terrorist attacks
TRANSCRIPT
1.
THE IMPACT OF THE TERRORISTATTACKS ON THE SCOTTISH
ECONOMY
AN UPDATE
Scottish ExecutiveJanuary 24th, 2002
2.
Contents
Page
Introduction 1
Summary 1
1 Global Economy 2
1.1 Global Economic Developments 21.2 Economic Developments in the US 31.3 Economic Developments in the Euro Area 51.4 Recent Global Forecasts 6
2 UK Economy 7
2.1 Overview of the UK Economy 72.2 Impact of the Terrorist Attacks 82.3 Prospects and Forecasts for the UK economy 8
3 Scottish Economy 9
3.1 Economic Outlook 93.2 Sectoral Impacts 11
3.21 Tourism 113.22 Aviation and Aerospace 123.23 North Sea Oil and Gas 143.24 Electronics Sector 153.25 Construction and Housing 153.26 Financial Services 163.27 Inward Investment 173.28 Exports 17
ANNEX A 19
1.
Introduction
Building for the Long-Term: Understanding the Impact of the Terrorist Attacks on theScottish Economy, published 4 October 2001, outlined the current situation in theScottish, UK and Global economies and highlighted how the terrorist attacks of 11September might be anticipated to affect those respective economies. As thisdocument emphasised, the impact of these events on Scotland is inextricably linked tothe manner in which the global economy responds and, in particular, how the USeconomy responds. As more than four months have now elapsed since the initialassessment of the impact of the terrorist attacks, the response of the global economiesand the Scottish Economy should be emerging (see ANNEX A for a summary of thekey economic statistics released since 11 September). This Report aims to update therecent economic situation and focus on the sectors which were identified in theoriginal report as being the most affected by the terrorist attacks.
Summary
Whilst compiling this report, it became clear that the hard evidence needed todetermine the impact and response to 11 September attacks is not all available.Accurate economic data takes time to compile. The global economy, which wasshowing signs of a slowdown prior to 11 September, has continued to deteriorate.The two largest economies – the US and Japan – have both been reported to bealready in recession. Nearly every economy has been affected by the globalslowdown with growth forecasts throughout the world being continually reviseddownwards. This current global slowdown was not caused by the terrorist attacks butthose events did influence the depth of the slowdown and it is still unclear when theglobal economy will recover. However, although official data remains mixed, manyforecasters expect the global economic recovery to begin in the second half of 2002.
Scotland and the UK have both been affected by international global events. Thecomparison of Scottish and UK GDP growth rates in the 4 quarters to 2001Q2 (0.3per cent and 2.5 per cent respectively) suggests that the slowdown in the worldeconomy has affected Scotland earlier. Recent forecasts from the Treasury show thatthe UK economy as a whole is well placed to face the global economic slowdownwith UK GDP expected to grow at the highest rate of all the G7 countries for 2001.
Building for the Long Term considered the impact of global events on a number ofsectors in Scotland identified as being most affected by the terrorist attacks.Monitoring the post-11 September response at the sectoral level remains difficult- therequired data are simply not yet available. Some sectors, for example, electronics, aresuffering as a result of the global slowdown and developments in product markets,while others (e.g. tourism and aerospace) are more likely to be directly affected by theconsequences of 11 September. However, much of the key data relating to the crucialperiod (2001 Q4 and thereafter) has yet to be released.
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1 Global Economy
1.1 Global Economic Developments
The global economy was already showing signs of increasing fragility even before theterrorist attacks in the US on 11 September. The three largest economies, US, Japanand the Euro Area, were all experiencing slowing growth, with few regionsthroughout the world escaping this global slowdown. The Terrorist Attacks on 11September acted to deepen rather than cause the global slowdown.
There are a number of indicators which have been released post-11 September whichillustrate how the global economy has been affected by the terrorist attacks. Theseinclude GDP forecasts for 2001 and 2002, consumer confidence, unemploymentfigures, along with information on the financial markets. However it is important tonote that these do not explicitly highlight the impact of the terrorist attacks. Rather,they show a combination of the terrorist attacks and the global slowdown.
The slowing down of world output and the 11 September attacks has led to asignificant decline in consumer confidence throughout the developed world.Although this initially started in the US, by October it had spread to the UK (seeChart 1.1).
However, it is clear that the attacks contributed to the significant decline in consumerconfidence in the months immediately following the attacks. Despite the dramatic fallin confidence in the latter part of 2001, there is evidence to suggest that confidencecould be on the increase again. Small increases in consumer confidence in Novemberand December in the UK, and in December in the US, suggest that a turning point
Chart 1.1: UK and US Consumer Confidence Index
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may have been reached and that consumer confidence could now be on an upwardtrend.
Financial markets were hit hard throughout 2001 and suffered even more in theimmediate aftermath of the terrorist attacks on 11 September. However, since the endof September, the markets have generally recovered to levels prior to the attacks (seechart 1.2).
