Weekly Economic Briefing

27 June 2017


Global Overview - Tourism Economics

Tourism often conjures thoughts of sun, sand, and crowds; but as a key component in global services trade, the sector also plays a large role in driving global growth. In this Weekly Economic Briefing, we look at the impact of the tourism sector and the factors that drive its growth. According to the World Bank, travel and tourism trade account for approximately 10% of global GDP and 30% of world services exports. Growing middle classes in China and India are continuing to push aggregate trade in tourism services to new highs. And as air travel becomes cheaper and more accessible, the sector is expected to continue expanding. This is important for developed and emerging economies alike (see Chart 1), as manufacturing trade remains structurally weaker relative to the past four decades, trade in services, particularly tourism and travel, will become a more important driver of the global economy.

Similar to trade in goods, competitiveness in tourism exports depends on many factors with direct policy implications. Beyond relative price competitiveness from currency fluctuations, tourism export competitiveness is also affected by concerns over safety and security, geopolitics, environmental sustainability, international openness, and infrastructure quality. The impact of such factors has become starkly evident as tourist trends have changed based on changing political and security factors. For example, French tourism exports were down nearly 7% year-on-year (y/y) in 2016 partially due to security concerns, and initial reports of airline bookings to the US shows a 3.4% y/y drop as of early June in part due to concerns over visa policies. Meanwhile, Turkey, where tourism is crucial, is suffering a sharp drop on the back of security and political risks. On the other hand, Asian countries are reaping the benefits of growing outbound Chinese tourism, but relative success is driven heavily by political factors. For example, improving diplomatic relations are partly credited with a 30% y/y rise in first-quarter Chinese arrivals to the Philippines. Meanwhile, Korea and Taiwan continue to lose market share due to political disagreements. Economic forces play a role, but governments would be wise to also focus on visa policies, security concerns, and the impact of geopolitics on this important sector.

Economic impact of travel
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US - Tourism obeys the law of demand

Like all goods and services, international tourism should be subject to the laws of economics. The volume of and expenditure by foreign tourists in the United States can be modelled as a function of its relative price – in this case the trade-weighted exchange rate – foreign incomes, as well as non-price and income factors that affect the country's relative attractiveness as a destination, like special events, perceived safety and the availability of visas. The same set of factors should influence the volume of and expenditure by US tourists abroad, though the sign of the exchange rate effect should be the opposite and it will be US incomes that matter. For the purposes of our analysis, we rely on international trade data for both conceptual and practical reasons. From a conceptual standpoint, inbound tourism is recorded as exports and outbound tourism is recorded as imports in the balance of payments. From a practical standpoint, official international trade data are more up-to-date than the official tourist arrivals data and compiled on a consistent basis for both inbound and outbound tourists – though the former is subject to more revision and the monthly data is only available on a value basis.

Growing arrivals from the Far East
Lagged dollar effects

So, what do we observe in the data? Our first takeaway is that the economic cycle is very important. Both tourist exports and imports tend to increase during economic expansions and decrease during contractions, though the former has grown more quickly on average since the beginning of the century and, as a result, America's tourism trade surplus has been on an upward trend over time. The faster growth of inbound tourism than outbound tourism makes sense given the faster average growth of non-US incomes over the past 16 years, as well as the fact that tourism has become much more affordable and accessible to the growing middle classes in China and other successful emerging markets. Indeed, between June 2009 and September 2016 (the latest month for which data is available), tourist arrivals from China increased by 378%, compared with 47% for all other countries combined (see Chart 2).

Discerning exchange-rate effects on inbound and outbound tourism is made more complicated by the fact that movements in the dollar are themselves partly driven by the local and global economic cycles. Nevertheless, the relative growth rates of tourism exports and imports in the periods before and after the trade-weighted dollar began appreciating rapidly in July 2014 show that currency movements do matter. In the five years before July 2014, inbound arrivals increased at an average annualised rate of 9.8%, while outbound journeys were up  5.5%. Since July 2014, the average growth rate of inbound arrivals has shrunk to 3.3%, while the annualised growth rate of outbound journeys has picked up to 6.3% despite the economy having slowed (see Chart 3). More recently, there has been speculation about whether the US election result and the subsequent attempts to restrict entry from countries considered to potential national security threats may have reduced foreigners' enthusiasm and ability to travel to the US. However, while the three-month annualised growth rate of travel services exports did slow to a 10-month low in April, it is too early to identify either the reason or whether the slowdown will persist.

