Friday 22 June 2018

Brexit and euro crisis the only clouds on the horizon for booming tourism sector

Hundreds of millions of people worldwide are joining the middle classes. The widening and deepening of global prosperity is changing many things. Photo: PA Wire
Hundreds of millions of people worldwide are joining the middle classes. The widening and deepening of global prosperity is changing many things. Photo: PA Wire
Dan O'Brien

Dan O'Brien

Tourism is one of the country's most important industries. It is big, geographically widespread and growing rapidly. How has it been performing recently and, as the summer peak season approaches, what are its prospects in the short term and over the longer term?

The last question may be the easiest to answer.

Hundreds of millions of people worldwide are joining the middle classes. The widening and deepening of global prosperity is changing many things.

One of those changes is an ever-increasing desire to travel. Add to this a (less measurable) shift away from owning material possessions to acquiring lived experiences, and the sky is the limit for the hospitality sector in the long term.

These trends are to be seen in the Irish tourism industry in recent times. In the five years to 2017, spending by foreign visitors to Ireland grew by two-thirds, multiples of the increase in residents' expenditure.

Most eye-catching has been the growth of non-traditional markets beyond Europe and North America. Aggregate spending by visitors from more exotic locations grew by 140pc over the past half decade, higher than any other market.

Although these visitors still account for a much smaller share of the overall market, as the accompanying chart illustrates, that will change over the next decade if current rates of increase continue.

With, among many other things, the first-ever direct scheduled flights to east Asia starting in the coming weeks, that looks like a reasonably sure bet.

The North American market is Ireland's second biggest source of visitors. It has also been the second fastest-growing, with spending doubling over the five years to 2017.

Reflecting the new-found position of the US as Ireland's largest trading partner, north American visitors now spend more than British ones (in terms of numbers of arrivals, Britons still far outnumber North Americans, but the latter spend much more per head).

Also reflecting trade patterns is the importance of continental Europe.

It is now the biggest source of tourism spend and has grown by 65pc over the past five years.

Indeed, so strong has been the growth in short visits from the continent that there is even talk of saturation point having been reached in the capital.

But if Dubliners are getting tired of shooing plodding tourists out of the way, they shouldn't expect any thinning of numbers. With hotels sprouting around the city and Airbnb becoming more popular, numbers are more likely to go up than down.

But numbers could drop if some risks materialise. A hard Brexit is one big risk for the sector. Over the past half decade Britain has been the industry's weakest-growing market.

Over the full decade it is been negative, with spending by British visitors still below pre-crisis peaks. It also fell last year (compared to 2016) for the first time since the recovery began.

Central to both slumps was/is the weakness of sterling.

Arrivals plummeted when the value of the pound relative to the euro fell by a third between 2007 and its low point just after the financial crisis began. The negative effects of sterling's Brexit-related depreciation - from late 2015 to early last year - has hit the sector again.

Last year, spending by British visitors and the numbers arriving both fell by 5pc on 2016. The currency movement had a double-whammy effect on Ireland.

Firstly, sterling depreciation made foreign holidays considerably more expensive. Secondly, it pushed UK inflation up so sharply (because imported goods became more expensive) that from early 2017 it exceeded pay growth. As a result, Britons experienced a real terms decline in the incomes over the course of last year.

Two future-related points are worth making about sterling and British visitors. The first is positive: the inflation-causing effects of the fall in sterling are waning and real incomes in Britain have started to rise again. That, and the broad stability of the exchange rate over the past year, should encourage more Brits to leave Blighty this year for their holidays.

A much-less positive development also looms on the horizon: a hard Brexit. Although it is more likely than not that a no-deal exit next March will be avoided, that is far from certain given the divisions within the ruling Conservative Party. If the Brexit talks break down and Britain crashes out next March without a deal, sterling will crash too. It is easy to see it fall below parity with the euro. In those circumstances it could very well stay there given that the UK is still running unusually large balance of payments deficits with the rest of the world (such deficits say that a currency is overpriced and needs to depreciate to bring imports and exports in line).

What about the immediate outlook for the US and continental markets?

The booming US economy and the strong dollar both look set to persist. These factors should continue to drive growth in US visitor numbers.

The strong upswing in the eurozone economy last year appears to have slowed somewhat in early 2018.

That is something to watch, although it may only be the sort of soft patch that economies on the up sometimes experience.

The big downside risk for the continental market is a reigniting of the euro crisis, now almost six years in abeyance. The coming to power of a radically different and eurosceptic government in Italy threatens to bring about an outcome that was narrowly avoided when Greece defaulted on its public debt.

Italy's economy is 10 times larger than Greece's, and its financial sector is bigger again. If Italy goes Greek the existence of the euro will be in doubt again.

Unless the new government backtracks on many of its commitments, we are heading into a crisis.

Tourism, and every other sector, will quickly feel the effects.

Sunday Indo Business

Business Newsletter

Read the leading stories from the world of Business.

Also in Business