London's status as one of the top city economies of the world looks set to continue, and improve, even in the face of challenges from fast-growing cities in emerging markets, according to new research published today in the latest UK Economic Outlook by PricewaterhouseCoopers LLP.

Analysis by PricewaterhouseCoopers shows that London was the sixth largest city economy in the world by estimated GDP at purchasing power parities (PPPs) in 2005, but should rise to fourth place by 2020, overtaking Paris and Chicago. Tokyo, New York and Los Angeles are expected to be ahead of London in 2020, but London's economy is projected to grow faster than any of these cities, driven in particular by strong growth in business and financial services.

Rankings of global cities by population are common, but these tend to overstate the relative economic significance of emerging market cities with comparatively low average income per capita levels. This new research is believed to be the first of its kind to provide a globally comprehensive ranking of the largest 100 urban agglomerations (using UN definitions) in the world by their estimated GDP at PPPs, taking into account both population and average per capita income levels.

The research draws on data from the United Nations (UN), the World Bank, the Organisation for Economic Co-operation and Development (OECD) and national statistical offices, as well as supplementary estimates by PricewaterhouseCoopers. By combining UN population projections with PricewaterhouseCoopers projections of GDP per capita at PPPs, the report also provides an indication of how global city GDP rankings might change by 2020.

Key highlights from the report include:

• At present, the mega-cities of the major developed economies continue to lead the global GDP rankings, with the top six in 2005 being Tokyo, New York, Los Angeles, Chicago, Paris and London (see Table A).

• These mega-cities are of a scale comparable to many national economies. The Tokyo and New York urban agglomerations, for example, have estimated GDPs at PPP broadly similar to those of Canada or Spain, while London has a higher estimated GDP than Sweden or Switzerland.

• None of the projected top 30 fastest-growing large cities in 2020 are from the major advanced economies, with emerging economy cities rising up the rankings.

• Five emerging economy cities are currently in the top 30 ranked by GDP (Mexico City, Buenos Aires, Sao Paolo, Moscow and Rio de Janeiro), but projections suggest that all of these cities except Rio will move up the global rankings by 2020 while fast-growing cities such as Shanghai, Mumbai, Istanbul and Beijing will move into the global top 30 by then (see Table B below).

• Three Indian cities are projected to rise into the top 100 in the GDP rankings between 2005 and 2020, while China and Brazil each have two new entries in the top 100. Ten of the 30 fastest growing large cities in the period 2005-20 are projected to be from China and eight from India.

• London is projected to grow somewhat faster than rivals such as Tokyo, New York, Chicago and Paris, moving up to fourth place by 2020, but other ‘old Europe' cities, including Rome, Milan and Berlin, appear likely to slide down the rankings as the emerging economy cities of Asia and Latin America rise.

• In the UK, Birmingham, Manchester and Leeds (ranked respectively 71, 73 and 85 in 2005) are all projected to slip down the global GDP rankings somewhat by 2020 (to 79, 82 and 108 respectively) – this is not because their economies are stagnating, but rather because their growth rates are not projected to keep pace with those of emerging economy cities of similar size.

John Hawksworth, head of macroeconomics at PricewaterhouseCoopers LLP, said:

"Within the developed world, it seems likely that the most successful cities of the future will be those that have comparative advantages in intangible business, financial and consumer services that are not so easily emulated by the rising stars of China, India or Brazil.

"A larger global market can still be of great benefit to those ‘old Europe' cities that are likely to slide down the relative GDP rankings. Historic capital cities such as Rome, Vienna and Berlin, for example, should benefit from increased tourist revenues from the residents of cities in the emerging economies, while London and Frankfurt should benefit from the increased financial services trade and Paris and Milan should find new markets for their fashion industries."

Thomas Hoehn, head of the economics practice at PricewaterhouseCoopers LLP, added:

"The general increase in cities' GDP across the world is good news, not only for emerging market economies. Cities of the established developed economies should see this as more of an opportunity than a threat. It gives them opportunities to specialise in areas where they have potential comparative advantages in fast-growing global markets."

UK growth set to moderate gradually in 2007-2008

In its main scenario, PricewaterhouseCoopers projects that GDP growth will moderate gradually from 3% in the year to Q4 2006 to around 2.75% in 2007 and around 2.5% in 2008 as the effects of higher interest rates and a tighter fiscal stance feed through. Business investment is expected to be the main driver of growth this year.

John Hawksworth, head of macroeconomics at PricewaterhouseCoopers LLP, said:

"In our main scenario, CPI inflation is projected to fall back to just below its 2% target rate by the end of 2007 as domestic energy bills decline, with interest rates peaking at 5.5%. But larger rate rises remain a risk if inflation does not fall back as quickly as hoped."