The latest US accounting disaster involves the giant telecommunications company WorldCom, which improperly recorded $3.8 billion of operating expenses as capital expenditure, thereby concealing a net loss of $2.4 billion for 2001 and instead showing an apparent $1.4 billion profit. This went unreported by the auditors – Arthur Andersen again – who claim not to have been aware of the incorrect accounting treatment by WorldCom.

It was known that the US Securities and Exchange Commission had been investigating WorldCom since March. The company now faces bankruptcy, with debts of Ł20 billion believed to include around Ł100 million each owed to Royal Bank of Scotland, Prudential and Barclays.

The succession of recent accounting scandals has focused attention on the conflicts of interest for company executives and audit firms, and has brought calls for tighter regulation to restore market confidence.

World stock market conditions

Merrill Lynch’s monthly indicator of world stock market conditions rose sharply from 9.2 in May to 12.3 in June. The indicator, compiled before the WorldCom announcement and based on a survey of 282 US fund managers responsible for combined investments of $711 billion, summarises profit expectations, interest rate prospects, equity valuations and investor sentiment.

More than 80% of fund managers believe that profits will improve in the next 12 months. Europe and the UK are regarded most favourably for quality of earnings, while more than 30% view the US market less favourably than any other region and 60% regard US equities as relatively the most expensive in the world. This reflects the negative sentiment following the Enron collapse and doubts about the quality of earnings from other US companies, including WorldCom.

US trade deficit

April saw unwanted records established in the US as the trade deficit and level of imports both reached all-time high levels. The trade deficit stood at $35.9 billion as imports of goods and services rose by 4.7% to $116 billion, compared with a 2.2% increase in exports to $80.1 billion.

The US current account balance, which includes returns for overseas investors, climbed to $112.5 billion for the first quarter. Foreign ownership of US assets rose by $113.3 billion, but this contrasts with a $250.8 billion increase in the previous quarter, and fears that falling stock prices and a lower dollar are deterring foreign investment fuelled speculation about a rise in interest rates. The US needs investment from overseas of more than $1 billion a day to support the trade deficit.

Weakening dollar

The dollar recorded a fall for the month of 7% against the euro to $0.9942, its lowest level since February 2000. The exchange rate with the Japanese yen reached Ą119.43, the lowest for nine months, despite interventions in the market by the Bank of Japan, and the dollar is also down more than 1% against both the pound and the Swiss franc.

Japanese recovery

The US trade deficit with Japan showed a 19.1% increase, contributing to growth in Japan’s global trade surplus of 715%, which boosted hopes that this signalled the end of the long economic recession. However, this is tempered by fears that the increasing strength of the yen against the dollar could undermine this recovery.

Economic growth

The National Institute of Economic & Social Research reported that the UK economy grew by 0.4% in the three months to April. In the US, economic growth of 6.1% for the first quarter prompted forecasts for a slower second quarter.

Interest rates

The Bank of England’s monetary policy committee again left interest rates unchanged at 4% following their June meeting, the seventh month running to have seen no change. The view continues to prevail among analysts that a rise some time this summer is inevitable.

The European Central Bank’s rate was also unchanged at 3.25%, but the ECB’s half-yearly forecast predicts that inflation will exceed the 2% target, adding to speculation that a rise in interest rates is imminent.

Inflation

The latest figures from the Office of National Statistics show a fall in the underlying rate of inflation (excluding mortgage repayments) from 2.3% in April to 1.8% in May. This is significantly lower than had been forecast, and represents the sharpest monthly decrease since October 1993 and the lowest annual rate since the data were first compiled in 1975.

The fall in headline rate (including mortgage repayments) from 1.5% to 1.3% also exceeded predictions.

Oil production

Russia and Norway, the world’s second- and third-biggest oil exporters, have ended their agreement with OPEC to cut production. The deal was made in the wake of September 11, when oil prices dropped to $16-17 per barrel, but since production was cut by 5% from the beginning of January prices have risen to $24-25 a barrel.

OPEC is extending the production limit of 21.7 million barrels per day for a further three months to support oil prices. Quota breaches by OPEC members and production increases by non-OPEC countries are expected to cancel out the effects of rising demand.

Car prices

EC proposals to eliminate the block exemption on motor vehicle distribution and servicing agreements could receive final approval in September, removing the barrier to greater consumer choice and lower prices.