The main policy response to the global slowdown and, latterly, the terrorist attacks onthe US, has been the easing of macroeconomic policies. Global interest rates havebeen falling throughout 2001 and, in particular, following the terrorist attacks, leavingthem at historically low levels. This easing, along with the gradual abatement of oilprices and of other shocks that have contributed to the slowdown, should help supportactivity and confidence in the periods ahead. With inflationary pressures now undercontrol in many of the advanced economies, many commentators predict further cutsin interest rates in the first few months of 2002.
1.2 Economic Developments in the US
Latest official figures from the US show that the US economy in the year to 2001 Q3,contracted at an annual rate of 1.3 per cent (see chart 1.3). This is a far biggercontraction than the 0.4 per cent previously forecast by the US government. It willnot be until the release of the final estimate1 for 2001 Q4 GDP figure (due on the 28March) that the size of the impact of the terrorist attacks on the US economy willbecome clearer.
1 Initial estimates of 2001 Q4 GDP will be made on 31 January and 28 February prior to the finalestimate.
Chart 1.2: Financial Markets, FTSE 100 & Dow Jones Industrial Average (DJIA)
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The National Bureau of Economic Research2 announced in late November that the USeconomy had officially gone into recession in March 2001. However, this is notbased on the more commonly used definition of a recession – two successive quartersof negative GDP growth - but rather a slowing of growth in total output, income,employment and trade lasting from six months to a year. Contrary to this, the IMFclaim that the current slowdown in the US economy is similar to that experienced inprevious peak-to-trough downturns, therefore concluding that the US downturnshould be relatively short lived.
The US government was quick to respond in the wake of the terrorist attacks,announcing major new expenditure measures to try and offset the impact of theattacks. The US Congress has already passed $15bn for airlines, $40bn foremergency spending, and $38bn in tax rebates. In addition, President Bush requestedan additional $75bn in spending to help bolster the economy. This fiscal stimulus issaid to boost GDP by 1.5 per cent.
Consumer confidence showed signs of recovery in the latter months of the year, withthe University of Michigan index for consumer sentiment increasing in foursuccessive months to January – it’s highest for a year. Similarly, the USConfederation Board’s Index for consumer confidence (see chart 1.1) showed a slightincrease in December, the first increase since June 2001. However, movements inconsumer confidence in the coming months will depend on the prospects foremployment and income within the US economy. A rise in unemployment will act toreduce consumer confidence even further.
The Federal Reserve continued to cut interest rates in the US throughout 2001. Themost marked cuts have occurred since the terrorist attacks with a cut of 50 basis
2 “The Business-Cycle Peak in March 2001”, National Bureau of Economic Research, 26 November2001.
Chart 1.3: US GDP Growth
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points on 17 September, 2 October and 6 November, leaving the base rate at 2 percent. In December, interest rates were reduced even further by 25 basis points,leaving them at 1.75 per cent.
Official figures from the US Department of Commerce show that retail sales in themonth of December were down just 0.1 per cent on the previous month – much lessthan the 1.4 per cent drop that was forecast by commentators. This also represents a4.1 per cent increase on sales in December 2000.
It is important to note that both monetary and fiscal measures will take some timebefore they impact on the US economy. However, it is expected that towards themiddle of 2002 the US economy will start to reap the benefits from both the fiscal andmonetary policy actions.
Alan Greenspan, the chairman of the US Federal Reserve, recently claimed thatalthough the US economy is showing signs of recovery, there are still significant risksin the short run. A contrary view emerged from a meeting of central bankers from 10of the richest countries in the world, where it was concluded that the global recoveryappears to be underway. There is clearly still a great deal of uncertainty over thetiming of the global recovery.
1.3 Economic Developments in the Euro Area
The Euro area has continued to slowdown throughout 2001 as the impact of the globalslowdown continued to spread. A first estimate of quarter-on-quarter real GDPgrowth was close to zero in the third quarter of 2001.3 Economic activity appears tohave remained subdued in the fourth quarter of 2001 as a result of continuedweakness in domestic and external demand, along with an overall high degree ofuncertainty.
The Euro continues to remain weak against the US dollar (see chart 1.4) despite arally following the introduction of Euro notes and coins on 1 January 2002. Thereasons behind the general weakness of the Euro are still not fully understood.However, some commentators believe that differing economic performances betweenthe Euro area and the US, along with portfolio adjustments as a result of the advent ofthe Euro, have played an important role.
3 Monthly Bulletin, December 2001, European Central Bank.
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Unemployment in the Euro area remained fairly stable over the first three quarters of2001, after the steady decline observed since 1997. ILO unemployment, thestandardised rate of unemployment for the Euro area, has remained around 8.4 percent between June and October.4
1.4 Recent Global Forecasts
The outlook for the world economy was uncertain prior to the terrorist attacks, withthis uncertainty increasing following 11 September. Forecasters have continued torevise downwards their forecasts for many of the advanced economies, mainlyreflecting the expected sharp downturn in the US economy, alongside furtherweakening in the Japanese economy. Overall, it was believed that growth in theworld economy would fall below recent levels for 2001 and 2002, but that a severedownturn would be avoided. However, the terrorist attacks on 11 September and theresultant effects on the global economy, have dampened the outlook for the nearfuture, with a steeper global downturn than previously predicted.
