Foresight March Foresight Issue 101. March visitbritain.org/research Follow us on VisitBritain Group LinkedIn

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1 Foresight March 2012 Foresight Issue 101 March 2012 visitbritain.org/research Follow us on VisitBritain Group LinkedIn

2 Foresight March Our market intelligence products provide an unrivalled source of information on inbound tourism. They paint a detailed picture of past, present and future inbound UK tourism trends, helping you gain an insight into how markets and segments are performing, as well as how Britain is perceived by prospective visitors.

3 Foresight March Payments Introduction international tourism balance of payments; that being the difference between how much overseas residents spend here in Britain and how much Britons spend when travelling abroad. More than five years on there have been some notable developments, not least a 41% real terms reduction in the size of the deficit between 2008 and 2011, so this edition revisits and updates the analysis presented first in History Lesson Britain has been a leading destination for international tourism for many decades (the 6 th most visited destination in 2010), but the array of destinations on offer to Britons elsewhere in the world has been increasing, with the fall of the iron curtain, development of low-cost airlines and expansion of the European Union all opening up new outbound travel possibilities. Furthermore, increasing numbers of destinations across the globe recognise that tourism can deliver on objectives such as economic growth, job creation and bolstering foreign currency reserves and are thus investing heavily in marketing themselves to Britons and other leading source markets for outbound travel. Chart 1 reveals that in only fourteen of the past fifty-four years has Britain enjoyed an international tourism balance of payments surplus, with the most recent occasion being in It is evident that Britain ran a surplus continuously between 1968 and 1980, and that it was the period 1998 to 2003 that resulted in the steepest year-on-year increases in the deficit, since when a few the size of the deficit through to All figures have been converted to 2011 prices using the Retail Price Index. So what might the explanation for the surplus during the 1970s be? Economics probably plays a fairly major role in understanding what was going on. Britain went through a period of economic rising unemployment and so on, all of which meant the amount of disposable income available for foreign travel was rather limited, but perhaps of more relevance is inflation. The average annual rate of retail price inflation in the UK between 1968 and 1980 was 11.9%. By contrast the average between 1958 and 1967 stood at 2.9%, and in the period since 1998 it has once again been 2.9%. There is a correlation then between periods of high inflation and a tendency towards Britain having an international tourism balance of payments surplus, with low inflation being associated with periods of deficit. What is of particular relevance is whether the British rate of inflation is at odds with the rate in destinations being visited by Brits and in the home country of visitors to Britain. This was regularly the case in the mid-1970s, when, for example, the rate of inflation in Britain for 1975 was 24.2%, whereas in the USA it was 9.2%. This means that in relative terms a visitor to Britain from the USA in 1975 would have been spending around 24% more in sterling terms than in 1974 simply to buy an equivalent set of goods and services, whereas the Brit going to the USA had only a 9% increase in order to enjoy the same set of goods and services from one year to the next. It is unsurprising then that, in terms of sterling, the British visitor economy was experiencing faster year-on-year growth in earnings from overseas residents in the mid-1970s than overseas visitor economies were earning from British residents. balance of payments ( m, 2011 prices) 8,000 4,000-4,000-8,000-12,000-16,000-20,000-24, Inflation is only part of the story, exchange rates are of equal, if not greater relevance in shaping how much overseas visitors spend here and how much Brits spend abroad. Taking the US dollar as an example it cost $2.33 for an American to buy 1 in 1980, whereas by