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UK - Vacation or staycation

Tourism is booming as more overseas visitors than ever holiday in the UK. A key driver is the relative affordability following the collapse in sterling. For those choosing to visit the UK, the depreciation of sterling following the referendum to leave the EU last June has led to an increase in their purchasing power. While there was little evidence of a boost to inbound tourism in 2016, so far 2017 has seen a more noticeable impact.  The increase in purchasing power for these visitors has boosted earnings in the UK from overseas visitors by approximately 11% in CPI-adjusted terms on the year in the first quarter. With regards to the number of people visiting the UK, visitors from the US and the European Union increased 13% and 14% year-on year (y/y) respectively in April. As a result, the overall share of tourism earnings in GDP has increased to 1.3% in nominal terms.

Spending boosts
Feeling the squeeze

It is unclear how trends in travel to the UK will develop throughout the Brexit negotiations, as sterling seems to be the main transmission mechanism for the market to express it views on the risks in the UK economy. As the market continues to price Brexit through the currency, there could be further relative gains for those choosing to visit the UK. Additionally, the recent tragic terror attacks in London and Manchester could also impact the number of overseas visitors to the UK as these were the most visited cities in England in 2016. The extent to which tourist numbers are negatively impacted by such events is often hard to quantify and may only become clear in the data as time passes. Using France as an example, the recent terror attacks could be impactful. Tourist exports in France were down 5.5% y/y in 2015 and nearly 7% y/y in 2016 as security concerns drove tourists elsewhere. Indeed, China will be an interesting bellwether – following Brexit, Chinese travellers to the UK were up nearly 50%. Part of this surge was a substitution effect as visits to France plunged nearly 25%. As both places deal with security concerns, it is unclear how foreign tourists will react.

By contrast, travel to Europe and the US for British visitors has become relatively more expensive. The number of UK residents travelling abroad has declined consecutively for three months; contracting 6% on a 6-month annualised basis in April (see Chart 5). In addition to the increase in the cost of travel, UK consumers have seen their real incomes squeezed, as the inflationary pressures caused by currency weakness have not been offset by wage increases. With the view that overseas travel may be seen as a luxury good, which declines in volume consumed as incomes decline, UK consumers may have to reduce spending on holidays or fund these through further drawdowns on savings. This could, when combined with unseasonably warm weather, lead to an increase in relatively more affordable domestic tourism, which in 2015 accounted for around a quarter of UK tourism revenues.  The trends in tourism in the UK going forward are likely to continue to be dictated by the pass-through of uncertainty into the value of sterling throughout the Brexit negotiations. Security risks can negatively impact the tourism industry but the overall trend in the recent tourism data seems fairly positive for the future outlook of the industry.

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Europe - More vacation days, more holidays

The World Travel and Tourism Council estimates that the direct contribution of travel and tourism to GDP in broad Europe was €624.3 billion (bn) or 3.5% of GDP in 2016, with a total contribution – taking indirect effects into account – of 9.9% of GDP. Breaking this down, direct employment in the industry accounted for 3.7% of total employment, with estimates of total employment – direct and indirect – accounting for just fewer than 10% of total employment in the region. The tourism sector provides yet another example of how the Eurozone is divided; in this case, into desirable destinations and demand-driving consumers. It can be difficult to build a coherent picture of tourism and travel, with much country-level data released with a significant lag, not to mention the difficulties differentiating between domestic, intra-EU and extra-EU tourism.

