Report warns over London's economy

It paints a bleak picture of the capital's financial future - suggesting things could get worse before they get better.

The Treasury paper admits it is almost impossible to determine what the longer term effects will be. But it predicts City job losses, a fall in residential and commercial building, a drop in tourism and an increase in unemployment in the coming months.

The report, published by Chief Secretary to the Treasury Yvette Cooper and Minister for London Tessa Jowell, said the capital's economy appeared to have been "relatively resilient" to the tougher economic conditions over the first half of the year. However, it concluded: "London continues to face significant economic challenges."

The Treasury paper set out action ministers were taking to support the City's competitiveness and London businesses and to help household finances. Ms Jowell pledged the Government would not be diverted from addressing the problems and she urged Mayor Boris Johnson to use the full powers of his office.

"During this economic downturn, what protects London is the current continued growth in employment," she said.

"If London is to remain resilient the Mayor must sustain those levels of employment and add to the city's skills pool by making full use of the powers we devolved to his office."

The report, The London Economy: responding to changing economic circumstances, found:

Financial services: there has been a sharp decline in merger and acquisition activity and private equity investments. Job losses and lower bonuses are expected in the City over the next few months.

Property: house prices in London have fallen by four per cent between January and June and the number of housing transactions has halved. Significantly fewer new developments have been started. Speculative commercial office developments are also increasingly being postponed.

Tourism: appears to be slowing with softer future booking levels. Visit London has lowered its visitor forecasts and passenger numbers at London's airports are also slightly down on last year.

Employment: the employment rate of working-age Londoners during the second quarter of this year has sharply increased. Deteriorating economic conditions from a slowdown would suggest upward pressure on unemployment levels in London.

Household budgets: Londoners have been affected by higher food and energy prices and mortgage costs in a similar way to families across the country. But due to lower car ownership levels, Londoners should be less affected by petrol price rises.

There was good news in the retail sector, especially in central London, with tourists and wealthy international residents continuing to spend. Public sector construction also remained strong due to sustained high levels of public investment.