Reports:

The impact of congestion charging on specified economic sectors and workers

2: Economic Context

Introduction

The congestion charge (CC) was introduced on 17 February 2003 in the midst of what by any definition could be said to be a turbulent economic and political environment. In seeking to gauge the effect that the charge has made on a number of economic sectors it is important to take into account the external forces that have been impacting on both the domestic and international economies.

This section of the report contains a review of research and analysis that has been placed in the public domain. Data is therefore 'secondary' and not all sources quoted are of equal rigour or validity.

The overall picture that emerges is one where the boom that London has enjoyed for almost ten years is showing signs of faltering, possibly leading to a period of recession.

London, however, is not just a UK city, it is what might be described as a 'World City'. As such, it is particularly vulnerable to world events, which have the potential to adversely impact its economy in sudden and unpredictable ways.

2.1 Economic background

According to the London School of Economic & Political Science (LSE) in their 'London's place in UK economy' annual report, dated September 2002:

• London has experienced a boom since the early 1990's, with growth at or above that for the UK economy as a whole. Every boom has a downturn, however, and it is very unlikely that recent trends will continue unchecked;
• There is some particular evidence that growth in the Central London area has been checked; and
• London's economy is more volatile than the rest of the UK . (IT IS) more exposed than the rest of the country to international influences.

The report concludes its executive summary with the following:

• London's economy remains volatile although possibly less fragile than in the past. The biggest threats relate to the poor quality of the infrastructure, both physical and social, growing competition from second and third order cities in Europe, the continuing fragmentation in governance structures, and concerns about international terrorism. Currently London's economy is probably more or less stationary, and it could move into decline over the next few months. However the fundamentals are stronger than they have been for many years and the long term prospects are good.

2.2 Economic sectors / factors

Key economic sectors / factors that should be considered vulnerable to 'world events' during the period under consideration may be defined as:

• The London tourist economy;
• Financial and service economy confidence;
• General economic activity (in London); and
• Consumer confidence.

The following table illustrates how these economic sectors / factors relate to the industries and groups of workers that are the subject of this report.

Congestion Charge Impact Research Sector	London Tourist Economy	Financial & Services	General Economic Activity	Consumer Confidence
Taxis & Private Hire	X	X	X	X
Retailers	X		X	X
Logistics Companies	X		X	X
Couriers		X	X
Low Income Workers	X		X	X

2.3 Issues / events

The research in the main body of this report identifies a number of issues and events that participants in the research believe have had a detrimental effect on the London economy.

Whilst all the factors have the potential to influence confidence / activity in the London economy:

• Normal text indicates factors that may be considered longer term in nature. A review of trend data can be used to judge relevance to economic impact in the light of congestion charging; and
• Bold text denotes 'one off' events and are less predictable or susceptible to trend analysis.

Current / Recent	Ongoing / Long Term	Historic
Iraq war SARS Bali bombing Increased Tax / NI Central Line closure Weather events	Economic slow down Threat of terrorism Exchange rates Falling stock prices Pensions concerns	BSE Foot & Mouth

The London Tourist Economy

London is a major attractor and visitors to the city come both from other parts of the UK and other parts of the world.

Tourism accounts for approximately 8% of London's Gross Domestic Product (GDP) and coincidentally 8% of employment is generated by tourist related activities.

Key statistics:

• £9 billion was expended by visitors in 2001;
• £1.8 billion was spent on shopping;
• Day visitors spent nearly £4.6 billion in 1998;
• Overseas visitors account for 30% of West End theatre ticket sales;
• 25% of underground passengers are visitors (in the central area); and
• 25% of Taxi fares are visitors to London.

Source: www.visitlondon.com.

According to London Economy Today (Issue 9), two thirds of tourist spending in London is by overseas visitors, this is double the UK average.

Commentary: This relatively high dependency on overseas visitors makes the London economy uniquely vulnerable (in the UK) to international events such as the War in Iraq, SARS and the fear of terrorism. The UK's role in both the 'War on Terrorism' and Iraq is likely to have led to a proportion of potential visitors either postponing, shortening or limiting the time spent in the city.

2.4 UK domestic visitors

Estimates of numbers and journey purpose
UK visitors account for approximately a third of tourist visits to London. The most recent figures for UK based tourists are from 2001 and indicate that almost 17 million people visit London each year from other parts of the UK. Almost half come on a holiday, with the remaining balance split between coming for business / work and visiting friends and family.

Figure 2a: UK visitors to London 2001

Source: London Tourist Board.

