreigners Strong ties to US Global client base Time zone bridging US and Asia Cutting edge sophisticated complex client needs Proximity to eurozone Must visit road-show destination Global centre for research Distinctive professional services Primary international transport hub Robust technology infrastructure/ future capacity Extensive transport network Leading, but unsupportive financial media System and services London retains top position in the Global Financial Center Index for 2010 Source: Clusters and the New Economics of Competition (Michael Porter)
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However, the outlook is worrying on several factors
37 However, the outlook is worrying on several factors Competitiveness increasing Competitiveness flat Competitiveness decreasing Overall context Benign corporate tax rates Historically predictable tax regime Favourable personal tax rates Non-invasive approach of tax authorities Regulatory system and reputation Commercially minded employment laws Openness to foreign ownership Open migration Stable legal framework People and culture English speaking Deep local talent pool Cost of living Strong arts and culture Low crime rate Magnet for global talent Culture of innovation Customer cluster Welcome to foreigners Strong ties to US Global client base Time zone bridging US and Asia Cutting edge sophisticated complex client needs Proximity to eurozone Must visit road-show destination Global centre for research Distinctive professional services Leading, but unsupportive financial media System and services Primary international transport hub Extensive transport network Robust technology infrastructure/ future capacity London retains top position in the Global Financial Center Index for 2010 Source: Clusters and the New Economics of Competition (Michael Porter)
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Key messages London is one of the world’s great cities – An economic and cultural powerhouse It has the potential to remain so, and generate significant economic growth over the next 20 years However, there are potential threats to London’s pre-eminence A clear strategy for London would increase the chances of it achieving its full potential
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5 levers provide a common architecture to identify opportunities for economic growth
Concentrations of industries, functions, and occupations Talent production, attraction, retention, and matching to jobs 1 2 4 Physical and virtual infrastructure Economic sectors/ clusters Linkages and movement of goods, people, and information Human capital Enablers 3 Government efficiency and efficacy Business environment Tax value proposition 5 Public and civic institutions Innovation and entre-preneurship Innovation performance Entrepreneurial ecosystem Source: Team economic development plans; Brookings Metropolitan Policy Program, Chicago Plan for Growth
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Priorities for London’s economic development
Doc ID Priorities for London’s economic development Preserving London’s role as the leading international financial centre Expanding leadership in professional and business services Maintaining leadership in creative industries Building on early success in High Tech and bio science Remaining open to skilled immigration Building on London’s great universities – as knowledge factories and magnet for international talent Expanding affordable housing Providing more rented accommodation for young citizens 1 2 4 Physical and virtual infrastructure Economic sectors and clusters Continued leadership Human capital Allowing London to expand – rethink ‘green belt’ policy Building more airport capacity Investing in public transport infrastructure Eliminating road bottlenecks through road-pricing and usage taxes 3 5 Public and civic institutions Innovation and entrepre-neurship Stronger decision rights for London, as part of de-centralisation of power in the UK to cities Investment in arts and culture, and public spaces Equitable distribution of planning gains to encourage development and reduce local taxes Openness to global talent Priorities Creative industries Tourism Bioscience High tech Prof & Business Services Financial services 21
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Further reading Urban world: Mapping the economic power of cities
From austerity to prosperity: Seven priorities for the long term in the United Kingdom
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Sustaining and Enhancing London’s Leadership Position
Venkie Shantaram Partner McKINSEY GLOBAL INSTITUTE Presentation to the LSE March 2012 CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited
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