The IMF5 revised their September forecasts downwards following the terroristattacks. They now predict that world output in 2001 and 2002 will be 2.4 per cent(see Table 1.1). Similarly, the OECD revised their forecast downwards for nearly allmajor economies as few countries or regions have been left unaffected by the globaleconomic slowdown. The OECD forecast (November) real GDP growth for theOECD area for 2001 at 1.0 per cent, down from 2.0 per cent from their forecast inJune. Growth of 1.0 per cent is also forecast for 2002 – down from their previous
4 Monthly Bulletin, December 2001, European Central Bank.5 IMF Statement on the Global Economic Situation, 15 November 2001.
Chart 1.4: Euro Exchange Rate Against USD and Sterling, 1 Sept 01 - 16 Jan 02
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forecast of 2.8 per cent. However, the OECD does expect growth to pick up in 2003,forecasting growth of 3.2 per cent.
Although the terrorist attacks on 11 September have been responsible for some of thedownward revisions in world economic growth forecasts, it is important to note thatforecasts were being revised downwards prior to 11 September.
Overall, it is clear that world economic growth was declining prior to the terroristattacks, and has since fallen further. Commentators are still unsure of the timing ofthe global economic recovery; however it is not expected to take place before thesecond half of 2002.
2 UK Economy
2.1 Overview of the UK Economy
The UK economy, like all major economies, has been affected by the global economicslowdown. However despite the global economy facing an uncertain future, the UKeconomy has continued to perform strongly. Forecasters predict that the UK will bethe fastest growing G7 country in 2001.
The terrorist attacks on the US on 11 September has led to a fall in business andconsumer confidence throughout the advanced economies (refer to chart 1.1).Business confidence has fallen since 11 September, while external demand hasweakened, causing firms to postpone investment. The fall in consumer confidencehas been less marked, with the cuts in interest rates helping to bolster consumers’confidence in their own finances, ultimately helping to sustain consumer spending.Overall, the impact of the global slowdown has shown up mainly in weaker businessinvestment.
The Monetary Policy Committee – charged with setting interest rates in order toachieve the UK Government’s inflation target of 2.5 per cent – has responded to theslowdown in the global economy and the terrorist attacks in the US. Consequently,
Table 1.1: World Output Trends and Projections, Percentage Growth, 2000-2002
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World Output 4.7 (4.8) 2.6 (3.2) 3.5 (3.9) 2.4 2.4 -0.2 -1.1
United States 4.1 (5.0) 1.3 (1.5) 2.2 (2.5) 1.1 0.7 -0.2 -1.5
European Union 3.4 (3.4) 1.8 (2.4) 2.2 (2.8) 1.7 1.4 -0.1 -0.8
Japan 1.5 (1.7) -0.5 (0.6) 0.2 (1.5) -0.9 -1.3 -0.4 -1.5
Developing Countries 5.8 (5.8) 4.3 (5.0) 5.3 (5.6) 4 4.4 -0.3 -0.9
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Source: IMF World Economic Outlook, September 2001, IMF Statement on the Global Economic Situation, 15 November 2001.
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interest rates have continued to fall throughout 2001 from a high of 6 per cent inJanuary, to 4 per cent in November. The most significant fall in interest ratesoccurred in November when the MPC cut the base rate by 50 percentage points,leaving interest rates at 4 per cent, the lowest level since 1964. The MPC kept interestrates unchanged at 4 per cent in December and January, with the latter decidedfollowing the MPC meeting on 10 January.
Inflationary pressures in the UK remain under control as the RPIX for December was1.9 per cent, up from 1.8 per cent in November, remaining within the +/- 1 per centrange around UK Government’s target rate for inflation. It is important to note thatthe MPC remit regards deviations below the target rate to be just as undesirable asdeviations above the target rate. Therefore, the MPC has no incentive to keep interestrates high when there is a weakening of inflationary pressures in the medium term.
2.2 Impact of the Terrorist Attacks
As mentioned in section 1, it is clear that the terrorist attacks have acted to deepen theglobal slowdown and, therefore, will have had an impact on the UK economy. As adirect result of the attacks, the UK Government has announced the following:
� An additional £100 million has been made available to the Ministry of Defencefor new equipment and immediate operational requirements;
� To tackle terrorist finance and to fund anti-terrorist measures, an extra £20 millionhas been set aside;
� To fund the need for additional policing since 11 September, a further £30 millionhas been made available to the Metropolitan and other police forces.
The terrorist attacks and the subsequent military action has appeared not to havedampened consumer expenditure. It was reported by the British Retail Consortium on8 January that trading in the shops during the run-up to Christmas and the first fewdays of the sales, was the best for a holiday season in the last five years, with sales up8.1 per cent year-on-year.
