The economies are still incredibly fragile, even eight years after the last crisis.
By Nick Corbishley, for WOLF STREET:
The tourism industry is in the “eye of the hurricane”, says Manuel Butler, executive director of the World Tourism Organization. “It was the first sector to be afflicted by the virus crisis and, unlike other crises, is likely to be the last to recover from it.”
Tourist spending across Europe already slumped 68% year-on-year in March, when the lockdowns began to spread across the continent, according to a recent UBS analysts’ note based on data from Planet, the VAT refund provider. “Chinese spend in Europe was down 84.6% y/y, with all other nationalities also declining in March,” the report said.
Italy, the first European country to be hit by the virus and the first to enter full lockdown, on March 10, saw the biggest drop in tourist spending, down 96% year-over-year. Hotel occupancy in Italy also slumped to 4%, its lowest level ever.
Overnight stays in hotels in Spain, which entered lockdown around ten days after Italy, plunged 61% year over year in March to 8.3 million, also the lowest number on record, according to Spain’s National Statistics Institute. In April, the number is likely to be much closer to zero since almost all of Spain’s hotels and other temporary lodgings have been closed since March 26.
Spain’s government plans to gradually relax the country’s lockdown conditions, among the harshest in Europe, on May 10, but there will be little relief for the country’s tourism industry. Spain’s Minister of Work, Yolanda Diaz, said in a statement this week that the sector would not be returning to any semblance of normality until at least the end of the year. While her words infuriated some in the sector, most tourism businesses are grudgingly accepting that the summer season is as good as lost.
Even as lockdown conditions are gradually lifted in places like Italy and Spain, many social-distancing restrictions will remain in place, including rules affecting travel. And consumers, still fearful of contracting the virus while also reeling from the deep economic recessions that are hitting just about every national economy on the planet, are unlikely to travel so far or with such frequency for some time.
“Fear of traveling will probably last longer than the pandemic itself. It’s difficult to expect an immediate recovery of tourism once the lockdown measures are lifted,” said Steven Trypsteen, an economist at Dutch bank ING.
The result is that European cities, towns, islands and beach resorts that were gearing up for yet another summer of unfettered tourism, with all the pros (oodles of money and jobs, albeit of the casual, low paid variety) and cons (sky-high prices and rents, overcrowding, noise, environmental degradation and pollution, overstretched public services and infrastructure) it brings, are now facing their most challenging year since the mass tourism industry came into being, in the post-World War 2 period.
The impact is likely to be particularly brutal for Southern European economies, which all share the following three features:
They all depend enormously on tourism. In Spain the sector accounts for 15% of GDP; in Italy it’s 13%; in Portugal it’s 18%, and in Greece it’s 21%. Travel and tourism also provide as much as 26% of jobs in Greece. While huge, these are still macro-level numbers. When you drill down to a more local level, there are many regions, such as Spain’s Canary Islands, for whom tourism represents one-third or more of the local economy. Within those regions in Southern Europe, there are thousands of towns and villages that depend almost entirely on tourism for jobs and income.
They are still incredibly fragile, even eight years after the last crisis. The Italian and Greek economies are still smaller than they were before the 2008 global financial crisis. Spain’s economy has rebounded more robustly but even after six and a half years of growth, its official unemployment rate was still barely below 15%. Now, it’s about to explode well above 20%, for the fourth time in 30 years.
They already have some of the highest levels of public debt on the planet. In absolute terms, Italy has the second highest level of public debt in Europe, at €2.44 trillion, the equivalent of 138% of GDP. Portugal’s public debt-to-GDP ratio is 122%, Spain’s is 95.5% and Greece’s is 176%. With the IMF forecasting GDP drops this year of 9.1% for Italy, 10% for Greece and 8% for Spain and with government expenditure set to explode in the coming months, those public debt ratios are likely to increase at an even faster rate than before.
This is one of the reasons why the EU’s internal market commissioner Thierry Breton wants Europe’s tourism sector to be first in line for EU recovery funds. Without direct help, the tourism economy could slump by up to 70% this year, Breton warns. Once EU leaders finally agree on the relief funds package, actually getting the money to the small businesses that most need it is not going to be easy. Even in a best-case scenario, almost one-third of jobs in the European tourism sector will be destroyed, at least in the short term, says Jennifer Iduh, head of research at the European Travel Commission.
For hotels, the pain has already begun. Europe’s largest hotel group, Accor, which owns brands such as Ibis and Movenpick, said that first-quarter sales fell 17% to €768 million, while like-for-like revenues were down 15.8%, excluding currency moves and acquisitions. The results are likely to be a whole lot worse in April and May, given that the economies of 92 of its 112 global markets are under some form of lockdown.
“In Spain, a progressive lifting of the [tourism] sector’s lockdown from here to December will result in total losses of around €124 billion. That will be devastating for the hotel sector,” said Gabriel Escarrer, chief executive of Meliá, one of Spain’s biggest hotel groups.
Some Spanish hotel groups are urging the government to facilitate mobility by quickly rolling out an immunity passport, which will show whether someone has already suffered from Covid-19 or not. But that will take time to put in place and it raises a host of prickly practical, legal and ethical questions.
In the meantime, Southern Europe’s one remaining hope is that the domestic tourism market will pick up some of the slack this summer. To help make that happen, local authorities and businesses are working around the clock to make their towns and businesses as covid-proof as possible.
But tourists will have to get used to “a whole new way of travel”, says the Canary Islands’ Councillor of Tourism, Yaiza Castilla, adding that everything associated with holidays will need an urgent redesign, including hotels, transport, leisure products, shops and the way tourists are supervised at their destination. As part of this, incoming visitors may be required to install an application on their cellphones that will allow authorities to track their every move.
If everything goes to plan and the gradual lifting of the lockdown does not precipitate another surge in cases, and national residents don’t balk at the idea of being constantly tracked, traced and controlled during their holidays, Italian tourists may have the magic of Venice, Florence and Sienna all to themselves this summer. Likewise, the local residents of Barcelona and Palma de Majorca may finally get what they have long wished for: a city that is not completely dominated by and tailored for foreign tourists.
But they could also end up getting a lot more than they had bargained for. If the virus does come back with a vengeance once the restrictions are relaxed, necessitating yet another lockdown, or if the domestic market does not pick up the slack as cash-strapped national residents decide to vacation at home or in their ancestral villages, the impact on the region’s most important and (until a couple of months ago) fastest growing economic sector will be even more brutal than is currently feared. By Nick Corbishley, for WOLF STREET.
Due to “the interconnectedness of the financial system” fund gatings can trigger “contagion risk” with “the potential to become a systemic issue,” warns Fitch. Read… Market Mayhem Meets Liquidity Mismatch: “At Least” 76 Mutual Funds in Europe Were “Gated” in March
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.