Hey big spender
Supply and demand

Balance of payments data gives us a partial insight into the relative importance of the tourist sector in Eurozone countries, by allowing us to identify the desirable destinations, as well as the sun-seekers, through travel receipts and expenditure. The results should not come as much of a surprise. Spain recorded the highest level of travel receipts in 2015 at €35bn, followed by France and the UK. However, in terms of the relative importance of the sector, travel receipts amounted to 18% of Croatian GDP, 13% of Maltese GDP and 12.7% of GDP in Cyprus. This high reliance on tourism also reflects the relative size and weakness of these economies – especially evident when we compare them to Spain, where travel receipts are a lower proportion of overall GDP at 4.7% in spite of being a major tourist destination. Meanwhile, on the expenditure side, Germany spent the most of all Eurozone countries on travel in 2015 by quite a margin at €69bn – for perspective, the next biggest spender was France at €34bn, half that of Germany. This chimes with more up-to-date data from the UN on tourism and travel spend per capita, which places Germany in third place internationally in 2016, behind Australia and Hong Kong (see Chart 6).

So far, so predictable; warmer, relatively low-cost destinations attract more tourists from the wealthier core, specifically Germany and to a lesser extent France – which is itself a major destination – and Belgium, as well as non-Eurozone tourists (see Chart 7). Looking ahead, the outlook for tourism in the Eurozone depends on a number of push and pull factors, including GDP and real income growth, currency and event risk. The supportive economic backdrop within and outside the Eurozone should mean good news for the tourist sector going into summer, with an increasing role for extra-EU tourists. Importantly, potential tourists are affected by not just generalised GDP growth but real income growth, the latter of which appears lacking in a number of Eurozone countries and the UK. Speaking of the UK, the relative strength of the euro versus the pound since the UK referendum means Euro-area travel will feel more expensive for British tourists this summer – conversely, a stronger US dollar in recent years continues to make Europe an affordable choice for Americans. Finally, the prevalence of terror attacks may affect tourist flows but evidence is patchy. French authorities noted a pick-up in tourism this year following declines in 2015/2016, suggesting some desensitisation to the terror risk – but the summer months will be the true test.

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Japan & Developed Asia - Tourism as a weapon

The tourism industry is not often a sector dragged into international disputes. However, the Chinese decision to ban the sale of group travel packages in retaliation for South Korea's deployment of the US-backed THAAD missile system is designed to demonstrate the nation's economic might. Will it work? The initial reaction has been significant, with Chinese tourist arrivals to Korea dropping 61.5% and 66.6% year-on-year in April and May respectively. At the current run rate, one could envisage a material impact on Korean GDP as a result. Revenues from tourism as accounted for in the balance of payments are estimated at 1.2% of GDP. With 46.8% of overseas visitors coming from China, we estimate Chinese tourism revenues at approximately 0.5% GDP. If this was to decline 60% in 2017, it could shave close to 0.3 percentage points off growth. In reality, we are already seeing the tourism sector display is fabled resilience. In Jeju Island, one of the nation's most popular destinations, tourists from China accounted for 84% of foreign visitors last year. While Chinese visitors have dropped sharply, the Jeju Tourism Association says a rise in opportunistic domestic tourists have offset the decline. They estimate that 12 million of the 15.8 million tourists to visit the island in 2016 were Korean. A campaign to attract more tourists from elsewhere in Asia has also been launched. While these coping mechanisms may dampen the blow, President Moon may come under pressure to strike a more conciliatory tone once an ongoing re-evaluation of the THAAD system is completed.