2.3 Prospects and Forecasts for the UK economy
The Pre-Budget Report in November 2001 outlined the Treasury’s recent forecasts forthe UK, with the economy expected to grow strongly in 2001 at a rate of 2.25 percent. Therefore, despite the global slowdown and increasing uncertainty surroundingworld trade, the UK Government’s pursuit of economic stability has left the UKeconomy well placed. Table 1.2 outlines both the PBR 2001 forecasts for the UKeconomy, and independent forecasts contained in the Treasury’s December edition of“Forecasts for the UK Economy”.
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The OECD forecasts the UK economy will grow at 2.3 per cent in 2001, falling to 1.7per cent in 2002, before recovering in 2003 to grow at 2.5 per cent. These forecastsappear more impressive when compared to forecast growth for the OECD area: 1.0per cent in 2001 and 2002. However, by 2003, the OECD predicts that the OECDarea will grow faster than the UK, at a rate of 3.2 per cent.
3 Scottish Economy
3.1. Economic Outlook
A key issue facing the Scottish economy is the impact that the 11 September terroristattacks will have, both in the short term and over a sustained period. Given theimportance of international trade and investment flows for the economy, much clearlydepends on the prospects for the global trading environment, particularly the recoveryof business and consumer confidence in the USA. It is still too early to predict withany certainty the precise impact on specific sectors in Scotland, such as tourism,aviation and electronics, though the multiplier effect from job losses in these sectorscould be significant. In general, however, with the continuing strength of the UKeconomy, and Scotland’s reliance on UK markets, the Scottish economy is relativelywell placed.
The available evidence indicates that the economy was slowing down prior to 11September. The comparison of Scottish and UK GDP growth rates in the 4 quartersto 2001 Q2 (0.3 per cent and 2.5 per cent, respectively) suggests that the slowdown inthe world economy had affected Scotland earlier. As usual, there was a variableperformance between sectors, with some – notably financial services and real estateand business services – continuing to perform strongly. By contrast, negative growthwas recorded across much of manufacturing, with total output in the sector havingfallen in five successive quarters.
The latest official statistics on the labour market (released on 16 January) continue topaint a fairly mixed picture. Although ILO unemployment remains unchanged overthe most recent quarter of September-November compared with June-August, it is upover the year. Indeed, there are signs that the labour market might have reached a
Table 1.2: Forecasts for the UK economy, 2001 and 2002
TreasuryIndependent Forecasts
TreasuryIndependent
Forecasts
GDP Growth (per cent) 2.25 2.2 2 - 2.5 1.9
RPIX (Q4) (per cent) 2.25 1.5 2.25 2.3
Current Account (£billion) -14 -16.3 -26.75 -24.3
Manufacturing Output Growth (per cent) 1.75 - 2 -1.6 1.5 - 2 -0.4
2001 2002
Source: HM Treasury Pre-Budget Report, Nov 2001, & "Forecasts for the UK economy", HM Treasury Dec 2001
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turning point in early 2001, although overall unemployment is at historically lowlevels.
Although there is a lack of official data on the Scottish economy since the terroristattacks, there are various surveys available. The Bank of Scotland’s report on theScottish6 economy in December concluded that:
� Manufacturing output fell in December for the ninth consecutive month, althoughthe rate of decline eased from the three year high recorded in November. Servicesector activity rose at its highest rate since September;
� Employment fell for the tenth successive month in manufacturing. The rate atwhich jobs were lost also increased to the highest point in the survey’s four-yearhistory. Service sector employment grew for the thirty-fifth month running, withthe rate of increase rising from the almost stagnant position seen in the previousmonth;
� Manufacturers’ input costs fell for the third month running, as inflationarypressures remained subdued. Average input costs in the service sector rose, but ata very low level. Average rises charged in the service sector rose modestly after afall in the previous two months.
The Lloyds TSB Scotland Business Monitor7 indicated that the total volume ofbusiness recorded by both production and service sector industries rose, albeitmarginally, over the quarter to November. Overall, it was concluded that “theeconomic slowdown was well entrenched before the WTC attacks. However demandhas weakened in major export markets transmitting the effects of the world economicslowdown to Scottish factories.” Furthermore, it reported that business expectationshave declined since the last quarter (June, July and August). For the next 6 months toend of May 2002, 26 per cent of those surveyed expected turnover to fall, 44 per centexpected no change compared to last year, but 30 per cent expected turnover toincrease.
Latest retail sales figures8 show that total sales for Scotland are ahead of those for theUK as a whole for the first time since September 2000. Overall figures for Decembershowed a year-on-year rise of 8.4 per cent, an increase of 0.4 per cent on theNovember figures.
The latest Scottish Chambers of Commerce Business Survey for the fourth quarter of2001, concluded that Scottish businesses had “overstated” the impact of the 11September terrorist attacks. More specifically, the survey concluded that:
� In manufacturing and tourism, optimism was stronger in the fourth quarter than inthe first half of 2001;
� In construction, wholesale and retail distribution, confidence was weaker in thefourth quarter than in the first six months of 2001;
6 Report is based on data from 800 companies in both manufacturing and private sector industries(excludes retail and wholesale businesses).7 This is a postal questionnaire survey carried out every quarter in order to monitor business trends,market conditions, financial factors, and business conditions in the Scottish Economy. A total of 1,601businesses were surveyed.8 Scottish Retail Consortium, 16 January 2002.
