Prospects For The Australian Travel And Tourism Economy

Transcript

Sarah Hunter:Thank you very much for that, Stephen. It's a pleasure to be here today presenting to all of you. As Stephen said, I'm going to be giving an overview of the global economy and Australia more specifically, and then talking a little bit about what that might mean for the travel and tourism sector. So just a bit about BIS Oxford Economics, the company I work for. For those of you that don't know, we're a macro forecasting and consulting company. We've got offices all over the world. We now have over 200 economists on staff, which makes us the biggest group of economists in the private sector. We do forecasts at the macro level, industry, right down to the states and cities. So I'm going to talk a little bit about the states later on. And that makes us really well placed to present to a group like yourselves. We've got that global overview, and on-the-ground presence here means we can do the Australia detail as well. So I'm going to start off at the top and work my way down, as it were. To begin with, what's going on with the global economy right now? Well, it's actually pretty good news. I do outlook presentations fairly regularly, and 3 months ago I was saying we've had a good start to 2017. We've seen that before though in recent years. Let's see where we get to in 3 months' time, and will it be sustained? Good news is it has been. It's actually been a really quite a punchy start to 2017 for some regions, and we're seeing it come through in the trade numbers, and it's starting to come through in GDP as well. China, obviously key market for you, but key market for us too in terms of the global economy. It's holding up better than expected this year. We thought growth would slow more this year than it has. We're seeing that in some of the leading indicators too. So the next 6 months are looking pretty good, maybe a touch slower than the start of the year, but nothing to get concerned about. Over the medium term, yes, it's going to slow down. That's inevitable. You can't go at 10% a year forevermore. But it's still very robust and very positive growth compared to other countries. And the good news is, with the transition that they're going through away from that investment trade-led growth towards more domestic consumption, households and consumer spending is going to be very robust. You can see that on the chart there, the red line, and that's a positive for tourism. These are the, the guys that spend money, so very positive outlook for China. Good news in China always means good news for the rest of Asia, both in the short run— the uptick in that trade cycle came through in Asia actually sooner than the rest of the world. It's been going for around about a year now, and over the medium term Asia as a group is really going to drive the global economy. It's where the growth is going to come through. This chart— the key point here is the divergence of that Asia line from the other lines. They're going to be the ones adding output at the margin, the ones with the additional spending power as we move through time. I don't want to completely ignore developed countries though, so I'll just quickly touch on the US and Europe. The US— well, Donald Trump is dominating our thinking, everyone's thinking. What is he going to do next? I'm not sure I want a job at the White House right now. We're becoming increasingly concerned about President Trump from an economics perspective. When he came to power, he did have his big infrastructure boost. He was going to cut taxes. It was going to be very positive for growth if he managed to achieve all of that. We were skeptical at the start. We're now even more skeptical. You can see the chart showing you where our forecast was was, where we are right now. And using our model, we've also run an alternative where we strip out any kind of Trump stimulus. We're not too far off that. So he's not been good news for the economy, and he could actually be worse news if things continue to go wrong. Europe, in contrast— and parking the UK to one side and Brexit— but Europe is a— the continental Europe, perhaps— is actually a very good news story at the moment, much more positive than the US. We're seeing some really strong growth momentum. We got the Q2 GDP data for Europe came out this morning, showed annualized growth above 2%. I know that doesn't sound very exciting for an Aussie, but for a European, this is wave the flags time. That's incredible growth compared to what we've had in recent years. We think that's going to be sustained and that we are finally seeing Europe come out of the mud, as it were, and that yes, 2% probably won't be sustained forevermore, but we should finally have got beyond the sort of crisis— peak crisis points of the eurozone crisis. So good news there. Finally, on the international scene, I thought it'd be worth touching on oil prices given the audience. We've seen quite a lot of weakness just recently, oil back below $50. We're pretty pessimistic, if you like, on the price. We don't think it's going to come back, probably a little bit, but we're certainly not going to get anywhere near $100 a barrel. It's becoming increasingly obvious that OPEC just don't have the control over the market that they once had. The US now is a major producer, actually produces a larger share of world output, oil output, than the Saudis. That's an interesting statistic. And so in that position, OPEC doesn't have the market control, and it's becoming increasingly obvious that those unconventional producers, they're probably not that comfortable at $50 a barrel, but they can still produce at $50 a barrel, and that's what matters. So some