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Scottish Economic Report: March 2004
3.3 Sectoral Analysis
3.3.1 Financial Services
As one of the most essential and dynamic elements of Scotland's economy, the financial services sector continues to perform robustly. Growth of 1.5 per cent over the quarter to 2003 Q3 was consistent with the quarterly average of around 1.8 per cent since 1996 Q1. Over the four quarters to Q3 output rose by 4.1 per cent. Financial services now contribute 4.7 per cent of total GDP in Scotland. Within financial services, banking remains the strongest component and accounts for nearly half of all financial service activity. Output in banking rose by 2.0 per cent in 2003 Q3 and by 6.1 per cent over the four quarters to 2003 Q3 as seen in Chart 3.5.
The number of jobs in the financial services sector has grown steadily in the last few years, with only a slight fall recorded in 2003. There are 100,800 people employed in the sector (Quarterly Employee Jobs - Spring quarter 2003). This represents an increase of 30.4 per cent since spring 1993 and the sector now accounts for 4.5 per cent of the total number of employee jobs (3.7 per cent in spring 1993).
Scotland's position at the centre of the European and UK financial markets is supported by a strong partnership between the Executive and the private sector.
The newly formed Financial Services Strategy Group brings together government with the sector's major firms, representative groups and trade unions and aims to develop and deliver a shared vision and strategy for the sector.
3.3.2 Tourism
The last 20 years has seen strong growth in world tourism - averaging around 4 per cent per year. Although 2001-02 saw a small fall as a result of the events that year, followed by the Gulf war and the impact of SARS, the pattern of international growth is expected to recover quickly, back to around 4 per cent per annum from 2004/5 onwards. Europe is the most visited tourist region in the world, with the highest tourism density. Tourism is one of the fastest growing economic sectors in the European economy, and overall activity is expected to double during the next 20-25 years.
The Scottish Executive is currently developing a methodology that will enable the gross value added contribution which tourism makes to Scottish GDP to be measured. This work is scheduled for completion by the end of 2004. Gross tourism revenues are, in the meantime, used as an indicator of tourism's importance to Scotland. Although overseas visitors only account for 9 per cent of trips, they spend more than UK residents, accounting for 17 per cent of spending.
The UK and Scottish tourism sectors grew steadily in step with the global tourism market for many years until 1997, when gross tourism spend in Scotland reached 5.1 billion (2002 prices). From that point, revenues declined to 4.2 billion in 2001, a decline experienced throughout the UK, although global tourism growth was maintained until 2001. Since 2001, Scottish revenues have recovered, totalling 4.5 billion in 2002 (see Chart 3.6 overleaf). Revenue growth in 2003 looks likely to outpace that achieved in 2002.
Tourism is one of Scotland's biggest business sectors, and businesses in industries that typically serve tourists (such as hotels, restaurants, museums) account directly for some 216,000 jobs, or under than 9 per cent of total employment (See Chart 3.7 overleaf). However most of the industries included in the definition of tourist related industries tend to have higher than average proportions of part-time workers. Indeed, half of those employed in 2002 worked on a part time basis, so a fairer comparison might be to look at full time equivalents (FTEs). On this basis the industry employs some 160,000 or around 7_ per cent of the Scottish FTE workforce. Regardless of whether we consider persons employed or FTEs, tourism is undoubtedly an important employer in many rural areas. In Perthshire, for example, tourism provides nearly 15 per cent of employment.
However, the sector is very diverse and fragmented, and its 27,000 businesses are mainly very small SMEs in a range of sub-sectors such as accommodation of all kinds, visitor attractions, retail outlets and restaurants. Figures from the 2001 Annual Business Inquiry show that tourism related industries 2 are characterised by small units in terms of employment, with 97 per cent of units employing less than 50 people. These same small units account for around 70 per cent of turnover and gross value added.
The recent publication by the Office for National Statistics of the final results of the International Passenger Survey for 2002 provides the opportunity to present tourism statistics in the format of a balance sheet of inward and outbound flows.
Table 3.2 shows that the number of visits to Scotland in 2002 exceeded the number of visits by Scots to the rest of the UK and overseas: there were 10.9 million inbound visits and 9.5 million outbound visits. However, because outbound visits tend to last longer, the balance for bed nights and expenditure is slightly tipped in favour of outbound travel, i.e. Scotland has a small balance of tourism payments deficit.
The results clearly illustrate the importance of tourism for Scotland. Scotland can in broad terms balance inbound and outbound tourism, while for England losses are much greater than gains. This is borne out by the UK figures which show two and a half times more outward than inward visits. In terms of expenditure, Scotland's tourism trade is more or less balanced, while the UK sees over two times more money flowing out than flowing in.
Final figures for 2003 for tourism trips and expenditure are not yet available, though all the indications are that last year was another strong year for the industry. Over 90 per cent of visitors to Scotland are from other parts of the UK and these domestic visitors account for over 80 per cent of all tourist expenditure in Scotland. Whilst the number of overseas visitors to Scotland is still showing a slight decline, this is offset by domestic tourism which continues to show a significant increase in spend.
Figures for the year to July 2003 show that UK tourists to Scotland spent 2.1 billion - an increase of 10 per cent on the comparative period for 2002. Other indicators tend to confirm that overall, Scottish tourism continued to grow last year. Occupancy figures for hotels for the January to October period were marginally up on the comparative 2002 period, while the Visitor Attractions Barometer registered a 2.6 per cent increase over January to September compared to the same period in 2002. Successive Scottish Chambers' Business Survey (SCBS) results in 2003 confirm that last year was a good year for Scottish tourism. Indeed the 2003 Q4 visitor figures were the best 4 th quarter figures since 1997, although overseas demand remained weak.