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� In tourism, the trend in total demand was similar to that reported in the fourthquarters of 1999 and 2000.
The Fraser of Allander Institute (FAI) released their December forecasts for theScottish economy which take into account the affects of the terrorist attacks. ForecastGDP growth in Scotland for 2001 remained the same as the September 2001 forecastof 0.9 per cent. However, for 2002, FAI revised their GDP forecast down marginallyfrom 1.4 per cent to 1.2 per cent.
3.2 Sectoral Impacts
In the original Report, a number of principal sectors were identified as the most likelyto be affected by the implications associated with the terrorist attacks. These sectors,namely tourism, aviation, North Sea oil and gas, electronics, financial services,inward investment, and exports, will be examined in turn. However, it is clear thatthere is so far very little official data which has been released which will illustrate theimpact of 11 September on the Scottish economy.
The transmission mechanisms through which the terrorist attacks could affect thevarious sectors of the Scottish economy are covered in the original Report. Sincethese have not changed and are still relevant, this report does not repeat them butconcentrates solely on any evidence, either official data or anecdotal, which highlightshow the various sectors of the Scottish economy have been affected.
3.21 Tourism
One of the direct impacts on the tourism sector in Scotland from the terrorist attackshas been the lost revenue from overseas expenditure due to people cancelling theirholidays. This will act to reduce the overall level of tourist expenditure in Scotland.Latest figures are for 2000 and show that overseas tourists spent £792m in Scotland,with UK tourists spending £3,699m. Visitors from the USA represent the largestsingle source of overseas tourism in Scotland, accounting for £189m or 24 per cent offoreign tourism expenditure. Provisional estimates of overseas spend for 2001 shouldbe available by June, with confirmed data available by September. These data willgive an idea of the overall results for 2001, although the effects of the USA attackswill be combined with those of FMD and the overall global economic slowdown.
It is estimated, using the 1998 Input-Output tables, that almost 4,500 jobs in Scotlandwere supported directly by US tourist expenditure, with a further 1,500 jobs supportedindirectly or through the induced effects of the employees spending. 9 Therefore, anydrop in US tourist demand would have a significant effect on the Scottish economy.For example, if visits to Scotland by Americans were to fall by 50 per cent over thenext year, then up to 3,000 Scottish jobs could be affected, either directly orindirectly.
The potential impact can also be estimated by looking at past years’ expenditure inScotland by foreign and domestic tourists, combined with assumptions about thelikely impact on demand post 11 September. Analysis undertaken by the Executive
9 Based on tourist expenditure in 2000.
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and VisitScotland has used this approach to develop a range of estimates of impact forthe period from 11 September to the end of 2001. The central estimate is that thelikely impact of the USA attacks in 2001 will be a loss of around £54m from overseastourist expenditure in Scotland. However, up to £40m of this negative impact may beoffset by an increase in expenditure from domestic tourists who would otherwise havegone abroad, although there is no guarantee that this sum would be spent in thetourism industry.
Following the terrorist attacks, VisitScotland surveyed 1,000 tourism-relatedbusinesses in order to uncover the views of businesses on the impact of the terroristattacks (immediate and longer term) and what actions they planned to take inresponse. Overall, they found that there was an immediate reduction in USA (andgeneral overseas) business in the wake of 11 September, with about 20 per cent ofbusinesses expecting the attacks to have serious effects on their business in the nextyear. However, 25 per cent of businesses expect the attacks to have no impact ontheir business.
The Tourism Action group, which includes the involvement of Scottish Enterprise’sTourism Team, have been on hand to offer support to businesses needing advice.However, feedback suggests that the Network has not had many requests for help.This reflects, to some extent, the fact that events happened at the end of the mainseason, and also that those businesses worst affected (larger hotels, tour operators) areamongst the most professional. As a result, they have been able to manage theirresponse without extensive help.
Various estimates of the impact on international travel have been made at the UKlevel:
• The British Tourist Authority have made an initial estimate that tourism will lose£2.5bn in 2001 (a decrease of 20 per cent) from a combination of Foot and Mouthdisease (£1.5bn) and the USA attacks (£0.8bn)10.
• The Department of Culture, Media and Sport refer to the Gulf War as being thenearest precedent for the type of effect that might be seen following the USAattacks. The Gulf War led to a fall of 22 per cent in the number of USA visitors toUK from 1990 to 1991 (and a fall in spending of 19 per cent). It was 1995 beforeUSA visitor numbers exceeded the 1990 figures.
• The World Tourism Organisation predict that growth in international tourism in2001 will be 1.5 percentage points lower than expected prior to 11 September.However, they anticipate that tourism will readjust (i.e. people will findalternative destinations) in the medium to long term, with growth returning to thepreviously predicted level of 4.1 per cent p.a. until 2020.
