1. 1.
THE IMPACT OF THE TERRORIST
ATTACKS ON THE SCOTTISH
ECONOMY
AN UPDATE
Scottish Executive
January 24th
, 2002

2. 2.
Contents
Page
Introduction 1
Summary 1
1 Global Economy 2
1.1 Global Economic Developments 2
1.2 Economic Developments in the US 3
1.3 Economic Developments in the Euro Area 5
1.4 Recent Global Forecasts 6
2 UK Economy 7
2.1 Overview of the UK Economy 7
2.2 Impact of the Terrorist Attacks 8
2.3 Prospects and Forecasts for the UK economy 8
3 Scottish Economy 9
3.1 Economic Outlook 9
3.2 Sectoral Impacts 11
3.21 Tourism 11
3.22 Aviation and Aerospace 12
3.23 North Sea Oil and Gas 14
3.24 Electronics Sector 15
3.25 Construction and Housing 15
3.26 Financial Services 16
3.27 Inward Investment 17
3.28 Exports 17
ANNEX A 19

3. 1.
Introduction
Building for the Long-Term: Understanding the Impact of the Terrorist Attacks on the
Scottish Economy, published 4 October 2001, outlined the current situation in the
Scottish, UK and Global economies and highlighted how the terrorist attacks of 11
September might be anticipated to affect those respective economies. As this
document emphasised, the impact of these events on Scotland is inextricably linked to
the manner in which the global economy responds and, in particular, how the US
economy responds. As more than four months have now elapsed since the initial
assessment of the impact of the terrorist attacks, the response of the global economies
and the Scottish Economy should be emerging (see ANNEX A for a summary of the
key economic statistics released since 11 September). This Report aims to update the
recent economic situation and focus on the sectors which were identified in the
original report as being the most affected by the terrorist attacks.
Summary
Whilst compiling this report, it became clear that the hard evidence needed to
determine the impact and response to 11 September attacks is not all available.
Accurate economic data takes time to compile. The global economy, which was
showing 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 be
already in recession. Nearly every economy has been affected by the global
slowdown with growth forecasts throughout the world being continually revised
downwards. This current global slowdown was not caused by the terrorist attacks but
those events did influence the depth of the slowdown and it is still unclear when the
global economy will recover. However, although official data remains mixed, many
forecasters 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. The
comparison of Scottish and UK GDP growth rates in the 4 quarters to 2001Q2 (0.3
per cent and 2.5 per cent respectively) suggests that the slowdown in the world
economy has affected Scotland earlier. Recent forecasts from the Treasury show that
the UK economy as a whole is well placed to face the global economic slowdown
with 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 of
sectors in Scotland identified as being most affected by the terrorist attacks.
Monitoring the post-11 September response at the sectoral level remains difficult- the
required data are simply not yet available. Some sectors, for example, electronics, are
suffering 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 the
consequences of 11 September. However, much of the key data relating to the crucial
period (2001 Q4 and thereafter) has yet to be released.

4. 2.
1 Global Economy
1.1 Global Economic Developments
The global economy was already showing signs of increasing fragility even before the
terrorist attacks in the US on 11 September. The three largest economies, US, Japan
and the Euro Area, were all experiencing slowing growth, with few regions
throughout the world escaping this global slowdown. The Terrorist Attacks on 11
September acted to deepen rather than cause the global slowdown.
There are a number of indicators which have been released post-11 September which
illustrate how the global economy has been affected by the terrorist attacks. These
include GDP forecasts for 2001 and 2002, consumer confidence, unemployment
figures, along with information on the financial markets. However it is important to
note 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 a
significant decline in consumer confidence throughout the developed world.
Although this initially started in the US, by October it had spread to the UK (see
Chart 1.1).
However, it is clear that the attacks contributed to the significant decline in consumer
confidence in the months immediately following the attacks. Despite the dramatic fall
in confidence in the latter part of 2001, there is evidence to suggest that confidence
could be on the increase again. Small increases in consumer confidence in November
and 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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US (left scale) UK (right scale)Source: UK GfK, US Confederation Board
Note: Indicators are not directly comparable across countries.

