Tourism dollar key to riding out mining slump: Gareth Aird
GUEST OBSERVER
The Australian economy is going through a period of transition. The mining investment boom is coming to an end, the terms of trade has fallen sharply and the AUD has been trending lower.
The weaker local unit is largely the result of the decline in Australia’s terms of trade. Since mid-2014, the AUD has fallen some 25% against the USD and 16% on a TWI basis. Over the year to June-2015, the terms of trade is estimated to have declined by 15%.
The decline in the AUD is a welcome development for sectors of the economy with a high export propensity or high import intensity. Tourism is one such sector. A lower AUD provides assistance to the Australian tourism industry in essentially two ways: (i) it encourages international holidaymakers to visit Australian because it reduces the relative cost of a trip; and (ii) it makes a domestic holiday more attractive to Australian residents because the relative cost of an overseas holiday rises.
How important is tourism to the Australian economy?
Tourism has long been an integral part of the Australian economy. The industry accounted for 2.7% of GDP in 2013/14 ($43.4bn), down a touch from 2.8% of GDP in 2012/13. By way of comparison, the tourism sector is a little bit larger than the agriculture sector, as a share of GDP. It is Australia’s third largest export and the largest services export.
More importantly for the Australian economic story, the tourism sector employs around half a million workers, which represents a significant 4.6% of total employment. Tourism’s share of total employment is greater than its share of GDP because it’s more labour intensive than other industries (as distinct from capital intensive industries like mining production). Tourism industry workers largely comprise those employed in the sectors of accommodation, cafes, hotels, transport, travel agencies, retail trade and education and training.
In recent years, however, it hasn’t all been smooth sailing for Australia’s tourism sector. Since the GFC, the sector’s share of the Australian economy has declined a little (down from 3% of GDP in 2007/08). The small fall is largely the result of the slowdown in the global economy, which has a negative impact on the number of inbound visitors and also the elevated level of the AUD. There is little that policymakers can do on either of those fronts. But as key export commodity prices have fallen, which has been the key factor in the decline in the AUD, the tourism sector has benefited.
How does the level of the AUD impact on tourism in Australia?
In a nutshell, a lower AUD is positive for the tourism sector. It benefits both the domestic tourism sector and also the international tourism sector. The recent trends in the AUD and tourism flows confirm that the lower AUD is having a positive impact on the Australian tourism sector. Since mid-2014, the ratio of arrivals to departures has gradually lifted. Or put another way, growth in the number of arrivals has outpaced growth in the number of departures. Over the same period, the AUD has fallen some 25% against the USD and 16% on a TWI basis.
The monthly trade balance data paints a similar picture. Since early-2014, tourism related service credits have been larger than tourism related service debits. In other words, the monthly tourism trade balance has moved into surplus. In our view, this will be the new norm.
Our forecasts have the AUD drifting a little lower over the next 12 months (both compared to the USD and on also on a TWI basis). On that assumption, the tourism sector will receive further support from the level of the exchange rate, particularly given there is a lagged effect between changes in the level of the currency and holiday-related decisions. The lag represents the timing differential between booking a holiday and taking it. We put this differential at 3-6 months. So the tourism sector’s share of the Australian economy and its contribution to growth is set to lift over the next couple of years.
Where will the tourists come from?
The lower level of the AUD means that domestic tourism will receive a boost as more Australian residents holiday locally rather than overseas. Equally, the lower AUD will boost the number of international holidaymakers visiting Australia.
Tourists from Asia, and in particular tourists from China, are the major growth area for Australian tourism exports. In 2014/15, the number of short-term arrivals from China to Australia rose to 935k (compared with 770k in 2013/14). If current trends are maintained, 1 million Chinese residents will holiday in Australia in 2016. In our view, this is likely to happen. The number of holidaymakers from China was already rising steadily when the AUD was elevated. This was partly the result of rising Chinese household income which has generated a resultant lift in tourism- related consumption. Some softening around travel controls over Chinese residents also helped. The lower level of the AUD will simply serve to act as a tailwind on the growth in tourists from China.
The impact of the lower AUD will be most noticeable on the number of tourists arriving from the UK and USA. The UK and USA economies have recovered and their currencies have appreciated commensurately. The lower AUD (and stronger GBP and USD) will see tourists to Australia from both the UK and USA lift. This has already started to happen with the number of tourists from the UK and USA rising on the back of stronger currencies against the AUD.
The tourism investment pipeline
A pickup in the tourism sector has benefits for non-residential construction and other capital expenditure. The tourism investment pipeline was estimated to have grown by 8.7% in 2014 to $53.7bn1. The pipeline constitutes aviation investment, accommodation investment and arts, recreational and business services.
Which regions will benefit the most?
All States benefit from a lift in tourism, but the States which have the highest specialisation to tourism will benefit the most. These States are NSW and QLD. Both States have a tourism specialisation ratio greater than 12. The Barrier Reef has been a major drawcard for international tourists while Sydney Harbour is one of Australia’s iconic places. The tourism sectors in ACT (specialisation ratio close to 2), being the national capital, and NT (with Kakadu National Park and Ayres Rock) are also important to local economies.
The national accounts spending data is telling. It shows that since the AUD started heading lower, real spending on hotels, restaurants and cafes has lifted considerably. The lift in QLD, in particular, is significant and illustrates the positive impact that a lower AUD has had on the tourism industry. We expect this trend to continue. Robust growth in the tourism industry will help to offset the downturn in mining investment and associated job losses in QLD.
Gareth Aird is an economist with the Commonwealth Bank of Australia and can be contacted here.