4 Foresight March the cost had plummeted to $1.30. The counter to this of course is that Britons travelling to the US were paying 80% more to purchase $1 in 1985 than five years before. that is of most significance, with tens of millions of Eurozone citizens for the global financial crisis to bring about a sharp depreciation in Returning to the earlier years, a further pivotal factor in the late British tourist was only allowed to take 50 out of the country in any single year between 1966 and More favourable economics, for Brits that is, help us understand what drove the growth in the deficit through to 2008, with higher disposable incomes and loose monetary conditions fuelling a rapid rise in how much was spent on goods and services, including foreign travel. The counter to this is of course that since 2008 real disposable income in Britain has been falling while at the same time sterling has depreciated in value, thereby acting as a constraint on how much, in sterling terms, Britons spend abroad, while attracting increasing spending by residents from overseas on trips to Britain. Indeed, in 2011 Britons spent nearly 6bn less on foreign travel than in 2008 in nominal terms, whereas the amount spent in Britain by visitors from overseas has risen, in nominal terms, by 1.5bn over the same period. This all means, that once we adjust figures to constant 2011 prices tourism balance of payments deficit amounting to 9bn since Supply and Demand There is a strong correlation between the rate of economic growth and that of outbound travel from a country, but in the case of Britain not only had the population been getting much better off during the 1990s, but the ease with which people could travel abroad was revolutionised by the emergence of low-cost airlines developing a web of point-to-point route networks from just about every regional airport in Britain. The new carriers have not been shy in advertising their low fares, ensuring people become inquisitive about visiting a multitude of destinations across mainland Europe that they had probably never before considered as a possible leisure destination. Widespread access to the Internet in Britain has ensured that the process of booking foreign travel is not just cheaper, but also far easier than Looking back to earlier decades the advent of the jet airliner made international travel to and from Britain increasingly feasible, with 1970 being a key milestone, as has been the impact of the sector, thereby allowing fresh-blood to ensure air fares remain competitive. The growing popularity of outbound package holidays in the 1970s and early 1980s was fostered by a highly competitive outbound sector that sought to take advantage of increasing levels of disposable income, the availability of airline capacity for both scheduled and charter services and the responsiveness of British Deficits and Surpluses Provisional figures from the International Passenger Survey show national tourism balance of payments deficit stood at 13.3bn, but as will be shown in this section, there are markets, and market segments, that in fact generate a surplus for Britain rather than contribute towards the size of the deficit. Markets Britain does not have an international tourism balance of payments deficit with each and every country. Chart 2 shows the five markets that account for the largest deficits and Chart 3 the five markets with which Britain operates the largest surplus. Chart 2: Markets with which Britain has the largest international tourism balance of payments deficit - 500,000,000-1,000,000,000-1,500,000,000-2,000,000,000-2,500,000,000-3,000,000,000-3,500,000,000-4,000,000,000-4,500,000,000-5,000,000,000 Spain France USA Greece Turkey There is a distinct commonality among four of the countries that appear in Chart 2, namely that they are all very popular outbound destinations for Britons seeking a sun and sand holiday, with Spain and its islands contributing nearly 4.5bn towards the overall

5 Foresight March deficit single-handedly. From Chart 3 it is evident that no countries operate a surplus of more than 1bn, indeed none makes it even to half that amount, but Britain does earn 400m more in spending by visitors from Germany than Germany earns from visitors from Britain. It is interesting to see Australia in the top five markets with which Britain has a surplus, but once again a major factor here will be the shifts in relative exchange rates in the past few years making Australia much more expensive for British tourists and Britain considerably more affordable for Australians. Chart 3: Markets with which Britain has the largest international tourism balance of payments surplus 450,000, ,000, ,000, ,000, ,000, ,000, ,000,000 that spent by visitors to Britain using this mode. It is possible to interrogate the International Passenger Survey in rather more detail, and when looking at the contribution of a surplus for the international tourism balance of payments deficit. The two major contributors towards the international tourism balance of payments deficit were Gatwick with a deficit of 3.2bn and Manchester Airport with a deficit of 2.8bn. By contrast the amount spent in Britain by inbound visitors who travelled through Heathrow was only.5bn less than that which was spent abroad by Britons using the airport. Chart 4: International tourism balance of payments by journey purpose 2,000,000,000-2,000,000,000-4,000,000,000-6,000,000,000-8,000,000, ,000,000 50,000,000-10,000,000,000-12,000,000,000-14,000,000,000 Germany Norway Sweden Australia Nigeria - 16,000,000,000 Holiday Business VFR Study Misc Journey Purpose Chart 4 shows for 2010 the international tourism balance of payments broken down by journey purpose and it is plain to see that Britain has a deficit because the amount that Britons spend on outbound holiday travel far exceeds that which is spent by overseas residents holidaying in Britain, and this despite the record number of almost 12 million inbound holiday visits to Britain during The amount spent on inbound business visits is close to that spent on equivalent outbound visits, while the deficit on VFR visits is under 1bn. Worth noting is the surplus that Britain runs on its during Chart 5: International tourism balance of payments by mode of travel - 2,000,000,000-4,000,000,000-6,000,000,000-8,000,000,000-10,000,000,000-12,000,000,000 Mode of Travel When looking at the balance of payments by the mode of travel used by visitors (Chart 5) it can be seen that while all three modes contrib for by far the majority, with the amount spent by Britons travelling abroad through the Channel Tunnel being pretty much identical to - 14,000,000,000 Air Sea Tunnel

