Bonus cuts have ripple effect

It does not take a PhD in econometrics to see why. In their 2001 book City State, historians Richard Roberts and David Kynaston estimated that financial services employers in the City of London paid out 1.5bn (€2.3bn) in bonuses in 2000. The stimulus offered by bonuses this year will be far less.

Douglas McWilliams at the Centre for Economics and Business Research (CEBR) says falling City of London bonuses will reduce UK GDP growth and will result in lower-than-expected government tax receipts. The Treasury is hit twice, says McWilliams, firstly by lower income tax and secondly by lower VAT, which is levied on the leisure goods that bonuses buy.

Lower bonuses will have a bigger impact on some sectors than others. Several years ago, a study by the CEBR revealed a correlation between sales of champagne in City of London wine bars and the UK capital's economy. Balls Brothers and Corney & Barrow, both purveyors of champagne to the Square Mile, say sales of vintage bottles are down on last year.

The malaise in financial services is even affecting demand for pints of beer. Fuller, Smith & Turner, a brewer that runs pubs in the district, says sales there fell for the first time this year. The company blames redundancies and a half-hearted approach to inebriation among those left behind.

Fine restaurants and health clubs in the area are also feeling the pinch. The manager of Harvey Nichols' Prism says it has around 5% fewer bookings than this time last year, when trade was already dire.

The manager of a top City health club says membership is only two thirds the desired level and that people are unwilling to take time out on the jogging machine when jobs are on the line.

Luxury car manufacturers are equally vulnerable to the vagaries of financial service pay levels. Tower Bridge Porsche says new car orders are down, although purchases of classic cars with investment potential remain strong.

UK sales of BMWs fell 28% between November 2001 and November 2002. Professor Garel Rhys, director of automotive research at Cardiff University, says low bonuses are likely to affect the luxury car market in south-east England next year.

Even artists feel the effects of a downturn in financial services. Cat Newton-Groves, a manager at the Contemporary Arts Society, says financiers account for a significant proportion of contemporary art purchases. Bonuses are used to top up budgets for spending on the arts, she says.

But it is property prices and estate agents' coffers that will be most affected by much reduced end-of-year payouts. McWilliams of the CEBR says about 50% of bonuses work their way into the property market, including buy-to-let and home improvements.

Charlie Ellingworth, a consultant at Property Vision, an estate agency focused on homes worth more than 400,000, says prices have fallen by about 10% over the past six months. Less popular areas and buy-to-let properties in large developments have been worst affected, he says.

David Moulton, a researcher at the estate agent Knight Frank, says there is now a two-tier property market - properties valued below 1m are still rising, but those valued at more than 1m are floundering. He believes bankers account for more than one third of buyers in the million pound-plus market.

Moulton says that while bonuses usually boost the property market every January, this year's reduced awards are more likely to go into deposit accounts than penthouses.

However, there are some areas that falling bonuses have yet to touch, including upmarket ski holidays. Flexi-ski, a company offering short skiing breaks and extras such as post-piste massage, says demand from bankers remains strong.

Private sales are up 20% on last year and there is no shortage of financiers willing to pay 650 for a weekend in Courchevel 1850.

Alternative investment specialists remain willing and able to splash out on luxury abodes. Ellingworth at Property Vision says hedge fund managers account for a growing proportion of his clients: "They are doing very nicely, thank you."

Even sales of standard champagnes appear to be holding up. Nigel Dean, operations manager at Balls Brothers, says that while sales of vintage bottles are down, sales of Bollinger are higher than last year. Bonuses may have been slashed, but bankers can still afford to celebrate.