3.22 Aviation and Aerospace Industries
Global demand for air travel has fallen significantly since 11 September and it ispossible that passenger numbers could remain depressed for some time (up to 2003).
10 These figures do not add up to the total of £2.5bn due to rounding of the individual cost estimates
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However, recent figures from BAA reveal passenger numbers at Scotland’s threemain airports (Edinburgh, Glasgow and Aberdeen) have been bucking the globaltrend. Total passenger numbers at these three airports increased by 6.8 per cent in theyear to November 2001. This compares with a decline of 0.4 per cent for all BAAairports over the same period. Figures for the individual airports reveal an increase of10.4 per cent for Edinburgh, 4.8 per cent for Glasgow and 4.4 per cent for Aberdeen.These figures compare with a fall of 5.0 per cent for Heathrow over the same period.The majority of the increase in Scotland has come from low cost airlines and furtherexpansion of Scottish services is expected in the near future.
However, it is important to recognise the impact of other factors on total passengernumbers. For example, the difficulties experienced in the rail network in 2001 arelikely to have had a positive impact on total passenger numbers at Scottish airports.
An assessment of the effects of 11 September on the aviation sector was carried outby Scottish Enterprise, in conjuction with Highlands and Islands Enterprise, theScottish Executive, VisitScotland and DTLR. It concludes that the appropriateresponse seems to be a longer term strategic review of support, rather than theprovision of any short-term financial assistance.
Throughout the world, companies in the aviation sector have announced tens ofthousands of redundancies in the wake of the terrorist attacks – partly a direct result ofthe attacks, but also reflecting the longer term restructuring process within theindustry. US airlines have been hit hardest by the attacks: American Airlines has cut20,000 jobs; Continental has cut 12,000 staff; Delta has cut 13,000 jobs; UnitedAirlines has announced 20,000 job losses; US Airways has cut 11,000 jobs; andNorthwest Airlines has announced 10,000 redundancies. European companies havealso been affected by the dramatic downturn in demand for air services (with Sabenafolding and BA, Virgin Atlantic, BM, Alitalia and KLM announcing redundancies).British Airways has announced a further 5,200 job losses since 11 September. It isnot yet clear where the redundancies will occur and what the likely impact will be inScotland. BA is reviewing all its operations and have indicated that routes which didnot contribute to the companies overall profitability would be dropped. Theimmediate speculation was that European short haul routes would be mostsusceptible.
British Airways announced service reductions on a number of its routes in the UK.The main changes which have impacted directly on BA’s Scottish services areEdinburgh/Glasgow to Belfast International which have been withdrawn (mainlybecause of competition from low cost airlines). ScotAirways announced thewithdrawal of its Inverness-Amsterdam, Inverness-London City and Aberdeen-London City services. GO has also announced it will cease to operate its routes fromGlasgow and Edinburgh to Dublin, which will end in March 2002.
There has been a short-term affect on transatlantic routes since 11 September. AirCanada was already considering withdrawing from Scotland prior to the crisis(Glasgow to Toronto was suspended on the 27th of October). American Airlines’service to Chicago is seasonal and was discontinued at the end of October.Continental continues its service to Newark from Glasgow (except on Mondays) buthas put on hold a decision on the proposed Edinburgh – Newark service. Icelandair,
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which has announced a reduction in flights from January 2002, carries a large numberof transfer passengers from Scotland via Reykjavik to the US while, at the same timedelivering numbers of high spending Icelandic shoppers to Scotland. Icelandairannounced, following 11 September, that it was suspending flights from Reykjavik toNew York for two months, although all other US destinations continue to operate. Atthe same time, they have reduced the frequency on the Glasgow to Reykjavik route tofour flights per week compared with the five which operated at this time last year.
Since 11 September, a number of companies have announced redundancies at plantsin Scotland. GE Caledonian, one of the world’s leading aero-repair and engineoverhaul companies, announced 170 job losses at Prestwick in October 2001. BAESystems also announced 219 redundancies at Prestwick in November. Rolls Roycealso announced 410 redundancies in November at Hillington and 40 at East Kilbride.The cuts have come at the end of a thorough review of its business in light of the post-attack slump in aviation demand.
The aviation value chain has clearly been affected in recent months. Redundancieswere reported in Grampian Country Foods in Edinburgh as a result of lost businessfrom airline meals. However, these are also consequences of a more generaleconomic downturn, so it is difficult to ascribe them solely to 11 September.
3.23 North Sea Oil and Gas
Oil prices: Oil prices have fluctuated widely over recent months. The attacks in theUS led to an immediate sharp increase in the price of oil but this was short-lived.Prices have since fallen to their current level of $21 per barrel (7 January), althoughthey have been as low as $16 per barrel and there have been a number of recentfluctuations. The market continues to be extremely uncertain. The fall is due to anumber of factors, including fears of a world-wide recession and, specifically,significantly reduced demand for jet fuel as airlines scale back their schedules.