5. 3.
may have been reached and that consumer confidence could now be on an upward
trend.
Financial markets were hit hard throughout 2001 and suffered even more in the
immediate aftermath of the terrorist attacks on 11 September. However, since the end
of September, the markets have generally recovered to levels prior to the attacks (see
chart 1.2).
The main policy response to the global slowdown and, latterly, the terrorist attacks on
the US, has been the easing of macroeconomic policies. Global interest rates have
been falling throughout 2001 and, in particular, following the terrorist attacks, leaving
them at historically low levels. This easing, along with the gradual abatement of oil
prices and of other shocks that have contributed to the slowdown, should help support
activity and confidence in the periods ahead. With inflationary pressures now under
control in many of the advanced economies, many commentators predict further cuts
in 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 bigger
contraction than the 0.4 per cent previously forecast by the US government. It will
not be until the release of the final estimate1
for 2001 Q4 GDP figure (due on the 28
March) that the size of the impact of the terrorist attacks on the US economy will
become clearer.
1
Initial estimates of 2001 Q4 GDP will be made on 31 January and 28 February prior to the final
estimate.
Chart 1.2: Financial Markets, FTSE 100 & Dow Jones Industrial Average (DJIA)
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DJIA (right scale) FTSE 100 (left scale)Source: FTSE 100 and Dow Jones
Note: These two series are not directly comparable.

6. 4.
The National Bureau of Economic Research2
announced in late November that the US
economy had officially gone into recession in March 2001. However, this is not
based on the more commonly used definition of a recession – two successive quarters
of 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 IMF
claim that the current slowdown in the US economy is similar to that experienced in
previous peak-to-trough downturns, therefore concluding that the US downturn
should 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 the
attacks. The US Congress has already passed $15bn for airlines, $40bn for
emergency spending, and $38bn in tax rebates. In addition, President Bush requested
an additional $75bn in spending to help bolster the economy. This fiscal stimulus is
said to boost GDP by 1.5 per cent.
Consumer confidence showed signs of recovery in the latter months of the year, with
the University of Michigan index for consumer sentiment increasing in four
successive months to January – it’s highest for a year. Similarly, the US
Confederation Board’s Index for consumer confidence (see chart 1.1) showed a slight
increase in December, the first increase since June 2001. However, movements in
consumer confidence in the coming months will depend on the prospects for
employment and income within the US economy. A rise in unemployment will act to
reduce consumer confidence even further.
The Federal Reserve continued to cut interest rates in the US throughout 2001. The
most 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 November
2001.
Chart 1.3: US GDP Growth
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Source: US Bureau of Economic Analysis

7. 5.
points on 17 September, 2 October and 6 November, leaving the base rate at 2 per
cent. 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 the
month of December were down just 0.1 per cent on the previous month – much less
than the 1.4 per cent drop that was forecast by commentators. This also represents a
4.1 per cent increase on sales in December 2000.
It is important to note that both monetary and fiscal measures will take some time
before they impact on the US economy. However, it is expected that towards the
middle of 2002 the US economy will start to reap the benefits from both the fiscal and
monetary policy actions.
Alan Greenspan, the chairman of the US Federal Reserve, recently claimed that
although the US economy is showing signs of recovery, there are still significant risks
in the short run. A contrary view emerged from a meeting of central bankers from 10
of the richest countries in the world, where it was concluded that the global recovery
appears to be underway. There is clearly still a great deal of uncertainty over the
timing 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 global
slowdown continued to spread. A first estimate of quarter-on-quarter real GDP
growth was close to zero in the third quarter of 2001.3
Economic activity appears to
have remained subdued in the fourth quarter of 2001 as a result of continued
weakness in domestic and external demand, along with an overall high degree of
uncertainty.
The Euro continues to remain weak against the US dollar (see chart 1.4) despite a
rally following the introduction of Euro notes and coins on 1 January 2002. The
reasons behind the general weakness of the Euro are still not fully understood.
However, some commentators believe that differing economic performances between
the Euro area and the US, along with portfolio adjustments as a result of the advent of
the Euro, have played an important role.
3
Monthly Bulletin, December 2001, European Central Bank.