Expenditure forecasts
The Oxford Economic Forecasting produced a report in April 2003 for the British Tourist Authority looking at spending estimates given a range of scenarios ('No war' with Iraq, 'benign', 'intermediate', and 'worse case' scenarios). The impact on both domestic and international tourism was modelled and the domestic forecasts for the UK as a whole are shown in the following table:

Total value of spend by domestic visitors to (in) UK (£bn)
Year	No war	Benign	Intermediate	Worse
2001	26.1	26.1	26.1	26.1
2002	26.7	26.7	26.7	26.7
2003	27.8	27.8	27.3	26.5
2004	29.8	29.9	29.3	27.8

Source: British Tourist Authority / OEF / GLA Economics.

It is clear that this forecasting organisation anticipate that even given the war and a relatively unstable economic / political world climate the domestic tourist market will see only minor decline in 2003.

Given that the Iraq war was concluded relatively quickly and the SARS outbreak appears to have been contained, the outturn is likely to be between the 'benign' and the 'intermediate' estimates, i.e. they are anticipating very little, if any, change in spend by domestic visitors in the UK.

However, it is noted that both central and London Government authorities are taking active steps to encourage domestic tourists to London - on this basis the outlook for 2003 is likely to be stable or modest growth.

Comment: The war with Iraq will almost certainly have deterred some domestic travellers visiting London in the pre-war period and the early weeks of the war. However this was not a peak period for tourist travel and the period of heightened concern was relatively short. As a reason for poor economic activity in the tourist sector, this is unlikely to have been more than a very limited and short term factor. It is believed that increased advertising and promotion activity following the war is likely to more than compensate for the loss of domestic visitors earlier in the year.

2.5 Overseas visitors

Drivers of demand
London is a major international attractor, and over the last 20 years, whilst its absolute share of world tourism has declined, the number of visitors has gone up by two-thirds (to c. 12 million). Over this period visitor expenditure has doubled in real terms (to just under £7 billion at 2002 prices). Source: GLA Economics / ONS.

A KPMG study^[1] for the Mayor's draft London Plan identified a strong relationship between world GDP and the number of nights spent in London by overseas visitors.

London Economy Today (Issue 9) comments on this relationship:

Trips abroad, like many leisure pursuits, are relatively expensive goods, and in many cases luxury goods. Thus, they are dependent on the income, wealth and economic optimism of potential visitors, and presumably one of the first things to be foregone when belts have to be tightened.

Comment: Most Western developed economies are in recession and whilst there is a trend for tourism to increase, London is a relatively expensive destination and therefore subject to cyclical economic factors. If the impact of the Iraq war, the associated terrorist threat (q.v. Bali), and SARS are added to longer term factors, a downturn becomes likely.

Most Recent Data
As yet there appears to be very little data available for 2003. GLA Economics have collated the following key statistics:

• British Airways (BA) passengers carried;
• British Airports Authority (BAA) London Terminal Passengers;
• British Incoming Tour Operators Association (BITOA); and
• London Underground (LU) and GLA 'tourist' station traffic.

Year on Year % Change
	Feb	Mar	Apr	May
UK IPS visits	+13.0	-3.0	-15.0	N/A
UK IPS spending	+3.0	-1.0	-16.0	N/A
BA Passengers carried	-2.8	-3.0	-0.5	N/A
BAA London Terminal Passengers	-5.6	-4.3	+0.4	+1.3
BITOA arrivals	-8.4	-12.5	-7.0	N/A
BITOA forward bookings	-13.8	-19.2	N/A	-
LU / GLA Economics	-3.0	-2.2	-1.5	N/A

Latest figures indicate that the downturn lasted into April, the only positive figures relate to traffic going through BAA's London terminals, but it is unclear how much this figure may include UK passengers.

Placing these findings into a longer term context, data from the ONS indicates that overseas visitors had been declining through 2001 and had only moved into growth in 2002. In the first quarter of 2003 overseas visitors and expenditure are still positive, but growth, in both numbers and expenditure, has been in decline since November 2002.

Figure 2b: Overseas visitors to the UK

Economic model
In addition to the UK visitor data discussed earlier, Oxford Economic Forecasting (OEF) also modelled overseas visitor spending under a range of scenarios. As the following table indicates, economic and political uncertainty is far more marked than we saw in the UK model.

Total value of spend by overseas visitors to the UK (£bn)
Year	No war	Benign	Intermediate	Worse
2001	11.31	11.31	11.31	11.31
2002	11.78	11.78	11.78	11.78
2003	11.96	10.93	9.15	8.69
2004	11.40	13.78	12.58	10.84

Source: British Tourist Authority / OEF / GLA Economics.