perhaps some good news there. Australia then. I'm going to spend a bit more time on Australia because I think it is worth focusing on that in terms of the domestic tourism market. So starting off with households then, not great news, I'm afraid. The unemployment rate is coming down. That is a headline number we look at. That is good, but there's stuff underneath that that's not so great. We have a problem with underemployment at the moment. A lot of people working part-time, they'd actually prefer to be working full-time. They want to up their hours. That's giving us slack in the labor market, and it's keeping wage growth down. If there's someone else who'd do your job, it's hard to go to your boss and bargain for a higher rate of pay. And we're seeing that coming through in the data quite clearly. This means that growth in household income is constrained, and so consumer spending is constrained. Up until now, households have been trading off that weakness in household income growth by running down their savings rates, so saving less month to month. Sustaining increases in consumption. They can't do that indefinitely. There is a limit. So that's why we think consumer spending is going to slow a bit over the next couple of years before it rebounds as the recovery or the acceleration in growth here really takes hold and we mop up that slack in the labor market. What the thing that's going to delay that process is the private sector investment, business investment. So we're coming towards the end of that mining boom. We've got a couple of LNG installations to finish off up in WA and the Northern Territories, but basically that transition is now over by and large. But what we're waiting to see is for the non-mining sector to come back, to start investing, hiring people, and soaking up all those guys who were driving trucks for $100K a year up in WA. They need to find a job somewhere else. What We're getting there, but we think it's going to be another 18 months or so before we've really got a broad-based recovery. And that's just what's going to slow us down a bit. And we see growth around 2.5% for the next couple of years rather than closer to 3%, which is what we might think of as trend. In terms of the states then, as you might expect, the mining states are going to struggle. It's going to be a long, hard road for WA because they don't really have a lot of diversification there. Queensland too, it's a bit of a struggle, although it will come back because they've obviously got more going on and the tourism sector there is important. But it's the next few years, it's really going to be New South Wales and Victoria driving things. And Victoria in particular looks very good, very good employment numbers there, really strong gross state product. That's the measure of their output. So there's— that's what's going to give us the growth in the short term. So what does this mean for the RBA? For those that were watching, we had their meeting yesterday. They held at 1.5%. We think they're going to stay there for quite some time, actually. Not until probably 2020, early 2020, maybe late 2019, but we're a good 2 years away, we think, from any kind of rate rise. There's a few reasons behind that. One is that, yeah, that slow process of non-mining sector coming back to the game, driving investment and driving growth. That's going to mean that we don't really have any inflationary pressures. We're going to be growing a little bit below trend, so there's no need to raise rates. If anything, they need to keep them low to keep supporting the economy and providing that monetary stimulus. A couple of important points on here. The Fed are going to keep raising rates. We think they're going to cross with the cash rate sometime next year in all likelihood. We think it's not going to be an issue for the RBA to keep the cash rate below the Fed funds. I don't see any problems with that. If anything, it's going to be good news because one thing the RBA are worried about is the currency, and recent movements have certainly not done anything to reassure them. We had the bounce up to 80 cents, and it's actually held there for the last couple of weeks. So I, I half wondered if it would bounce and come back, and it hasn't. This is a challenge. This is a problem. They actually flagged it in the minutes. It's obviously a challenge if you're trying to attract your external tourists to come into the country. It's a problem for the manufacturing exporters, even for the agriculture exporters. That's a very competitive market, and the currency movements do matter. So they're worried about this. And I would say, if anything, with the policy rate, there's downside risk, as in they'll cut the rate to try and push down on the Aussie dollar and get it back down towards— well, they'd love it at 70. I think they'd take 75 right now, but they're battling at 80. So what does all of this mean then for tourism in Australia and the outlook? Well, the big driver in terms of tourism and travel is going to be that international arrivals. Asia— I'm not telling you anything you don't know, but Asia is the big provider of your international arrivals. It's going to continue to be so, and in fact that share is going to grow over time. If you remember back, I showed you the chart with that Asia growth profile being so positive, that's going to drive this number. So big influx from Asia, and that's going to continue. I always find it quite interesting, although perhaps not surprising given the geographic isolation, but domestic tourism is by far and away the most important bit for hoteliers and people on the ground here. So here, not so much in the way of good news for the immediate term. That's really