8. 6.
Unemployment in the Euro area remained fairly stable over the first three quarters of
2001, after the steady decline observed since 1997. ILO unemployment, the
standardised rate of unemployment for the Euro area, has remained around 8.4 per
cent between June and October.4
1.4 Recent Global Forecasts
The outlook for the world economy was uncertain prior to the terrorist attacks, with
this uncertainty increasing following 11 September. Forecasters have continued to
revise downwards their forecasts for many of the advanced economies, mainly
reflecting the expected sharp downturn in the US economy, alongside further
weakening in the Japanese economy. Overall, it was believed that growth in the
world economy would fall below recent levels for 2001 and 2002, but that a severe
downturn would be avoided. However, the terrorist attacks on 11 September and the
resultant effects on the global economy, have dampened the outlook for the near
future, with a steeper global downturn than previously predicted.
The IMF5
revised their September forecasts downwards following the terrorist
attacks. 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 all
major economies as few countries or regions have been left unaffected by the global
economic slowdown. The OECD forecast (November) real GDP growth for the
OECD area for 2001 at 1.0 per cent, down from 2.0 per cent from their forecast in
June. 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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Euro/GBP Euro/USDSource: oanda.com

9. 7.
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 the
downward revisions in world economic growth forecasts, it is important to note that
forecasts were being revised downwards prior to 11 September.
Overall, it is clear that world economic growth was declining prior to the terrorist
attacks, and has since fallen further. Commentators are still unsure of the timing of
the global economic recovery; however it is not expected to take place before the
second 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 economic
slowdown. However despite the global economy facing an uncertain future, the UK
economy has continued to perform strongly. Forecasters predict that the UK will be
the fastest growing G7 country in 2001.
The terrorist attacks on the US on 11 September has led to a fall in business and
consumer confidence throughout the advanced economies (refer to chart 1.1).
Business confidence has fallen since 11 September, while external demand has
weakened, causing firms to postpone investment. The fall in consumer confidence
has 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 business
investment.
The Monetary Policy Committee – charged with setting interest rates in order to
achieve the UK Government’s inflation target of 2.5 per cent – has responded to the
slowdown in the global economy and the terrorist attacks in the US. Consequently,
Table 1.1: World Output Trends and Projections, Percentage Growth, 2000-2002
2000 2001 2002 2001 2002 2001 2002
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
September 2001 Projections
(May 2001 in brackets)
Latest IMF
Projections
(November 2001)
Difference from Nov
updates and May
2001 projections
Source: IMF World Economic Outlook, September 2001, IMF Statement on the Global Economic
Situation, 15 November 2001.

10. 8.
interest rates have continued to fall throughout 2001 from a high of 6 per cent in
January, to 4 per cent in November. The most significant fall in interest rates
occurred 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 interest
rates unchanged at 4 per cent in December and January, with the latter decided
following the MPC meeting on 10 January.
Inflationary pressures in the UK remain under control as the RPIX for December was
1.9 per cent, up from 1.8 per cent in November, remaining within the +/- 1 per cent
range around UK Government’s target rate for inflation. It is important to note that
the MPC remit regards deviations below the target rate to be just as undesirable as
deviations above the target rate. Therefore, the MPC has no incentive to keep interest
rates 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 the
global slowdown and, therefore, will have had an impact on the UK economy. As a
direct result of the attacks, the UK Government has announced the following:
An additional £100 million has been made available to the Ministry of Defence
for new equipment and immediate operational requirements;
To tackle terrorist finance and to fund anti-terrorist measures, an extra £20 million
has been set aside;
To fund the need for additional policing since 11 September, a further £30 million
has been made available to the Metropolitan and other police forces.
The terrorist attacks and the subsequent military action has appeared not to have
dampened consumer expenditure. It was reported by the British Retail Consortium on
8 January that trading in the shops during the run-up to Christmas and the first few
days of the sales, was the best for a holiday season in the last five years, with sales up
8.1 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 for
the UK, with the economy expected to grow strongly in 2001 at a rate of 2.25 per
cent. Therefore, despite the global slowdown and increasing uncertainty surrounding
world trade, the UK Government’s pursuit of economic stability has left the UK
economy well placed. Table 1.2 outlines both the PBR 2001 forecasts for the UK
economy, and independent forecasts contained in the Treasury’s December edition of
“Forecasts for the UK Economy”.