The price of oil in the short-term is highly dependent on the actions of OPEC. OPEChave a stated commitment to ensure price stability with a target price range of $22-$28 per barrel and, until recently, the organisation has been successful in keepingprices within their target range. During November, OPEC announced that in order toachieve a balance in the oil market it would be necessary to reduce the supply from alloil producers by two million barrels a day. Following commitments by 5 non-OPECproducers to reduce their own output by nearly half a million barrels a day, OPECconfirmed on 28 December 2001 that its members would cut production by anadditional volume of 1.5 million barrels a day, effective 1 January 2002. This bringsthe total reduction in oil supply to 5.5 million barrels a day in the last year. Thisalliance has restored some credibility to OPEC's ability to influence markets and hasincreased oil prices to over $20 per barrel.
Outlook: Oil companies are currently making investment decisions based on anassumed price of $16 per barrel. If prices stay above this level, firms are unlikely tochange their plans. If prices do fall below $16 a barrel then, given the lags between adecision to invest and production actually occurring, plans will depend on futureexpectations of whether the lower price will be sustained. A continued period of lowoil prices could lead to investment decisions, which have been taken but not yet
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implemented, being postponed or cancelled. A number of oil companies - includingShell Expro and BP - have recently announced investment plans for the North Seawhich are not yet in operation.
A fall in the oil price could mean oil companies abandoning fields with marginalreserves. The cost of operating these fields is higher and it may not be worthwhile ifthe oil price were lower. This would lead to a fall in production. Once abandoned, itis possible that these fields would not be returned to.
However, Shell has recently stated that it expects to perform well, despite the globalslowdown and fall in oil prices. Commitment to the North Sea is to be strengthenedand investment in 2002 is expected to increase. An interview with a senior figure inShell in November reported that the then price of $18 a barrel was unlikely to haveany significant impact on exploration and development plans in the North Sea.
3.24 Electronics Sector
The latest Business Strategies Ltd forecasts, published in November, suggest that"further cuts in manufacturing are expected over the next few months, as the domesticeconomy slows and conditions in export markets remain tough. But if global growthstarts to pick up later next year (i.e. 2002), as expected, Scottish manufacturers shouldsee a modest upturn in growth, led by electronics. "
The electronics sector, which is critically dependent on worldwide economic forcesand associated market linkages, is clearly suffering on account of the recent downturnin manufacturing and the global slowdown that is evident. The events of 11September provided a shock to the world economy and will have had an impact on theglobal electronics sector. In Scotland there have been a number of high profile joblosses in the electronics sector throughout 2001. These include redundancies atMotorola, Compaq, Panasonic and NEC.
3.25 Construction and Housing
The latest figures on the construction and housing sectors are summarised in table 3.2below.
Table 3.2: Evidence of short-term effects on Scottish housing market and constructionindustry of the recent terrorist attacks
Evidence CommentsHousing market
1. Nationwide House Price Index, 2001Q4 House price growth at the end of 2001 was strong across most of the UK with theScottish market steadier. A 0.5 per cent decrease (quarter on quarter) wasrecorded for Q4 but over the year prices rose by 4.7 per cent (UK=13.8 per cent).It is unlikely that this price decrease in Scotland is WTC-related. The lower pricegrowth in Scotland was attributed to concern over recent high profile job losses,but steady growth (5 per cent) was expected in 2002. It is clear that stableconditions in (most sectors of) the economy, combined with historically lowmortgage rates, have helped maintain confidence in the market throughout theUK, including Scotland.
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2. Halifax House Price Index, 20001Q4 Very similar verdict to Nationwide. There was small decrease of 0.8 per cent(quarter on quarter) in Scotland in Q4 but prices rose by 5.2 per cent over 2001as a whole and are expected to rise by 5 per cent again in 2002. The overallstability of the economy combined with historically low mortgage rates, are againcited as helping to maintain confidence in the Scottish market as is an approachfrom Scottish housebuyers to seek value for money and to avoid becoming"overstretched".
Construction industry
3. Scottish Chambers Business Survey,2001Q3
Little effect picked up so far. Construction was one of the few sectors in whichoutput was reported to have increased in 2001Q3, and the only one whereemployment had increased. However, all sectors reported reduced confidence.About half of the survey was carried out before September 11, and halfafterwards.
4. UK Construction Trends Survey,2000Q3
Little effect picked up so far. A majority of respondents reported that output hadrisen during 2001 Q3. A majority also expected output to rise in the year to 2002Q3. However a majority also reported that new enquiries had fallen - a possiblesign that activity is faltering.
Upcoming indicators
� SCBS Construction Survey (2001Q4), due February 2002.� UK Construction Trends Survey (2001Q4), due February 2002.� Council of Mortgage Lenders (House prices, mortgage market data for 2001Q4), due late
January 2002.� Construction output data (2001Q3), due February 2002.
3.26 Financial Services
Overall, the financial services sector was back to operating as normal soon after the11 September attacks. Despite much publicity, the industry only suffered short-termeffects and these were not as significant as first suggested in the press. Otherindustries such as aviation have been affected much more by the 11 Septemberattacks.
As noted in Chart 1.2, equity markets regained some confidence after their initialsharp decline, and have now stabilised at a slightly lower level than before the attacks.
