The effects of the Financial and Economic Crisis on Tourism Activities Egon Smeral
Facing Climate Change and the Global Economic Crisis EURAC, Bolzano/Bozen • 20-21 November 2009
The macroeconomic setting (1) In 2009 the world economy became mired in a deep recession, the worst since the Second World War. The sharp decline in exports and industrial production, rising unemployment and rapidly eroding consumer confidence had a severe negative impact on tourism activities. In 2009 the global economy will shrink by 1% to 1½%, the world trade will fall by 12%. At present it appears that the free fall of production and trade has come to an end and is about to bottom out.
The macroeconomic setting (2) At the business level the massive destocking process seems to have stopped. Investments remain weak, because of spare capacities. On the consumer side the outlook does not promise a recovery: unemployment will continue to rise and income development will be limited. Governments – still actively engaged in stabilizing the economy – have not yet started to increase taxes and cut public spending to reduce debt burden.
The macroeconomic setting (3) Industry confidence indicator in the Euro zone Balance of optimistic and pessimistic responses in % of businesses polled, seasonally adjusted
Source: Business survey of the European Commission. Time period covered: January 2005 to October 2009.
The macroeconomic setting (4) Consumer confidence indicator in the Euro zone Balance of optimistic and pessimistic responses in % of consumers polled, seasonally adjusted
Source: Consumer survey of the European Commission. Time period covered: January 2005 to October 2009.
The macroeconomic setting (5)
The BRIC countries already appear to be at the point of recovery: • China has taken substantial monetary – especially fiscal – measures. • Brazil and India show signs of a slight recovery (the economic confidence indicators improved). • Russia is suffering a severe recession, but with commodity prices on the rebound and the effects of government measures there should be a recovery on the horizon.
The macroeconomic setting (6)
In the new EU member states the economy was borne 2008 along by domestic demand, which screened their business sectors from the global crisis.
2009: high debt level of private households, currency devaluations, households came in trouble because of loans in foreign currency.
2009: a significant decrease of the GDP is expected (around 3½%).
The macroeconomic setting (7) The downturn of the global economy is a result of a dramatic credit crunch and an economic slump. In contrast to former downturn, the current crisis has a global and all encompassing impact that has hit tourism services – a nonnecessary consumer good – with particular force. In 2009, most of the advanced economies have been experiencing a sharp decline in their GDPs. Economic policy efforts appeared to prevent a worse collapse.
The macroeconomic setting (8)
It is uncertain whether the signs of the slowdown or the stop of the contraction in output and trade are indicators of a sustainable recovery or only a temporary flash in the pan.
In spite of such uncertainties, projections raise hopes for a recovery in 2010.
This recovery will be weak and fragile.
The negative economic and social consequences of the crisis will be long lasting – especially the reduction of unemployment will be difficult.
The macroeconomic setting (9)
In the medium term, only moderate overall growth rates are expected, also in tourism.
It is more than doubtful whether after this crisis consumption, investment and tourism behavior will be the same than before.
The global recession created a new wording: balance sheet repairing, back to the new "normality", zombie-households/-companies
Current trends in international tourism (1)
After a slight decline in the second half of 2008, international arrivals will drop this year at least by 6% (UNWTO).
Europe (–8%) and the Middle East (–18%) get hit harder than the global average (in terms of international arrivals)
The EU business survey for the hotel and restaurant industry clearly reflects the negative assessment by the industry in the course of 2008 and 2009 (in terms of the turnover development during the past 3 months), but shows also a light recovery.
Current trends in international tourism (2) Turnover in the hotel & restaurant sector • past 3 months Balance of optimistic and pessimistic responses in % of businesses polled, seasonally adjusted
Source: Business survey of the European Commission. Time period covered: January 2005 to October 2009.
Current trends in international tourism (3) Turnover in the hotel & restaurant sector • past 3 months Balance of optimistic and pessimistic responses in % of businesses polled, seasonally adjusted
Source: Business survey of the European Commission. Time period covered: January 2005 to October 2009.
Current trends in international tourism (4) Turnover in the hotel & restaurant sector • past 3 months Balance of optimistic and pessimistic responses in % of businesses polled, seasonally adjusted
Source: Business survey of the European Commission. Time period covered: January 2005 to October 2009.
