Britain: The Economic Fallout

The economic crisis is rippling out to the sectors that service the financial elite—from child care to restaurants to travel agencies

by Kerry Capell

A shop window is seen boarded up in Princes Street, in Edinburgh, Scotland. Bruno Vincent/Getty Images

With unemployment rising and investment banks likely to lay off thousands more in the coming months, Britain is in the midst of a major slowdown. Although the situation isn't as dire as in the U.S., ripple effects from the financial crisis are starting to spread through the British economy. From restaurants to real estate agents to domestic staff agencies, myriad businesses that service Britain's financial sector are feeling the pinch. "Cafés, restaurants, and other services linked to the City and financial markets are going to be reamed," says Jamie Dannhauser, an economist at Lombard Street Research in London.

Consider Abbeville Nannies, a child-care placement agency that operates in the affluent London neighborhoods of Battersea and Wandsworth, known as "Nappy Valley." Director Kate Barker says the credit crunch has led to a drop in demand for maternity nurses, who provide 24-hour care for newborns at a cost of up to $2,000 a week. At the same time, Barker is fielding calls from worried nannies who say the parents they work for are getting laid off and can no longer afford their services. "It has really affected us over the last year, and now it is accelerating," Barker says.

Nannies may be a luxury, but worsening economic trends suggest the pain could spread to all manner of services. In August, British unemployment, rose to 5.5%, the biggest jump in 16 years. Professor David Blanchflower, a U.S.-based economist on the Bank of England's interest-rate-setting committee, told Parliament that 2 million Britons could be out of work by the end of this year. Meanwhile, the Organization for Economic Cooperation & Development (OECD) recently slashed its forecast for British economic growth to just 1.2% for 2008, predicting that the country will face its first recession since 1991 by yearend.

Just the beginning?

The dramatic slowing of the financial sector—which accounts for one-fifth of British jobs and has been the second-fastest-growing part of the economy for the past 15 years, after oil and gas—is expected to lead to major job cuts. In May the Centre for Economic & Business Research (CEBR), a London consultancy, forecast job losses of 20,000 in Britain's financial sector in 2008. Now, says Richard Snook, an economist at CEBR, those estimates look overly optimistic. "We expect the number of layoffs to be substantially more," he says.

Des Gunewardena, chairman and CEO of D&D London, which owns several restaurants favored by the City's financial elite, is preparing for the downturn. At the group's Plateau restaurant in Canary Wharf, bookings plummeted by as much as 25% in the wake of the crises at Lehman Brothers and Merrill Lynch (MER). "People didn't want to go out for lunch," he says. "They just wanted to stay in their office and stare at their screens."

Business is slowly starting to pick up again, but Gunewardena acknowledges that to survive restaurants will have to fight harder for business and keep a tight lid on costs. "Next year we will probably see more restaurants closing than opening for probably the first time in a decade," he says. It's already starting to happen in France, where nearly 3,000 restaurants have closed this year (BusinessWeek.com, 9/24/08).

It's not just on expensive lunches that Britons are cutting back. With housing prices down by 10% or more in many parts of the country, "people have had to have a bit of reality check," says Cate Dodkin, sales manager at the Canary Wharf branch of real estate agents Foxtons.