6 Foresight March The Global View Clearly at a global level there is no international tourism balance of payments deficit or surplus, as all outbound expenditure will be inbound tourism receipts somewhere else. However, we can take a look at figures compiled by the United Nations World Tourism Organisation to get a clearer picture of which countries operate with a surplus, and which, like Britain, with a deficit. and Turkey feature towards the top of the table for countries operating with a surplus, along with countries such as France and Italy that have both beach and mountain resorts ensuring year round inbound visits, along with key city break destinations such as Paris and Rome. Countries such as Spain, France and Italy also have a strong domestic holidays as an alternative to foreign travel. It is worth significant surplus such as Thailand and Egypt, these figures being for 2010 so before any impact resulting from the Arab Spring. Turning to those countries with a deficit, Britain is in second spot, but with a deficit considerably lower than that of Germany in Russia and Japan are close on the heels of Britain, but it is such as Norway and Canada that join Britain in operating an international tourism balance of payments deficit as well as In order to compile these figures it has of course been necessary for all figures to be converted from their local currency to a single currency unit, with the US dollar being the chosen currency by UNWTO. As such relative exchange rates play a role in the results depicted in Chart 6. Future Outlook Many countries operate with an international tourism balance of payments deficit, among them some of the most successful global economic powers such as Germany and China, while other countries that enjoy a strong international tourism balance of payments surplus face significant economic headwinds, for example Greece and Spain. The lesson then is that being a country with a deficit on international tourism does not pigeon-hole the destination as being unsuccessful, quite the contrary, it is often the sign of a successful economy with a strong currency and population enjoying a standard of living that allows for spending on travel, be that domestic or outbound. Indeed despite having a deficit China th highest earner from international tourism, Germany 6 th and Britain 7 th. ational tourism balance of payments deficit has declined in real terms by 41% between 2008 and 2011 is a construct of many factors including exchange rates, Britons popularity as a destination for international tourism, indeed, during 2011 out of the 30.6 million visits to Britain from overseas there was a near record of just under 12 million holiday visits. Inbound tourism can be thought of as export earnings for Britain, and during 2011 these exports amounted to 17.76bn for the British economy that is more than the total construction costs of the new Crossrail scheme that will ease congestion and bring 1.5 million more people within 45 minutes commuting distance of Lon visitors to get around the capital and to reach transport hubs that will link them with other parts of Britain such as the Midlands and West of England. Chart 6: International tourism balance of payments by country (US$bn) Spain USA Turkey Thailand Italy Egypt Malaysia Greece Austria Australia France Portugal Hong Kong (China) Mexico Switzerland India South Africa Lebanon Czech Rep Hungary New Zealand Israel Poland Indonesia Luxembourg Ukraine Argentina Taiwan (pr. Of China) Sweden Singapore Denmark Untd Arab Emirates Ireland Netherlands Korea, Republic of Belgium China Norway Brazil Canada Saudi Arabia Japan Russian Federation UK Germany

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