Rodney Dickens says now that tourism is vying with dairying as our number one export earner, it is time to scrutinise its economic impact in more depth

By Rodney Dickens*

Tourism competes with dairying as New Zealand's largest export earner making it an important industry when assessing economic growth prospects among other things.

This Raving looks at tourism from several perspectives including an overview of what is driving the latest boom in foreign visitor arrivals, introducing the concept of net tourism that paints a different picture of the impact of the tourism industry on economic growth and a look at economic multiplier effects set in motion by the latest tourism boom.

Drivers of the latest boom in foreign visitor arrival numbers

Tourism has been a strong growth industry over many years based on the increase in the rolling 12 month numbers of foreign visitor arrivals that includes tourists and other short-term visitors like business travellers (black line, adjacent chart). It has also been a quite cyclical story with periods of strong growth like that experienced since 2014, periods of little growth like the experience between 2006 and 2013 and even occasional periods when visitor arrival numbers fall like the fall caused by the 1998 East Asian crisis.

Thanks to help from Lynne Tuxford, Partner at the Baldwin Boyle Group, the adjacent chart compares national milk production with tourist visitor arrivals back to 1990. The performance of the two has been remarkable similarly since 1990 although over the last three years growth in tourist visitor arrivals has been strong while there has been some downside in milk production.

Statistics NZ only provides a breakdown of visitor arrival numbers for eight major source markets with the annual numbers for seven of these plus all other source markets shown in the two charts below. The charts reveal the latest boom has been driven by increased numbers from China, Australia, the US and all other source markets although the Chinese numbers have grown little in the last year. The rest includes some of the strongly growing Asian markets like Vietnam and some of the traditional markets from which growth is likely to be relatively weak (e.g. some of the other European markets).

This Raving isn't designed to provide detailed analysis of the drivers of foreign visitor arrival numbers as opposed to some general insights. Factors behind the latest tourism boom that has occurred despite a generally high NZD in recent years include growing per capita incomes in parts of Asia resulting in increased propensity to travel and associated with this has been many new routes being opened up between NZ and Asia and falling airfares that recently will have been driven at least partly by lower fuel costs. The adjacent chart shows the CPI components for NZ international airfares and total US airfares that will be dominated by domestic fares with both having fallen significantly in the last couple of years.

However, the oil price has increased moderately since the recent low in October 2016 so the boost to tourist numbers from falling travel costs may not last too much longer.

More detailed research I have done in the past on the drivers of global tourism show that it is impacted significantly by economic cycles. In that context, the adjacent chart that uses a weighted average of manufacturing purchasing manager surveys for the major economies as a leading indicator of GDP growth for the G20 major economies suggests that global tourism prospects should be in the process of improving. G20/global economic growth appears to be in the process of improving quite a bit based on the weighted average PMI survey. GDP growth won't necessarily improve as much as signalled by the combined manufacturing PMI survey based on the experience when G20/global growth last improved in 2013.

Past experience suggests that the strong growth in recent years will not continue indefinitely. Exactly what contributes to the next significant slowdown in growth and when it occurs I don't know. But on the other hand it seems reasonable to assume that until virtual tourism takes over from actual tourism, international tourism will remain a reasonably strong growth industry possibly aided by new generation planes that contribute to significantly faster travel times.

Net tourism paints quite a different picture at times

While most focus is normally on foreign visitor arrival numbers, just as important to the impact of international tourism on the New Zealand economy is what is happening to the number of NZ residents heading overseas for holidays and other reasons like business travel. The left chart shows foreign visitor arrival numbers and the numbers of NZ residents departing for short-term trips. In terms of the likes of consumer spending the important question is how many foreigners are in the country at any one time consuming versus how many local residents are spending money overseas. The black line in the right chart below shows annual net tourism (i.e. foreign visitor arrival numbers less NZ resident departure numbers). Net tourist numbers still show a moderate upward trend over time but are much more cyclical than foreign visitor arrival numbers meaning that international tourism has a more cyclical impact on domestic spending than suggested by the foreign visitor arrival numbers.

Recently, NZ residents holidaying overseas have been growing faster than foreign visitor arrivals meaning slightly lower net tourism. If this pattern continues it means that international tourism will go from providing a reasonably significant boost to growth in consumer spending to providing no boost. Based on past experience at some stage over the next few years there will be another major cyclical fall in net tourism numbers while it is possible the start of that fall may already be underway.

Up until around 2005 the exchange rate was the major driver of cycles in net tourism as shown in the adjacent chart. If there was a major fall/increase in the exchange rate as measured by the NZ dollar trade weighted exchange rate index around 30 months later there was an upturn/downturn in net tourism. Reflecting this quite long lagged impact of the exchange rate the red NZD TWI line in the chart has been advanced or shifted into the future by 30 months. Prior to 2006 the exchange rate impacted with quite a long lag which related to how long it took for travel packages to be repriced after changes in the exchange rate, how long it took for the new editions of the brochures to be distributed to travel agents around the world and how long people planned travel in advance. The exchange rate will still be having an impact although the time lag between changes in the exchange rate and changes in net tourism has probably changed as a result of increased online bookings but most importantly other factors have become much more important drivers of net tourism. If the exchange rate were still the major driver net tourism would currently be around trough levels rather than peak levels with the potential for some near-term upside and net tourism driven by the last fall in the exchange rate. Maybe the exchange rate still has a sufficient impact to help prolong the latest boom in net tourism but the flipside of that is that the increase in the exchange rate over the last couple of years would then imply some downside risk to net tourism starting around mid-2018.

Some of the economic multiplier effects of the latest tourism boom

While the boost to consumer spending from net tourism may be about to end some of the positive economic multiplier effects from the latest boom in tourism that will include some upside in domestic tourism will remain at work over the next couple of years. The adjacent chart shows the NZ occupancy rate for commercial accommodation to be a useful leading indicator for consents for hotels and other short-term accommodation. The tourism boom has driven occupancy rates to the highest level on record and this is somewhat belatedly flow through to increased consents for hotels etc. It isn't a perfect relationship but the highest correlation at a moderately positive 0.65 is with the occupancy rate leading by 20 months with this reflected in the chart by the red occupancy rate line being advanced or shifted into the future by 20 months. Similarly, in response to increased demand a range of tourist operators will be looking to increase capacity including staff numbers which will have a positive flow on impact on the economy including for consumer spending. This will be a small factor in the corporate tax take running ahead of what Treasury has been forecasting, which will help fuel increased government spending.

Even if the upturn in net tourism has ended, the positive economic multiplier effects set in motion by the latest tourism boom will make a positive contribution to economic growth for some time. However, tourism is a highly cyclical industry when we look at the likes of the occupancy rate and consents for hotels etc. At some stage it will be time to start focusing on the next cyclical downturn that will include negative economic multiplier effects including for the likes of hotel construction and tourism-related employment as will be covered in our pay-to view, monthly economic reports.

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*Rodney Dickens is the managing director and chief research officer of Strategic Risk Analysis Limited.