The following table presents the overall growth or decline in overseas visitor spending in 2003 under the various scenarios:

Year	No war	Benign	Intermediate	Worse
2003 change	+1.5%	-7.2%	-22.3%	-26.2%

Given that the war is now an historical fact and that there has also been the SARS outbreak, all the scenarios for overseas visitors are negative, the only question is how long and deep a downturn London is likely to experience in 2003.

London Economy Today (Issue 9 - May 2003) has the following to say on the matter:

Even though the war is over, it is difficult to say what the impact has been on tourism. The British Tourist Authority estimates that the war will cost Britain's inbound tourist industry around £1.5 - £2 billion in 2003; a drop of 15% compared to 2002.

However this is higher than the OEF 'Benign' scenario drop of around 7%.

Nevertheless we appear to have avoided the 'Worst case' and even the 'Intermediate' scenarios.

Comment: It is clear that both UK and international visitors to London declined steeply in the early months of 2003. However, the short-term factors of war, terrorism and disease appear to have run their course (at least for the time being) but these events appear to have presaged the retrenchment that many had predicted (LSE London's place in the UK economy). Overseas visitor numbers are down and are likely to fall somewhere between the 'Benign' and 'Intermediate' scenarios discussed above. UK visitor numbers are likely to hold up, and given the initiatives being made to encourage trips to London we may even see some increases in the coming months. The London tourist economy is likely to be significantly down overall in 2003.

General Economic Activity

2.6 Economic background

Provisional data from the ONS indicates that the UK economy grew by 0.2% in the first quarter of 2003. Data is unavailable for London at the time of writing, but the last quarter of 2002 was 1.4% down from 1.6% in the previous quarter.

Figure 2c: UK GDP and London GVA growth, constant prices

This data indicates that the London economy appears to be gradually picking up after 'bottoming out' during 2002. However, the 'dropping back' (to 1.4%) in the last quarter is possibly indicative of further retrenchment in the first quarter of 2003.

2.7 Manufacturing

The manufacturing economy is more optimistic about future output in the first quarter of 2003 (compared to the previous quarter) and actual output is stable.

Figure 2d: Output - manufacturers who said their volume of output in London have increased / will increase

However, the CBI regional health check (published in May 2003) indicates that there are significant regional variations, with London and the South East experiencing negative investment intentions and forecasting job cuts in the manufacturing sector.

Financial and Service Economy Confidence

2.8 UK service sector activity

The UK service sector has experienced a slowdown in business activity since the beginning of 2002.

The blue line in Figure 2e shows a slight upturn, the service economy is showing some sign of picking up in April but this is from a low base.

The orange line shows the expected change in business activity over the coming 12 months, this data only goes as far as March, but the trend is down.

Figure 2e: UK service sector activity

2.9 Service sector - investment

Investment is a strong indicator of confidence and the British Chamber of Commerce (BCC) produce data on investment intentions for plant and machinery for the service sector.

It is clear from the Figure 2f that following a very high peak in 2000, investment has been declining gradually over the last three years. The last quarter of 2002 saw the index dropping into negative territory for the first time since 1993. Given the general economic and political uncertainly, confidence is unlikely to have increased during the first quarter of 2003.

Figure 2f: Company investment intentions - services who increased their investment plans in plant and machinery over the past 3 months

Consumer Confidence

Consumer confidence is driven by a number of factors and the first quarter of 2003 saw it assailed by a number of high profile economic and social factors including terrorist threats, the war with Iraq, a decline in the value of sterling and falling property prices.

Factors that can be measured include:

• House prices;
• Retail sales; and
• Share price indices.

2.10 House prices

Whilst houses are most people's largest financial commitment, they are also considered by many to be an indicator of 'financial well being'.

The London house price market has been surging ahead since the recession of the early 1990's. As the following two graphs illustrate, which cover the period up to December 2002, prices in London had moved from growth to decline, and demand for houses had fallen significantly.

Figure 2g: Change in London house prices (%)

Figure 2h: London demand index (October 2000=100)

Source: Hometrack Monthly London Survey December 2002.

Hard data on house prices in 2003 are less available. Estate Agents 'Cluttons' produce regular surveys on property related matters and work with Oxford Economic Forecasting to produce a range of property price scenarios for both the UK market and Central London (Note: Central London is not necessarily representative of the wider London property economy).