Current trends in international tourism (5)
The fall of expenditures was much stronger than the decline of arrivals.
Unlike airlines, the hotel industry is not able to respond to lower demand by cutting supply.
In Europe, 2009: ADR –22%, revPAR –28% (ETC)
There is evidence that domestic and near foreign destinations were suffering considerably less than long distance destinations.
Tourists economize on the duration of their stay, scale back their expenditures per night and tend to sacrifice secondary holidays.
Current trends in international tourism (6)
Tourists tend to book in the last moment (general uncertainties, last minute deals).
The crisis hit business travel harder than leisure travel, also city tourism suffered under a strong demand fall (business, secondary holidays).
Overnight stays in both, luxury and lowbudget accommodations, showed growth rates above the average.
Accommodations with cooking possibilities showed an increase in demand.
Modeling tourism demand (1)
Application of the standard tourism demand model which results from multi-stage budgeting
Tourism demand for foreign travel of a special source market (indicated by tourism imports at constant prices and exchange rates) is basically explained econometrically by • • • •
the GDPs, the relative prices, habits (flexible trends, HP filters), and special developments (dummies).
Modeling tourism demand (2)
5 source markets: Australia, Canada, USA, Japan, Euro zone – around 80% of the international world tourism
Econometric estimation: 1978-2008; annual data; variables in absolute differences of the natural logarithms (partly OLS and ECM approaches, different variants)
The estimation results could be considered as very satisfying: R² 70%-80%; the coefficients were found to be statistically significant, the parameter signs correspond with the expectations based on economic theory.
Forecasting 2009 and 2010 (1)
Real GDP 2008–2010 Percentage changes from previous year
2008
2009
2010
Australia
+2.3
–0.4
+1.2
Canada
+0.4
–2.6
+0.7
USA
+1.1
–2.8
+0.9
Japan
–0.7
–6.8
+0.7
Euro zone
+0.5
–4.8
±0.0
Source: OECD Economic Outlook, Vol. 2009/1, No. 85, June 2009.
Forecasting 2009 and 2010 (2) Forecast results for real tourism imports for 5 source markets Years 2009 and 2010 • Percentage changes from previous year
2009 Variant 1
2010 Variant 2
Equation [3] Australia Canada USA Japan EU 151) Total 5 (added up)
–2.4 –1.2 –14.7 –21.8 –10.9 –11.2
+1.1 +2.2 –2.3 +3.2 –0.3 –0.2
–1.0 +1.2 –5.7 –0.1 –2.5 –2.5
Equation [4] EU 151) Total 5 (added up)
–12.6 –12.3
–2.8 –1.9
–5.6 –4.6
Source: Own calculations. – 1) Excluding Austria.
Concluding remarks (1)
Tourism has taken a bad battering from the global recession.
The impact on international tourism has been softer than the slump experienced by foreign trade and industrial production. – Reasons: • no de-stocking process; • tourism services are perishable goods and can not be stored; • the other side of the medal: the recovery in tourism might take longer because there is no stock building process.
Concluding remarks (2)
Tourism, as a non-necessary consumer good, will recover slower than other economic activities. – Reasons: • high unemployment rates; tight consumer budgets will be first spent on necessary consumer goods; • the loss in wealth will increase the saving rates in the medium-term; • higher taxes and reduced public spending will limit consumer expenditures.
Concluding remarks (3)
The fact that domestic tourism was hit much less than long-distance travel has made tourism boards realize that campaigns to boost domestic tourism might help boost the sluggish demand.
From the point of an international macroeconomic view this behavior could be seen as a protective measure ("beggar my neighbor policy").
Concluding remarks (4)
Tourists have become highly price sensitive.
"Price wars" are possible, consequences are • liquidity crunch, • lacking investments, • service quality might deteriorate.
Uncertainties for 2010: Can a sustainable recovery be expected or are we only just crossing a wide trough valley?
The forecasts made here assume that tourism demand elasticities are symmetrical, i.e., that the elasticities in up- and downturns have a similar magnitude.
Concluding remarks (5)
A consideration regarding the medium term development shows that the negative economic and social consequences of the crisis will accompany us for a long time. – Difficulties: • reducing the high unemployment rates, • fixing the financial system, • coping the massive structural changes as a "new" consumer with more limited financial and economic means might emerge from the crisis.
Thank you for your attention!