11. 9.
The OECD forecasts the UK economy will grow at 2.3 per cent in 2001, falling to 1.7
per cent in 2002, before recovering in 2003 to grow at 2.5 per cent. These forecasts
appear more impressive when compared to forecast growth for the OECD area: 1.0
per cent in 2001 and 2002. However, by 2003, the OECD predicts that the OECD
area 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 terrorist
attacks will have, both in the short term and over a sustained period. Given the
importance of international trade and investment flows for the economy, much clearly
depends on the prospects for the global trading environment, particularly the recovery
of business and consumer confidence in the USA. It is still too early to predict with
any certainty the precise impact on specific sectors in Scotland, such as tourism,
aviation and electronics, though the multiplier effect from job losses in these sectors
could be significant. In general, however, with the continuing strength of the UK
economy, and Scotland’s reliance on UK markets, the Scottish economy is relatively
well placed.
The available evidence indicates that the economy was slowing down prior to 11
September. The comparison of Scottish and UK GDP growth rates in the 4 quarters
to 2001 Q2 (0.3 per cent and 2.5 per cent, respectively) suggests that the slowdown in
the world economy had affected Scotland earlier. As usual, there was a variable
performance between sectors, with some – notably financial services and real estate
and business services – continuing to perform strongly. By contrast, negative growth
was recorded across much of manufacturing, with total output in the sector having
fallen in five successive quarters.
The latest official statistics on the labour market (released on 16 January) continue to
paint a fairly mixed picture. Although ILO unemployment remains unchanged over
the most recent quarter of September-November compared with June-August, it is up
over 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
Treasury
Independent
Forecasts
Treasury
Independent
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

12. 10.
turning point in early 2001, although overall unemployment is at historically low
levels.
Although there is a lack of official data on the Scottish economy since the terrorist
attacks, there are various surveys available. The Bank of Scotland’s report on the
Scottish6
economy in December concluded that:
Manufacturing output fell in December for the ninth consecutive month, although
the rate of decline eased from the three year high recorded in November. Service
sector activity rose at its highest rate since September;
Employment fell for the tenth successive month in manufacturing. The rate at
which jobs were lost also increased to the highest point in the survey’s four-year
history. Service sector employment grew for the thirty-fifth month running, with
the rate of increase rising from the almost stagnant position seen in the previous
month;
Manufacturers’ input costs fell for the third month running, as inflationary
pressures remained subdued. Average input costs in the service sector rose, but at
a very low level. Average rises charged in the service sector rose modestly after a
fall in the previous two months.
The Lloyds TSB Scotland Business Monitor7
indicated that the total volume of
business recorded by both production and service sector industries rose, albeit
marginally, over the quarter to November. Overall, it was concluded that “the
economic slowdown was well entrenched before the WTC attacks. However demand
has weakened in major export markets transmitting the effects of the world economic
slowdown to Scottish factories.” Furthermore, it reported that business expectations
have declined since the last quarter (June, July and August). For the next 6 months to
end of May 2002, 26 per cent of those surveyed expected turnover to fall, 44 per cent
expected no change compared to last year, but 30 per cent expected turnover to
increase.
Latest retail sales figures8
show that total sales for Scotland are ahead of those for the
UK as a whole for the first time since September 2000. Overall figures for December
showed a year-on-year rise of 8.4 per cent, an increase of 0.4 per cent on the
November figures.
The latest Scottish Chambers of Commerce Business Survey for the fourth quarter of
2001, concluded that Scottish businesses had “overstated” the impact of the 11
September terrorist attacks. More specifically, the survey concluded that:
In manufacturing and tourism, optimism was stronger in the fourth quarter than in
the first half of 2001;
In construction, wholesale and retail distribution, confidence was weaker in the
fourth 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 1,601
businesses were surveyed.
8
Scottish Retail Consortium, 16 January 2002.

13. 11.
In tourism, the trend in total demand was similar to that reported in the fourth
quarters of 1999 and 2000.
The Fraser of Allander Institute (FAI) released their December forecasts for the
Scottish economy which take into account the affects of the terrorist attacks. Forecast
GDP growth in Scotland for 2001 remained the same as the September 2001 forecast
of 0.9 per cent. However, for 2002, FAI revised their GDP forecast down marginally
from 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 likely
to 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 that
there is so far very little official data which has been released which will illustrate the
impact of 11 September on the Scottish economy.
The transmission mechanisms through which the terrorist attacks could affect the
various sectors of the Scottish economy are covered in the original Report. Since
these have not changed and are still relevant, this report does not repeat them but
concentrates solely on any evidence, either official data or anecdotal, which highlights
how 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 attacks
has been the lost revenue from overseas expenditure due to people cancelling their
holidays. 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 largest
single source of overseas tourism in Scotland, accounting for £189m or 24 per cent of
foreign tourism expenditure. Provisional estimates of overseas spend for 2001 should
be available by June, with confirmed data available by September. These data will
give an idea of the overall results for 2001, although the effects of the USA attacks
will 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 Scotland
were supported directly by US tourist expenditure, with a further 1,500 jobs supported
indirectly or through the induced effects of the employees spending. 9
Therefore, any
drop 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 the
next year, then up to 3,000 Scottish jobs could be affected, either directly or
indirectly.
The potential impact can also be estimated by looking at past years’ expenditure in
Scotland by foreign and domestic tourists, combined with assumptions about the
likely impact on demand post 11 September. Analysis undertaken by the Executive
9
Based on tourist expenditure in 2000.