One theme which has been noticeable since the attacks is the increase in businesscontingency planning. Financial services firms are openly acknowledging aheightened awareness of business contingency issues, contingency planning anddispersal strategies.
Overall, there are a number of ongoing changes in the financial sector, and a numberof global companies are currently reviewing their operations, some parts of which arelocated in Scotland, while in other cases companies are shedding staff. Two wellpublicised examples are Deutsche Bank and J P Morgan. Further consolidation islikely in the medium term, but this has been a long-term trend towards rationalisationwhich reflects technology advances, cyclical equity markets, and a bear trend whichall pre-dated 11 September.
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In general, trading results which have become available since 11 September havebeen good and none have referred to 11 September as having had a major impact ontheir business. Key players are cautiously optimistic for 2002.
3.27 Inward Investment
Although the level of mobile foreign direct investment enquiries remains below thatof recent years, Scottish Development International (SDI) has seen a slight recoveryfrom the US in recent weeks. This includes new projects as well as ongoingconsolidation and rationalisation proposals. A difficulty in relation to inwardinvestment remains the ongoing reluctance of many US nationals to undertakeinternational air travel (although this too is easing slightly).
SDI’s Field Operations team have postponed a number of planned activities andinitiatives till 2002 e.g. a Biotech FDI initiative; several Software City sales calls andevents; and the launch of the Financial Services Campaign.
There is evidence of mobile projects emerging, in part, as a result of the terroristattacks – particularly in relation to financial services companies seeking locations outwith the major international financial centres, specifically New York, London and, toa lesser extent, Frankfurt.
On a more positive note, the whole area of security – from cybersecurity, electronicidentification and recognition to military and defence is predicted to experiencegrowth. Likewise, biotech firms, especially those engaged in the battle against bio-terrorism are seeing an increase in activities. These could present inward investmentand trade opportunities in the near future.
3.28 Exports
Scottish Enterprise report, on the basis of their contacts with Scottish exporters, thatthere appear to be few significant problems as a direct result of the terrorist attacks on11 September. Scottish Enterprise is ready to offer assistance to any company who ishaving difficulty trading with the US, possibly by helping them diversify into newmarkets. There is some anecdotal evidence from LECs that first-time exporters to theUS have changed their attitudes significantly in light of the attacks. There has beenmuch less fall-off in such sentiment for established exporters (although there is stillthe issue of the more general economic slowdown). In the LEC Network, all LECsare keeping close to their customers to offer any required additional assistance. Thegeneral message is they have not yet seen any significant 11 September effects.
Official Scottish manufactured exports data for the year to 2001 Q3 shows that exportsales increased by 9.4 per cent in real terms. However, export sales decreased by 5.9per cent in real terms in 2001 Q3 compared to the previous quarter. Survey evidencefrom the Bank of Scotland’s report on the Scottish show that manufacturing outputfell for the ninth consecutive month in December, mainly due to order bookdeterioration. However strong domestic demand for consumer goods and an easing inthe deterioration of export orders resulted in the smallest fall in orders for six months.
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Therefore, there is evidence to suggest that a fall in overseas demand has beenpartially offset by the continuing strength of domestic demand.
SDI are now conducting a survey of SCDI exporters, to gauge the effect of 11September on their exporting business. The survey was sent out to 600 knownexporters (320 known exporters to US, 180 who stated that the US was a new targetmarket, and 100 others who export to Muslim countries). This survey should providedata on the value of the effect (positive/negative) of the 11 September attacks; theestimate of time taken to revert to pre-11 September levels; and the degree to whichcosts have increased. The survey is due to be published on 25 January 2002.
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ANNEX ALatest Key Statistics
United Sates
� US GDP contracted by 1.3 per cent for the year to 2001 Q3;� Consumer confidence on the increase in the US:
� US Confederation Board’s index rose in December� University of Michigan Index rose in the four consecutive months to
January 2002
� Federal Reserve cut interest rates in December, leaving them at 1.75 per cent;� Retail sales up by 4.1 per cent in December 2001 compared to December 2000;
United Kingdom
� Treasury forecast growth of 2.25 per cent for 2001;� Consumer confidence increased in November and December;� Interest rates were cut in November, and have since been left at 4 per cent;� Inflation remains within the +/- 1 per cent range around the UK Government’s
target rate of inflation, currently 2.5 per cent;� Retail sales continued to remain strong, with an increase of 8.1 per cent year-on-
year in the run up to Christmas;
Scotland
� Scottish GDP growth in the four quarters to 2001 Q2 was 0.3 per cent;� ILO unemployment remains unchanged over the most recent quarter of September
– November compared with June – August, although it is up over 2001;� Scottish Manufactured Exports for 2001 Q3 showed:
� Export sales increased by 9.4 per cent in real terms in the year to 2001 Q3;� In 2001 Q3, export sales decreased by 5.9 per cent in real terms compared
with the previous quarter.
� Retail sales for December showed a year-on-year rise of 8.4 per cent, an increaseof 0.4 per cent on the November figures.