a product of those constrained household income growth and holidays are the things that you can sacrifice if you're a bit strapped for cash. You've got to pay your mortgage and you've got to eat, but you don't have to go on holiday. So it's a subdued outlook, but it is going to come back over the medium term as the economy improves. One interesting facet though of that much faster growth profile in the international space is that the share for domestic tourism is going to keep coming down. You can see it on the chart. It's come down over the the last recent years, that's going to continue into the forecast. Moving on and perhaps finishing up then with business travel. So this is looking at both inbound and domestic arrivals. Somewhat subdued, again dominated by domestic, and as we've just been saying, domestic is somewhat constrained at the moment, but it is going to pick up. It's been a pretty dismal few years with the end of the mining boom and those guys leaving the party, and no one's really taken their their place. That's going to happen, but it's just going to take a bit of time, and it's going to be driven by professional services. This is really the sort of space where Australia has a comparative advantage globally, and this is the space that's going to drive the economy, drive exports ultimately, and then drive business travel. So when I say professional services, I mean finance, insurance, scientific, professional, technical industries. where the highly educated workforce gives Australia that comparative advantage in the global economy, and that then means that that's going to drive growth and then drive spending in the tourism sector. Thank you very much. A bit— very whistle-stop brief tour, so hopefully caught up a bit of time, and maybe even time for some questions if anyone has any. Thank you. Bonsen Lam from Japan Travel. Appreciate Asia is a big part of Australia's future, but you also talked a lot about Latin America as a second big driver. Do you think that's sustainable, or do you have any insights in Latin America going on? So Latin America is quite a disparate bunch, really, and they, they tend to have domestic issues and problems come up on a sort of country-by-country basis. So you go all the way from Chile, which is, you know, very much a high-middle-income, pretty solid growth fundamentals, pretty good outlook going forward, although comparatively small population, right through to sort of basket cases like Venezuela and everything in between. Probably worth touching on Brazil, obviously the single biggest country in the region. We are not that optimistic. There's upside risk with Brazil, but we're pretty disappointed in the political situation. It's very short-termist. They, they always have great announcements about what they're going to do and and then never follow through, really. So Brazil rode the commodity boom and rode it hard and really punched through the 2000s up to, you know, '13, '14, and it's really ridden the down as a result of that because it didn't do anything to make that position sustainable. And so it's had a recession that's really come off in the last couple of years. We think growth there is going to be moderate, definitely not spectacular. So upside risk if the politics can sort itself out, but— We don't see any evidence of that at the moment, and without that, no real reason to change the outlook, unfortunately. Any other— any other questions? Sure, whether I'm on. Yeah, we could just hear again. Just got the microphone coming. Thank you, Susan. Quick question for Asia. Asia is a huge region. Very large region. I'm not sure you have time to have a little bit of breakdown, maybe top 5, top 6 Asian countries. Sure, absolutely. Yeah, absolutely big region. I mean, we always do China and Asia, but I mean, Asia even excluding China is huge. So in terms of just raw growth, so just looking at GDP growth, top countries are China, India, Indonesia, Philippines, and probably Malaysia. Certainly those 4, and then I think it's Malaysia after that. Malaysia is pretty good at the moment. Really, the story with Asia is a combination of, for a lot of these countries, starting from a relatively low point. So they're, you know, GDP per capita terms, they're at best middle income. Quite a few of them are low income still. So that gives them catch-up potential. But unlike some of our Latin American counterparts, a lot of the fundamentals in these countries are good. They're not great. They're certainly not— the institutional environment, for instance, isn't as good as it is here, but there's a lot of movement in the right direction. There's a lot of focus on infrastructure investment, on improving the governance environment, which all really helps for growth. And so those top 4 countries I mentioned, we've got growth in all of them upwards of 5.5%, 6% per annum over the next 5, 10 years. And that's pretty— that's very punchy compared to a lot of other countries. So Those would be the ones that I mentioned. In terms of the middle class, and if you're thinking more disaggregated in terms of who's going to be spending their money on foreign travel, China is still by far and away the big story there. And China, you've got the combination of fast growth, relatively slow population growth, so household income on a household level is going up really quite quickly. In contrast, Indonesia and India, they've got that rapid growth, but they've still got the rapid population population growth. So that household income level is just that much lower, and so that's going to be just that bit— take a bit longer for that to come through as a market for you guys. Thank you.

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