Key comments from this forecast for 2003 (published in February) are:

UK housing market (Short Iraq war scenario)

• UK house prices growth would slow dramatically to two percent by the end of 2003; and
• Central London house prices would decline ten percent in 2003.

2.11 Retail sales

Figure 2i illustrates that on a national basis, whilst year on year retail sales volume has been generally rising since 1991, the growth rate has fluctuated significantly and has been showing a downward trend since the middle of 2001.

Figure 2i: Retail sales volume (constant prices, seasonally adjusted)

Annual UK retail growth has dropped markedly in the last year. Annual growth in April 2003 was down to 2.7% - half its rate a year ago and the lowest annual rate since May 1999.

The April slowdown may, at least in part, be attributed to the National Insurance increase in the budget, this comes on top of all the other uncertainties described in this report.

One concerning factor is that London Economics Today (Issue 10) reports that the Footfall Index (which measures the number of visitors to retail centres) showed decline year on year in London, especially central London. This is probably closely related to the reduction in overseas visitors to London, but congestion charging cannot be ruled out as a contributory factor.

The London Chamber of Commerce undertook research amongst a range of London retail businesses approximately a month following the introduction of the congestion charge (with full findings to be reported mid / end June. This can be found on the London Chamber of Commerce web site). The research appears to have been self-completion with over 520 businesses responding.

Initial findings indicate:

• Of the retailers who reported that takings were down year on year, almost 60% attributed the shortfall either 'all' or 'mostly' to the congestion charge; and
• Over one third of companies employing 1-2 staff said they wanted to relocate outside the zone. For companies employing between 3 and 12 people the corresponding figure was 23.5%. By comparison, no firm employing more than 250 people was planning to move.

It is understood that these findings relate to small businesses and individual branches of larger chains of stores.

2.12 Share price indices

Following a very poor start to the year, the stock market has been recovering since the third week of March (when the Iraq war ended). The FTSE all share index changes between February and May 2003 are given below:

February	+2.5%
March	-1.3%
April	+8.0%
May	+4.1%

Source www.ftse.com.

2.13 Economic context summary and observations

The congestion charge was introduced in the midst of long term structural and economic change and short-term political and economic turbulence.

Trends
Both the service and manufacturing sectors of the London economy have been going through a difficult period:

• Manufacturing has been declining from a peak in 1999. The last quarter of 2002 and early 2003 has seen a stabilising of the situation, but only from decline to no growth (Section 2.7); and
• Service sector activity and jobs have both been in decline in the second half of 2002 and in the first quarter of 2003 (Section 2.8).

Tourism is a significant part of the London economy, accounting for c. 8% of employment and GDP, and higher than this in the central area. The tourist / visitor economy (a part of the service sector) had been growing through 2002 with overseas visitors to the UK growth rates peaking at almost 30% in November 2002. It has been declining continuously since then.

Retail sales growth has also been in decline through 2002 with growth rates falling from a peak of just over 7% to c. 3% in April / May. There are reports of Central London being more significantly effected than other areas but this can probably be largely attributed to the fall in overseas visitor numbers.

The rise in house prices, particularly in London, appears to be slowing significantly. This slowdown impacts on people's perceptions of wealth, and therefore their willingness to spend and their ability or willingness to release equity.

Short term 'events'
Early 2003 was marked by a number of 'events', some of which were war related.

War related factors
The war with Iraq had the effect of reducing both business and consumer confidence internationally in two ways:

• London is a 'World City' and the capital of one of the two states prosecuting the war against Iraq (therefore seen by some to be a legitimate target). This will have influenced many peoples willingness to travel to London, or if here already, inhibit expenditure whilst in the city; and
• The tensions, uncertainty and mistrust between trading nations that proceeded the conflict will have reduced the propensity to both trade and travel.

Other 'events'
The early months of 2003 saw a number of other 'events', some domestic and others international in nature.

• The SARS outbreak, whilst largely confined to the Far East and parts of Canada, had the effect of reducing people's propensity to travel (particularly from / to the contaminated parts of the world);
• The bad weather that hit much of Southern England on January 30th will have reduced peoples willingness to travel unnecessarily; and
• The increase in National Insurance appears to have slowed consumer spending from late March onwards.

Congestion charging - in context
In reviewing this section, it is clear that London's economy has been hit by a number of factors in the first half of 2003. If congestion charging has played a role in the economic downturn, it would appear to be relatively small in relation to the factors discussed above.

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1: SDS Technical Report 13, Demand and Capacity for Hotels and Conference Centres in London. August 2002

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