The USA is the country which provides the largest number of overseas visitors to Scotland and the weakness of the dollar and the continuing fears about terrorism have played their part in the recent downward trend in overseas visitor numbers. UK tourists are continuing to visit Scotland in ever increasing numbers and the SCBS continues to report difficulties in recruiting suitable staff to cope with the increasing demand.
3.3.3 Manufacturing
In common with most developed nations, the proportion of national output and employment accounted for by Scotland's manufacturing sector has declined over the last few decades. However, manufacturing is still a hugely significant sector of the Scottish economy, contributing around one-fifth of GDP.
Manufacturing output declined by 0.6 per cent in the third quarter of 2003, and by almost 4 per cent between the years ending September 2002 and September 2003. This means that sectoral output has now declined in fourteen consecutive quarters. UK manufacturing output increased by 0.2 per cent in the third quarter, though it decreased by 0.7 per cent in comparisons between the two years.
One of the major recent factors in this decline has been the downturn in the Electrical and Instrument Engineering (E&IE) sector (see Chart 3.8). This decline was part of the general global economic slowdown and the global restructuring of this sector. The markets for many electrical goods, such as PCs and mobile phones, have also been approaching maturity, making cost an increasingly important deciding factor in assembly operations. The importance of the sector to the Scottish economy meant that these developments had a significant effect on total manufacturing output in the second half of 2001, 2002 and the first half of 2003.
The manufacturing sector is a major source of Scotland's exports. According to the recent Global Connections Survey, manufacturing exports were worth over 14 billion in 2002, over three-quarters of the total for Scotland. This survey also underlines the importance of E&IE to Scotland's economy; as the sector contributed almost half of Scotland's manufactured exports and over a third of total exports in 2002.
According to the Quarterly Employee Jobs series, the manufacturing sector in Scotland employed approximately 267,400 people in September 2003 - around 12 per cent of the total workforce. According to this measure, manufacturing
employment decreased by almost 6 per cent in year on year comparisons, while the overall decline in total employment was less than 1 per cent over the same period.
3.3.4 Construction
GDP data for the third quarter of 2003 revealed that the construction sector had performed relatively well. Output had increased by 2.7 per cent on the previous quarter and by 4.4 per cent when year on year comparisons were made. The sector's UK output grew by 2 per cent in the third quarter, and by 6.1 per cent in year on year comparisons.
According to the ONS Labour Force Survey, the sector employed 200,400 people in Scotland in Autumn 2003. This represented over 8 per cent of total employment in Scotland.
Independent commentators have highlighted several reasons for output growth such as was witnessed in the 2003 Q2. The Fraser of Allander Institute's Quarterly Economic Commentary identified Public Private Partnership (PPP) projects, housing demand and planned investment in transport as being significant drivers of output growth. It was noted that delays in some projects had adversely affected the sector in recent times.
Overall, the short term outlook for the sector appears relatively optimistic. Independent surveys suggest that the sector is relatively buoyant, and is emerging from its recent difficulties. The Scottish Chambers' Business Survey for 2003 Q4 reported positive expectations of future orders, work in progress and employment, though noted some concerns about skill shortages in some areas. There are expectations among forecasters that employment and GDP will increase in 2004 and 2005. On balance, the sector's prospects in both the short and medium term are encouraging.
3.3.5 North Sea Oil and Gas
DTI figures suggest that oil production from September to November 2003 was 12 percent lower than a year ago. The Royal Bank of Scotland oil and gas production index for January 2004 suggests that oil production in November 2003 averaged 2,039,455 barrels a day, a 1 per cent increase on the month but an 11.4 per cent fall on November 2002. Gas production in November was up 24 per cent on the month, and up 11.1 per cent on November 2002.
It is estimated that the level of reserves remaining in the North Sea lay between 13.6 and 47.6 billion barrels of oil equivalent (BBOE) at the end of 2002. Given that cumulative production stood at 32.9 BBOE at the end of 2002, it may be the case that there are the same level of reserves in the North Sea as have been extracted. However these are predominately in marginal, challenging fields. Nevertheless, the major oil companies maintain their commitment to the North Sea.
UK Offshore Operators Association - the oil and gas industry trade association - predicts UK Continental Shelf (UKCS) output will peak in 2003. However, new advances in technology and expertise are allowing companies, in particular new entrants to the UKCS, to further develop existing sites. The PILOT work annual report for 2002 confirmed that the level of investment in the North Sea in 2002 was 3.5 billion.
Budget 2003 announced the abolition from 1 January 2004 of Petroleum Revenue Tax on all new third-party tariffing business under contracts completed on or after 9 April 2003. The tariff related to the use of pipelines and other infrastructure in the UK and on its continental shelf. Such tariffs, which are earned by participants in oil or gas fields from allowing participants in other fields to use pipelines and associated processing equipment, will now be taxed under the Corporation Tax regime. This change will encourage the optimum use of North Sea infrastructure and the development of all commercially viable reserves in the North Sea.
Following a consultation launched in the 2003 Budget on the current low levels of oil and gas exploration, the subsequent Pre-Budget Report announced the introduction of a new Exploration Expenditure Supplement. This is intended to reduce barriers to entry for new North Sea companies that do not receive the full benefit of the current exploration and capital expenditure allowances. The full details of the new supplement, which will allow new entrants to claim exploration costs plus allowances for inflation and interest charges at a later stage, will be announced in the Budget 2004.
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