14. 12.
and VisitScotland has used this approach to develop a range of estimates of impact for
the period from 11 September to the end of 2001. The central estimate is that the
likely impact of the USA attacks in 2001 will be a loss of around £54m from overseas
tourist expenditure in Scotland. However, up to £40m of this negative impact may be
offset by an increase in expenditure from domestic tourists who would otherwise have
gone abroad, although there is no guarantee that this sum would be spent in the
tourism industry.
Following the terrorist attacks, VisitScotland surveyed 1,000 tourism-related
businesses in order to uncover the views of businesses on the impact of the terrorist
attacks (immediate and longer term) and what actions they planned to take in
response. Overall, they found that there was an immediate reduction in USA (and
general overseas) business in the wake of 11 September, with about 20 per cent of
businesses expecting the attacks to have serious effects on their business in the next
year. However, 25 per cent of businesses expect the attacks to have no impact on
their business.
The Tourism Action group, which includes the involvement of Scottish Enterprise’s
Tourism 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 main
season, and also that those businesses worst affected (larger hotels, tour operators) are
amongst the most professional. As a result, they have been able to manage their
response without extensive help.
Various estimates of the impact on international travel have been made at the UK
level:
• 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 Mouth
disease (£1.5bn) and the USA attacks (£0.8bn)10
.
• The Department of Culture, Media and Sport refer to the Gulf War as being the
nearest precedent for the type of effect that might be seen following the USA
attacks. The Gulf War led to a fall of 22 per cent in the number of USA visitors to
UK from 1990 to 1991 (and a fall in spending of 19 per cent). It was 1995 before
USA visitor numbers exceeded the 1990 figures.
• The World Tourism Organisation predict that growth in international tourism in
2001 will be 1.5 percentage points lower than expected prior to 11 September.
However, they anticipate that tourism will readjust (i.e. people will find
alternative destinations) in the medium to long term, with growth returning to the
previously 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 is
possible 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

15. 13.
However, recent figures from BAA reveal passenger numbers at Scotland’s three
main airports (Edinburgh, Glasgow and Aberdeen) have been bucking the global
trend. Total passenger numbers at these three airports increased by 6.8 per cent in the
year to November 2001. This compares with a decline of 0.4 per cent for all BAA
airports over the same period. Figures for the individual airports reveal an increase of
10.4 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 further
expansion of Scottish services is expected in the near future.
However, it is important to recognise the impact of other factors on total passenger
numbers. For example, the difficulties experienced in the rail network in 2001 are
likely 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 out
by Scottish Enterprise, in conjuction with Highlands and Islands Enterprise, the
Scottish Executive, VisitScotland and DTLR. It concludes that the appropriate
response seems to be a longer term strategic review of support, rather than the
provision of any short-term financial assistance.
Throughout the world, companies in the aviation sector have announced tens of
thousands of redundancies in the wake of the terrorist attacks – partly a direct result of
the attacks, but also reflecting the longer term restructuring process within the
industry. US airlines have been hit hardest by the attacks: American Airlines has cut
20,000 jobs; Continental has cut 12,000 staff; Delta has cut 13,000 jobs; United
Airlines has announced 20,000 job losses; US Airways has cut 11,000 jobs; and
Northwest Airlines has announced 10,000 redundancies. European companies have
also been affected by the dramatic downturn in demand for air services (with Sabena
folding and BA, Virgin Atlantic, BM, Alitalia and KLM announcing redundancies).
British Airways has announced a further 5,200 job losses since 11 September. It is
not yet clear where the redundancies will occur and what the likely impact will be in
Scotland. BA is reviewing all its operations and have indicated that routes which did
not contribute to the companies overall profitability would be dropped. The
immediate speculation was that European short haul routes would be most
susceptible.
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 are
Edinburgh/Glasgow to Belfast International which have been withdrawn (mainly
because of competition from low cost airlines). ScotAirways announced the
withdrawal of its Inverness-Amsterdam, Inverness-London City and Aberdeen-
London City services. GO has also announced it will cease to operate its routes from
Glasgow and Edinburgh to Dublin, which will end in March 2002.
There has been a short-term affect on transatlantic routes since 11 September. Air
Canada 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) but
has put on hold a decision on the proposed Edinburgh – Newark service. Icelandair,

