International real estate advisor Savills, has released a report undertaken by economic forecaster Oxford Economics on the prospects for the London economy.

The research finds that London's economy was hit hard by the onset of the recent global recession, with its initial heavy focus on financial and related services resulting in a total of 8% decline in employment and a 4.5% contraction in GDP. The research states politics poses a big threat to the city but forecasts London will reemerge as the fastest growing major European destination and one of the fastest growing global financial centres, exceeding New York and Tokyo in the medium term.

Oxford Economics anticipates a growth in London GDP of 3.4% pa between 2010 and 2012, which will be exceeded only by Stockholm and Frankfurt. Thereafter, from 2012 to 2020 it forecasts London will be the fastest growing major European city, with accelerated GDP growth of 5% in 2012 averaging at 4% pa over the eight year span. The City's recovery, according to the research, is going to be robust with levels of growth outstripping the rest of the UK and most comparable cities around the world. London alone accounts for 19% of UK GDP.

John Rigg, Savills Head of International Investment and Central London Capital Markets, says: "The sub prime crisis which triggered the global financial meltdown produced a seismic shock for all three global financial capitals. The impact and consequences were potentially cataclysmic. However concerted central bank action and the fall in sterling combined with London's intrinsic attractions are causing a rapid recovery to certain markets. Particularly a flood of new overseas investors seeking London and UK real estate based on a confidence often absent domestically. London is unique and it is up to those in government to ensure that any new medicine for the financial services industry does not kill the patient."

In order to reach growth forecasts, the research examines London's economic, demographic and structural strengths and weaknesses focusing on London's "virtuous circle". It suggests that high rewards attract the best talent from around the world, creating a cluster of efficient businesses and a highly productive regional economy. This in turn supports the high rewards on offer, and so the virtuous circle begins again. Highlighting a number of risks to the future of London, both domestic and international including the drift of economic power to Asia Pacific, the report finds immediate risks lie in potential "significant policy mistakes". Taxation, transport infrastructure and the regulatory environment are areas where political intervention could damage London's prospects.

Mat Oakley, Head of Savills Research, adds: "To ensure that we have a stock of business and residential space that is fit for purpose we need to encourage investment into redevelopment and refurbishment of London's office and residential stock. Too much caution by developers banks and the authorities could be as damaging to our global position as too little investment into training or transport."

The report concludes that even if growth of the financial services sector is weaker than we have been used to in the past: "London's combination of available skills, capital, market access and flexibility should ensure that non-financial activities step up to fill the growth gap."