EU trade sanctions

The EU will consider raising tariffs on US goods including steel, textiles and orange juice unless exemptions for European exports and lower tariffs on other products are forthcoming to compensate for duties imposed by the US on steel imports. The EC is due to report on negotiations by 19 July, and in the absence of progress a decision on sanctions will be made by 1 August.

French imports of beef/lamb

The European Court of Justice will impose financial penalties if France fails to lift its ban on British beef imports by July 11. Ministers had requested a further report from the French food safety agency before deciding whether to lift the ban, but that report is not expected before September.

Meanwhile, lamb importing regulations, which were to have come into force in France on January 1, have been postponed for a further six months. The regulations, which are more stringent than those imposed by the EU, could cost Scottish agriculture Ł50 million a year. France is Scotland’s largest export market for lamb.

Whisky exports

Scotch whisky exports topped 1 billion bottles for the first time in 2001, showing a 2.4% increase in volume on the previous year and a 6.4% increase in value at Ł2.2 billion. A consumer trend towards more expensive blended whiskies and malts resulted in the value of exports growing faster than volumes for the first time since 1997.

Far East sales recovered from the sharp decline, which followed the 1998 financial crisis, with volumes to Japan and South Korea up 33% and 26.5% respectively. Exports to France increased 13% by volume as France regained its position as biggest market from Spain, which remains the most lucrative at Ł296 million despite a 13% drop in volume. US exports were down by both volume and value, 7% and 3% respectively.

Tourism

Tourism worldwide suffered a 2.6% decline last year as a consequence of the global economic slow-down and the impact of September 11.

The effects of September 11 and the foot-and-mouth outbreak contributed to an 8% drop in BAA’s pre-tax profits to Ł505 million for the year to March. Air traffic into Heathrow and Gatwick from North America was down 38%, although Scottish airports saw an overall 7% increase in passenger numbers.

EasyJet and Go both reported large year-on-year increases in passenger numbers for May. EasyJet’s total was up 43% at 900,000 and Go showed an 89% improvement at 531,160. In May EasyJet agreed a Ł374 million takeover of Go with the latter’s major shareholder, the venture capital group 3i.

UK productivity

Productivity in May rose at its fastest rate since October 1999, according to a report from Lloyds TSB and the Institute of Management Services, which showed a sharp increase in private sector productivity in manufacturing, and services.

Retail sales

Retail sales fell 0.6% in May, the largest drop for more than two years and a dramatic reversal following April’s 1.8% increase. Clothing and footwear were hardest hit, suffering a 5.2% decline from the previous month. The Office of National Statistics commented that moving the traditional May bank holiday to June for the Queen’s golden jubilee may have had an effect, but pre-World Cup sales of TV sets helped the household goods sector to sales growth of 2.2% for the same period.

The British Retail Consortium’s shop price index showed a 0.4% decrease in May from its level of 1.1% in April, indicating that shop prices continue to rise at less than the rate of general inflation.

Property

The number of houses for sale in Edinburgh in April fell by one fifth compared with the same month in 2001. Although sales were correspondingly down, the shortage contributed to a 16% rise in the average price to Ł118,000.

Mortgage broker Charcol suggests that the continuing rise in UK house prices, and the commensurate increase in borrowing, could lead to longer repayment terms if mortgages are to remain affordable.

This year has seen a slow-down in the demand for commercial property as a consequence of the general economic conditions and the aftermath of September 11. However, the Scottish market was the UK’s best performer with a 23% increase in property holdings, followed by London and south-east England with 18%.

Personal wealth

At the end of 2001 Britain had 345,000 millionaires, according to the annual World Wealth Report from Merrill Lynch. World-wide, the combined wealth of the 7.1 million millionaires rose by 3% to Ł17.7 trillion, but the number of new millionaires in that total was only 200,000, the smallest increase in the 16 years for which data have been compiled.

Research by market analyst Datamonitor shows that the effect of stock market falls on the value of liquid assets saw a 1% reduction last year in the number of people in the UK with liquid assets of between Ł30,000 and Ł200,000.

Gloomy outlook for accountants

According to the findings of the latest annual survey by recruitment agency Robert Half, one in five accountants under the age of 45 believed that the Enron scandal had severely damaged their prospects, and 41% are looking for another job.

Remuneration packages for accountants in Scotland average Ł25,000- Ł40,000 compared with Ł40,000-50,000 in London and the Thames Valley, where average pay rises of 5% fell well short of the 9% anticipated pre-Enron.

The Centre for Economics and Business Research predicts that by next year the total number of financial jobs in London will have fallen by more than 20,000 back to 1997 levels of around 313,000.