Impact of COVID-19 on Tourism Industry

Impact of COVID-19 on Tourism Industry 

By Aarthi Raghavan, Edika Amin, Taisha Antony | March 29 2020, 9:00 AM SGT

 

According to the World Travel and Tourism Council, COVID-19 pandemic could cut 50 million jobs worldwide in the travel and tourism industry and Asia is expected to be the worst affected. Once the outbreak is over, it could take up to 10 months for the tourism industry to recover, which currently accounts for 10% of global GDP.

There are three major impact channels of COVID-19 on the tourism industry. First, the travel restrictions and lockdowns, and reduced appetite for business and leisure travel. Financial conditions are also seen as an accelerator that can amplify the effects of COVID-19 on the tourism industry. Second, consumer confidence due to disruptions in global markets and reduced business activity. Third, weak supply chains as a result of factory closure, inventory shortage and lockdown risks.

The working assumption is that if the virus is contained through the second quarter of 2020 and the lockdowns ease in the second half of the year, then there is a possibility of an economic rebound. This year has seen the fastest economic contraction worldwide so far and any stabilization in the latter half of the year will have a positive impact. However, a lot of catch-up growth will be a result of the situation improving.

The potential accelerator effect of the pandemic can be a one or two-quarter contraction in the economy, mainly because of the impact on households and businesses in the absence of government support. For example, school closure, as a metric, is a proxy for the household impact which was stable through most of February. Starting from March 2, this metric has seen an increase. It appears that the impact on households and businesses will be determined largely by how long the restrictions remain in place.

Governments and central banks have been key drivers in stimulating the economy. Federal rate cuts have inspired emerging markets to do likewise. The idea is to inject money into banking and to try and shelter businesses from the negative impact of the lockdowns. These measures can help businesses at the global level, as well as the travel and tourism sector. However, it is predicted that there will be a permanent impact on the labour market since in certain vulnerable sectors there would be an irreversible loss of business and jobs which may delay any potential rebound. Households will feel the impact of the current lockdowns for the next 2 years, including that of a market correction.

Across the tourism sector, hotel occupancy rates have been falling. At an APAC level, impact varied across countries at the end of February, however by the start of March more unanimous impact has been observed. The travel industry, which is seasonal in nature, will see a more severe impact if the lockdowns last longer. In APAC, it is anticipated that the effect will last for up to 8 months and will affect the peak 2020 travel season. Losses in tourism are estimated to be around 39% to the travel industry. If lockdowns and travel bans prolong for the rest of the year, it can lead to a maximum of 80% decrease in the tourism industry.

Around the world, the industry will see a negative impact of nearly 40 per cent on inbound travel. Northeast Asia will be severely impacted. Countries most linked to Chinese tourism will see the greatest impact. China itself will experience a massive hit due to a fall in domestic tourism. According to the analysis conducted by Oxford Economics, Thailand will be the most affected since it has opened to Chinese tourists more rapidly in the past several years, and seems to have adopted a mono-cultural approach to China.

Though we will see a large demand drop in the tourism sector, history suggests that the rebound will be large. For instance, the global financial crisis saw a reduction in tourist arrivals by 3.6% in 2009 but rebounded by 6.5% in 2010. APAC itself has previously seen a V-shaped recovery following the global financial crisis, wherein tourist arrivals fell by 0.8% in 2009 and rose by 12.6% the following year. At the same time, the rapid growth expected in 2021 is likely to offset only a proportion of the fall in 2020. The rebound this time will potentially be sluggish due to the severe impact on households which may alter their travel behaviour and jobs.

Experts see a whole range of scenarios on how the impact will look like in the next few months and the next year. Worst case scenario will be if the restrictions last for 10 months. It is also seen that the impact will vary across different age groups. The elderly generation, who are generally more likely to travel, will now be more risk-averse after this pandemic subsides, even after things return to normal.

 

This blog is developed based on our participation at the APAC Webinar on “Tourism Impacts of COVID-19 on the Asia Pacific”, by Tom Rogers, Head of Macroeconomic Consulting, Asia, at Oxford Economics.

The presentation deck can be found HERE

Image credits: Traveldailymedia 

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