16. 14.
which has announced a reduction in flights from January 2002, carries a large number
of transfer passengers from Scotland via Reykjavik to the US while, at the same time
delivering numbers of high spending Icelandic shoppers to Scotland. Icelandair
announced, following 11 September, that it was suspending flights from Reykjavik to
New York for two months, although all other US destinations continue to operate. At
the same time, they have reduced the frequency on the Glasgow to Reykjavik route to
four 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 plants
in Scotland. GE Caledonian, one of the world’s leading aero-repair and engine
overhaul companies, announced 170 job losses at Prestwick in October 2001. BAE
Systems also announced 219 redundancies at Prestwick in November. Rolls Royce
also 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. Redundancies
were reported in Grampian Country Foods in Edinburgh as a result of lost business
from airline meals. However, these are also consequences of a more general
economic 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 the
US 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), although
they have been as low as $16 per barrel and there have been a number of recent
fluctuations. The market continues to be extremely uncertain. The fall is due to a
number 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. OPEC
have 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 keeping
prices within their target range. During November, OPEC announced that in order to
achieve a balance in the oil market it would be necessary to reduce the supply from all
oil producers by two million barrels a day. Following commitments by 5 non-OPEC
producers to reduce their own output by nearly half a million barrels a day, OPEC
confirmed on 28 December 2001 that its members would cut production by an
additional volume of 1.5 million barrels a day, effective 1 January 2002. This brings
the total reduction in oil supply to 5.5 million barrels a day in the last year. This
alliance has restored some credibility to OPEC's ability to influence markets and has
increased oil prices to over $20 per barrel.
Outlook: Oil companies are currently making investment decisions based on an
assumed price of $16 per barrel. If prices stay above this level, firms are unlikely to
change their plans. If prices do fall below $16 a barrel then, given the lags between a
decision to invest and production actually occurring, plans will depend on future
expectations of whether the lower price will be sustained. A continued period of low
oil prices could lead to investment decisions, which have been taken but not yet

17. 15.
implemented, being postponed or cancelled. A number of oil companies - including
Shell Expro and BP - have recently announced investment plans for the North Sea
which are not yet in operation.
A fall in the oil price could mean oil companies abandoning fields with marginal
reserves. The cost of operating these fields is higher and it may not be worthwhile if
the oil price were lower. This would lead to a fall in production. Once abandoned, it
is possible that these fields would not be returned to.
However, Shell has recently stated that it expects to perform well, despite the global
slowdown and fall in oil prices. Commitment to the North Sea is to be strengthened
and investment in 2002 is expected to increase. An interview with a senior figure in
Shell in November reported that the then price of $18 a barrel was unlikely to have
any 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 domestic
economy slows and conditions in export markets remain tough. But if global growth
starts to pick up later next year (i.e. 2002), as expected, Scottish manufacturers should
see a modest upturn in growth, led by electronics. "
The electronics sector, which is critically dependent on worldwide economic forces
and associated market linkages, is clearly suffering on account of the recent downturn
in manufacturing and the global slowdown that is evident. The events of 11
September provided a shock to the world economy and will have had an impact on the
global electronics sector. In Scotland there have been a number of high profile job
losses in the electronics sector throughout 2001. These include redundancies at
Motorola, Compaq, Panasonic and NEC.
3.25 Construction and Housing
The latest figures on the construction and housing sectors are summarised in table 3.2
below.
Table 3.2: Evidence of short-term effects on Scottish housing market and construction
industry of the recent terrorist attacks
Evidence Comments
Housing market
1. Nationwide House Price Index, 2001Q4 House price growth at the end of 2001 was strong across most of the UK with the
Scottish market steadier. A 0.5 per cent decrease (quarter on quarter) was
recorded 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 price
growth 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 stable
conditions in (most sectors of) the economy, combined with historically low
mortgage rates, have helped maintain confidence in the market throughout the
UK, including Scotland.

