Anthony Hilton: Lucky London is on cutting edge as tech sector thrives

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The head of one of our big financial institutions said last week that the most important thing in his world was that “the geeks had discovered business”. His intriguing thesis was that even in technology, people only invent what they think is important to them at the time. 

Thus they initially needed to find out things so they invented the search engine — hence Google; next they wanted a partner so they invented social media — hence Facebook; third, they wanted to gossip and talk to each other so they invented Twitter. Having got the basic needs out of the way, they now want to make money. Hence the focus on business. 

The merit of the observation lies not in whether it is strictly true but rather in the way it alerts us to the coming storm of innovation. The sheer amount of mental and physical energy that is currently devoted to developing applications and using them to create new and transform old businesses is unlike anything we have ever seen before. 

The economist Doug McWilliams charted this phenomenon last year in a book that I described here at the time as one of the most important to be published on the British economy in decades. Today sees the publication of the paperback version, with its key figures and impacts brought up to date. 

In the original version of The Flat White Economy*, McWilliams was writing about the digitally driven explosion of activity heavily concentrated around Old Street. That single London postcode of EC1V had in the two years since the Olympics seen the creation of 32,000 businesses and had created more jobs than the financial sector had lost. It was the fastest rate of business creation ever seen in a single postcode area.

Since then, the growth has continued and the technology footprint has spread. Shoreditch and its surroundings have got too expensive so South London is the new East London, with a particularly strong cluster in Croydon. Other locations are benefiting too, most notably Leeds, Manchester, Edinburgh, Brighton and the West Midlands. 

In measuring the economic impact of all this, McWilliams not only looks at the value added by the tech sector in isolation but also includes activities where the business model is based on the application of technology, although they are not tech businesses. Opinion pollsters are one example and we also lead the world in online retailing, advertising and media, plus of course the application of technology to finance. 

This generates some seriously impressive numbers. McWilliams calculates that the sector now accounts for 8.7% of GDP, making it the UK’s second-largest business sector. Two years ago, it was in fifth place although already bigger than the car industry and North Sea oil; today it has overtaken finance, the retail sector and wholesale. Only construction outranks it.

Whether all this activity is captured in official statistics is a moot point, and arguably there is up to 5% of GDP currently unaccounted for — partly because it is difficult for statisticians to keep track of the activities of small firms but also because of quirks in definitions which mean, for example, that money spent on software is treated as an expense rather than as investment. But invisible or not, properly recorded or not, it is what is driving London’s expansion.

McWilliams believes that about 40% of the UK’s growth in GDP was attributable to this activity in the three years to 2015. It grew 8% last year alone and this gives him the confidence to reaffirm his prediction that by 2025 — so in less than 10 years — it will drive a third of the British economy. Since another third of the economy is taken up by the state sector, this implies that well over half the private sector — the market-driven side of the economy where value is added rather than simply transferred — will depend in some way on the digital economy.

It would be nice to think that this had been planned — or was the result of enlightened Government action — but the reality is simply that London has had a massive stroke of luck. The crisis in the eurozone prompted many of the brightest and best-educated young people to come to London to work. They are almost all naturally computer-gifted but the real key is their diversity because out of that comes creativity. 

Different cultures look at things in different ways, varying backgrounds bring a range of perspectives. This coming together is not something you can create artificially; it is an accident of history. But it is because of this accident and the efforts of the people involved that London is growing at 4% a year, twice the rate of the rest of the country and much of the world.  

*The Flat White Economy by Douglas McWilliams, published by Duckworth, £9.99 paperback

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March 25, 2016 |
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