21 Jul, 2011

European Travel Steady But Economies Face Downside Risk – Report

Imtiaz Muqbil

With Western economies facing significant headwinds and downside risks, European countries will need to maintain strong promotions of inbound tourism to maintain jobs and growth, according to the latest Quarterly Report (Q2/2011) of European Tourism In 2011: Trends & Prospects, released on 20 July.  It sends a strong underlying message of caution to investors and industry executives, not to become overly optimistic or set exaggerated targets.

The report, available for free download here, says that although travel to and within Europe has remained buoyant in the first half of 2011, some of the growth is partly reflective of the “rebound effect resulting from comparison to data during the air space closures in April 2010.”

Writing in the foreword, Leslie Vella, Chairman, ETC Market Intelligence Group, notes that this edition of “Trends and Prospects” includes a special Oxford Economics analysis of the possibility of a “lost decade” for the world’s developed economies, similar to what Japan experienced in the 1990s. The analysis concludes that the recovery in the developed nations has now reached a stage where it is self-sustaining, particularly when set in the context of continued rapid growth in the Emerging Markets.

“Clearly the recovery we are now enjoying will have to contend with significant headwinds. Fiscal tightening, private sector deleveraging, and a possible sovereign debt default all present significant risks to economic growth.

“So while we are encouraged by the performance of our industry, the challenges we face require our commitment to work together to promote all of Europe to the world,” Vella says.

The Oxford Economics analysis itself paints a much more grim picture, especially in relation to the future of the U.S. economy.

Says the report, “In Europe, governments have already embarked upon ambitious fiscal austerity programs to satisfy the financial markets that their public finances are on a sustainable path. Meanwhile, within the United States, there appears to be little appetite within Congress for additional fiscal stimulus given the present trajectory of the public debt ratio.

“The White House is negotiating deficit cuts of between $1 trillion and $4 trillion over the next decade to win the Republicans’ agreement to raise the ceiling on federal debt. The current stand-off over raising the debt ceiling also raises the risk that the US will have to make more substantial short-term spending cuts.

“It is likely that a last minute compromise will eventually be reached on raising the debt ceiling. But it is clear that the US public sector is stretched to the point where it has become a source of risk itself. This was underscored by the ratings agency Standard & Poor’s, after it cut the long-term rating outlook for US government debt from stable to negative in April, reflecting concerns over the lack of progress in cutting the budget deficit.

“Against this background, the outlook remains uncertain as it is not clear how the private sector will cope when fiscal policy support is removed. Indeed, history suggests that policy tightening after financial crises can derail fragile recoveries,” the report says.

It concludes, “There seems little doubt that downside risks to global growth have increased over the last month. And in a longer perspective, it is notable that some of our current baseline forecasts – especially for the US – have moved significantly towards what was considered a ‘sub-par’ growth outcome six months ago.”

Reflecting another key trend, the growing importance of the “emerging markets” and a rebalancing of the world economic and geopolitical order, the report says:

“Growth in the emerging markets should also remain a supportive factor. Although this has moderated of late this may well represent a ‘soft landing’ for these economies, which will allow the expansion to proceed on a more sustainable basis.

“Although slower growth in the Emerging Markets is currently being felt in the advanced nations, the avoidance of a boom-and-bust cycle in these economies has also markedly enhanced the sustainability of the recovery in the advanced economies. We expect the Emerging Markets to continue providing the main driving force behind the global recovery over the next few years.”

The report, one of the best monitors of European travel performance, is available free of charge here. Extracts are reproduced below.

Executive Summary

(+)  Travel to Europe continued to exhibit strong growth through May as indicated by industry and arrivals data. Nearly all destinations report growth in arrivals for the first three to five months of the year.

(+)  However, the heady growth numbers are due in part to a rebound effect resulting from comparison to data during the air space closures in April 2010. This effect will become less pronounced as the year carries forward.

(+)  The most recent lodging and arrivals data are showing signs of moderating growth while data for European airlines shows a modest expansion in recent weeks. Available (and continually added) capacity should allow for competitive fares which could provide some added support to travel demand over the near term.

(+)  Hotel occupancy slowed in Southern and Eastern Europe in May while the rest of Europe held relatively steady. Average Daily Rates continue to push up across Europe in response to demand and have displaced demand as the primary driver of hotel revenue growth.

(+)  We expect the overall growth trend to slow in the remainder of 2011 as comparisons are made to stronger performance in 2010 and fight against the headwinds of an anaemic global economy.

(+)  Only two years into the recovery and incoming data indicate that the global economy has weakened anew, raising doubts about whether the expansion in the advanced economies is sustainable.

(+)  However, the softening of growth in Q2 likely reflected a number of temporary factors that are already fading. The recovery in the developed nations has now reached a stage where it is self- sustaining, particularly when set in the context of continued rapid growth in the Emerging Markets. Fears of a ‘lost decade’ resembling Japan in the 1990s are thus overplayed.

Foreword by Leslie Vella Chairman ETC Market Intelligence Group

Travel in Europe continues to move toward full recovery. The first half of the year has produced encouraging results across all regions. It appears that— even if the market slows as expected—international visits will reach prior (2008) peaks in 2011.

The aviation sector is driving some of this growth with added capacity which has the dual benefit of improving access and lower fares over time. Air passenger demand is exhibiting sustained strength as the year progreses with North American and intra-European routes growing at a sustainable pace.

And the recovery has been widespread with the vast majority of destinations posting visitor arrivals growth thus far in 2011 and many at double-digit rates. Through the first 5 months of the year, every country in Europe has experienced an increase in occupancy rates and revenue per available room (RevPAR). For the year through May of 2011 occupancy rates grew 4.2% across Europe and RevPAR has increased by nearly 10%.

These encouraging trends appear set to continue, albeit at a slowing rate as comparisons are made to stronger performance in 2010 and the Eurozone debt crisis weighs on business and consumer confidence.

This edition of “Trends and Prospects” includes a special Oxford Economics analysis of the possibility of a “lost decade” for the world’s developed economies, similar to what Japan experienced in the 1990s. The analysis concludes that the recovery in the developed nations has now reached a stage where it is self-sustaining, particularly when set in the context of continued rapid growth in the Emerging Markets.

Clearly the recovery we are now enjoying will have to contend with significant headwinds. Fiscal tightening, private sector deleveraging, and a possible sovereign debt default all present significant risks to economic growth.

So while we are encouraged by the performance of our industry, the challenges we face require our commitment to work together to promote all of Europe to the world.

We trust you will find the analysis in this report helpful as you track your own destination’s performance and seek to anticipate future trends.