18. 16.
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 2001
as a whole and are expected to rise by 5 per cent again in 2002. The overall
stability of the economy combined with historically low mortgage rates, are again
cited as helping to maintain confidence in the Scottish market as is an approach
from 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 which
output was reported to have increased in 2001Q3, and the only one where
employment had increased. However, all sectors reported reduced confidence.
About half of the survey was carried out before September 11, and half
afterwards.
4. UK Construction Trends Survey,
2000Q3
Little effect picked up so far. A majority of respondents reported that output had
risen during 2001 Q3. A majority also expected output to rise in the year to 2002
Q3. However a majority also reported that new enquiries had fallen - a possible
sign 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 the
11 September attacks. Despite much publicity, the industry only suffered short-term
effects and these were not as significant as first suggested in the press. Other
industries such as aviation have been affected much more by the 11 September
attacks.
As noted in Chart 1.2, equity markets regained some confidence after their initial
sharp 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 business
contingency planning. Financial services firms are openly acknowledging a
heightened awareness of business contingency issues, contingency planning and
dispersal strategies.
Overall, there are a number of ongoing changes in the financial sector, and a number
of global companies are currently reviewing their operations, some parts of which are
located in Scotland, while in other cases companies are shedding staff. Two well
publicised examples are Deutsche Bank and J P Morgan. Further consolidation is
likely in the medium term, but this has been a long-term trend towards rationalisation
which reflects technology advances, cyclical equity markets, and a bear trend which
all pre-dated 11 September.

19. 17.
In general, trading results which have become available since 11 September have
been good and none have referred to 11 September as having had a major impact on
their business. Key players are cautiously optimistic for 2002.
3.27 Inward Investment
Although the level of mobile foreign direct investment enquiries remains below that
of recent years, Scottish Development International (SDI) has seen a slight recovery
from the US in recent weeks. This includes new projects as well as ongoing
consolidation and rationalisation proposals. A difficulty in relation to inward
investment remains the ongoing reluctance of many US nationals to undertake
international air travel (although this too is easing slightly).
SDI’s Field Operations team have postponed a number of planned activities and
initiatives till 2002 e.g. a Biotech FDI initiative; several Software City sales calls and
events; and the launch of the Financial Services Campaign.
There is evidence of mobile projects emerging, in part, as a result of the terrorist
attacks – particularly in relation to financial services companies seeking locations out
with the major international financial centres, specifically New York, London and, to
a lesser extent, Frankfurt.
On a more positive note, the whole area of security – from cybersecurity, electronic
identification and recognition to military and defence is predicted to experience
growth. Likewise, biotech firms, especially those engaged in the battle against bio-
terrorism are seeing an increase in activities. These could present inward investment
and trade opportunities in the near future.
3.28 Exports
Scottish Enterprise report, on the basis of their contacts with Scottish exporters, that
there appear to be few significant problems as a direct result of the terrorist attacks on
11 September. Scottish Enterprise is ready to offer assistance to any company who is
having difficulty trading with the US, possibly by helping them diversify into new
markets. There is some anecdotal evidence from LECs that first-time exporters to the
US have changed their attitudes significantly in light of the attacks. There has been
much less fall-off in such sentiment for established exporters (although there is still
the issue of the more general economic slowdown). In the LEC Network, all LECs
are keeping close to their customers to offer any required additional assistance. The
general 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 export
sales increased by 9.4 per cent in real terms. However, export sales decreased by 5.9
per cent in real terms in 2001 Q3 compared to the previous quarter. Survey evidence
from the Bank of Scotland’s report on the Scottish show that manufacturing output
fell for the ninth consecutive month in December, mainly due to order book
deterioration. However strong domestic demand for consumer goods and an easing in
the deterioration of export orders resulted in the smallest fall in orders for six months.

20. 18.
Therefore, there is evidence to suggest that a fall in overseas demand has been
partially offset by the continuing strength of domestic demand.
SDI are now conducting a survey of SCDI exporters, to gauge the effect of 11
September on their exporting business. The survey was sent out to 600 known
exporters (320 known exporters to US, 180 who stated that the US was a new target
market, and 100 others who export to Muslim countries). This survey should provide
data on the value of the effect (positive/negative) of the 11 September attacks; the
estimate of time taken to revert to pre-11 September levels; and the degree to which
costs have increased. The survey is due to be published on 25 January 2002.

21. 19.
ANNEX A
Latest 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 increase
of 0.4 per cent on the November figures.