Ozzies outspend in Japan
Jobs for all

Elsewhere, Japan has seen a rapid acceleration in foreign visitors under the Abe administration, with overseas visitors topping 24.0 million in 2016. That compares to just 8.4 million in 2012, the year Abe entered office. The government has been quick to claim responsibility, highlighting investment in tourism infrastructure and an easing of visa restrictions. This characterisation seems disingenuous. One explanation for the rapid growth appears to be the low base. Japan has lagged regional counterparts with overseas visitors in 2012 standing at  11.1 million in Korea, 14.5 million in Singapore and 48.6 million in Hong Kong (with more than 30 million from mainland China). Another factor driving the growth of tourism over the period is the yen, which has dropped 40% over the past five years against the dollar. The growth of Chinese tourists appears particularly sensitive to currency trends, with the number of visitors stabilising since early 2016, in line with the relative currency movements. By contrast, visitors from Korea have continued to grow, and now represent the largest source of foreign arrivals. The average spend per tourist has also closely follows the USD-JPY, topping out in September 2015 before falling more recently. Interestingly, the highest spenders on a per capita basis are the Australians (see Chart 8). This reflects a hefty budget for accommodation, a pattern repeated across western economies. Despite the growth both in numbers and aggregate spending, it is clear that Japan's tourism industry is still playing catch-up. The direct contribution of tourism is estimated at 2.4% compared to an OECD average of 4.1% (see Chart 9). The trend is reversed when one examines employment, with employment in tourism 6.9% of total employment compared to an OECD average of 5.9%. The unbalanced story confirms suspicions that Abe's ability to mobilise the workforce has not been accompanied by a willingness to implement productivity-enhancing reforms capable of driving growth higher. 

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Emerging Markets - Big spender or big investor?

Chinese outbound tourism has grown rapidly in recent years as incomes increased, consumption patterns changed, and visa requirements became less onerous. Chinese tourists have been an important source of growth for many countries and are often cited as evidence of China's rebalancing, both towards greater consumption but also reducing external imbalances. Official data show the stark increase in overseas tourism (see Chart 10) – according to official data, tourism spending overseas increased from approximately US$100 billion in 2012 to approximately US$ 250 billion in 2015, and average spending per traveler increased from US$1300 in 2013 to US$2300 in 2015. This sudden surge in Chinese spending is seemingly backed up by countless anecdotes. Reported examples include Chinese tourists splurging on big-ticket jewelry in Hong Kong; tourists stocking up on cosmetics and health food products in Korea and Japan; or the fact that shopkeepers from London to New York have added Mandarin speaking staff to accommodate the influx of Chinese shoppers. However, anecdotes also abound of tourists spending on financial assets overseas, namely real estate. This begs the question – how much of this spending is on traditional goods and services abroad and how much is on financial assets? Put in other words – is the rise in Chinese tourism spending simply disguised capital outflows, while actual spending on goods and services is much less than official statistics imply? 

Disguised outfolws
Fewer tourists spending more

Until recently this was a topic where anecdotes tended to dominate the conversation, namely reports of Chinese tourists using debit cards to purchase property abroad or phoney jewellery transactions to convert large sums into foreign currency. However, recent research from the Federal Reserve Bank of San Francisco sheds light on how financial outflows might have been concealed or mismeasured as tourism spending. Their key conclusion is that capital outflows concealed as travel spending are "large and significant,"accounting for a quarter of net private financial outflows. Also, because the services deficit was likely distorted, the current account surplus was therefore likely larger than stated over the last couple of years. Among the reasons cited in the paper is the simple fact that travel transactions, especially since the end of 2013, responded to economic forces in ways that are opposite to the norm – they increased when growth faltered as well as when the currency depreciated. Indeed, travel spending spiked in 2014 at the same time growth weakened significantly and the currency depreciated. Other data points show highly anomalous patterns: in 2014, China's travel expenditure as a share of GDP was higher than the United Kingdom's even though the UK's GDP per capita was seven times that of China's. The Fed paper noted the other EM country with abnormally high travel spending as a share of GDP was Russia. Additionally, the growth of travel spending has greatly exceeded the number of outbound tourists, especially in 2014 when travel expenditure grew four times as fast as the number of outbound travelers (see Chart 11). Furthermore, this rise in spending per traveler coincided with a period when luxury brands saw weaker global sales and expensive destinations such as the Maldives saw declining Chinese tourist numbers. Although there are clear indications that travel was used to move capital abroad, it does not refute the fact that genuine tourism spending has still increased significantly and Chinese tourists will continue to be a driving force in global tourism spending.

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