Report Prepared For: San Diego Tourism Authority
Contents 1 Executive Summary... 3 2 San Diego Tourism Outlook... 6 2.1 Visitor Trends... 6 2.2 Expenditures... 7 2.3 Hotel Performance... 2 3 US Tourism & Lodging Outlook... 4 4 Key Origin Economies... 5 4.1 US Market Summary... 5 4.2 Mexico... 8 4.3 Canada... 9 4.4 Japan...10 4.5 United Kingdom...10 4.6 Germany...12 4.7 Switzerland...13 4.8 Eurozone...14 4.9 Australia...15 4.10 China...16 5 G7 tensions come as world trade growth slows... 17 6 San Diego Forecast Tables... 19 7 Forecast Methodology Overview... 22 8 San Diego Convention Center Attendance Forecast... 24 9 San Diego Hotel Project Pipeline... 25 2
1 Executive Summary The first quarter of 2018 exhibited strong growth, as both visitors to San Diego and expenditures within the destination increased. Hosting nearly 7.7 million visitors, yearover-year growth registered 8.4%, the fastest pace seen in over 5 years. Day visitors led the charge with 13.4% growth, while overnight visitors increased 4.1%; however, it should be noted that more visitors still tend to stay overnight in San Diego than visit for the day. Expenditures increased by 5.3% in Q1; like visitation, growth was led by day visitor expenditures (15.8% vs 4.4%). Day visitors from Mexico rebounded in the first quarter, following a year of declines. Expenditures followed suit, increasing 10.7%. In the hotel sector, demand growth outpaced supply, increasing 3.0% to supply s 0.8%, and occupancy unsurprisingly increased 2.2%. Revenue per available room (RevPAR) expanded 2.8% in Q1 2018 after a slight decline in Q4 2017, and average daily room rate (ADR) grew 0.6% for the first quarter, increasing to $154.10. On a national basis, 2018 is shaping up favourably for the hotel business. Demand is expected to grow 2.4%, compared to estimated 2.2% growth last year excluding hurricane impacts (including hurricane impacts, national demand grew 2.6%). This is anticipated to result in another year of increased occupancy on a national basis. Despite high occupancy levels, hotel pricing remains sluggish on a national basis, with factors such as heightened price transparency, greater dependence on more price-sensitive leisure business, and competition from short-term rentals, continuing to weigh on ADR gains. Indeed, US ADR increased just 2.1% in 2017, compared to 3.0% in 2016. Pricing appears to improving somewhat in 2018, with ADR expected to increase approximately 2.6%, potentially boosting RevPAR above 3.0%. Next year is anticipated to bring slower momentum, as the national economic context moderates, with RevPAR potentially slowing to 2.4%. Current economic conditions send mixed signals for travel. Historically low unemployment, firming wage growth, solid consumer confidence, and strong consumer spending paint a bright economic picture throughout the rest of 2018 and into 2019. However, rising energy prices and trade tensions pose risks to visitor demand and subsequent expenditures. Tariffs have the potential to discourage business investment and weigh on growth, while deteriorating relations abroad may discourage international travel. In addition, high energy prices may discourage travel and weigh on consumer spending. Our visitor forecasts have been revised upwards slightly for both 2018 and 2019. Our current forecast points to steady but restrained growth in visitation for the coming years, with visits growing around 3.5% in 2018, led by a 4.7% growth in day visitors. Overnight visits will increase by 2.4% in 2018. Visitation is expected to moderate in 2019, with a 2.1% rate of growth projected through 2021. Day and overnight visits will grow at roughly the same rate in the years after 2018, with 2.1% and 2.0% overnight growth in 2019 and 2020, respectively, and 2.2% day visitor growth in each year. Expenditures are expected to grow 5.0% in 2018, again led by a 5.6% gain in day spending, with overnight spending 3
growth following closely behind at 4.9%. In 2019, growth in overnight spending will eclipse day visitors spending, registering 4.5% as opposed to day visitors 3.3%. In the hotel sector, room demand growth is projected to outpace supply in 2018, but this will reverse in 2019 through 2021. Occupancy will remain stable around 77% until 2020, when it will drop to 76.9%, driven by slower demand growth relative to supply. ADR is expected to increase by 3.1% in 2018 and 4.0% in 2019, with RevPAR also posting an increase of 3.4% in 2018 and 3.5% in 2019, on pace with 2017 s growth of 3.6%. With a consumer-led rebound in GDP growth, looking to post nearly 5.0% (annualized) growth in Q2 2018 and just under 3.0% for the year, the US economic outlook looks relatively strong. Unemployment ticked down to 3.8% in May 2018, its lowest level since 2000. Headline and core PCE inflation look likely to reach the Fed s 2.0% inflation target by the end of 2018. Firming wage growth, alongside a projected 2.5% increase in consumer spending and a 6% increase in business investment, signals a strong economy. However, rising energy prices look likely to weigh on global travel, though energy sector investment may offset their climb. In addition, looming uncertainty regarding trade poses headwinds. On the international front, slowing economic growth and tighter financial conditions threaten emerging markets, although growth is still expected. Moving forward, we expect steady but restrained growth in both overnight and day visitors, underpinned by positive domestic fundamentals, yet open to potential downside risks of rising energy prices and trade tensions. 4
San Diego Tourism Summary Outlook (annual % growth, unless stated) 2017 2018 2019 2020 2021 2022 2023 Visits 0.3% 3.5% 2.1% 2.1% 2.1% 2.0% 1.8% Day -0.7% 4.7% 2.2% 2.2% 2.1% 2.1% 1.5% Overnight 1.2% 2.4% 2.1% 2.0% 2.1% 2.0% 2.2% Expenditure 4.1% 5.0% 4.4% 4.3% 3.9% 3.6% 3.7% Day 1.7% 5.6% 3.3% 3.3% 2.9% 3.0% 2.5% Overnight 4.4% 4.9% 4.5% 4.4% 4.0% 3.7% 3.8% Hotel Sector Room supply 1.0% 2.4% 2.4% 2.3% 2.2% 2.1% 1.9% Room Demand 1.3% 2.7% 1.9% 1.9% 1.9% 2.1% 2.2% Occupancy (%) 77.3 77.5 77.2 76.9 76.6 76.6 76.8 ADR ($) $160.11 $165.07 $171.64 $177.38 $180.84 $183.08 $185.25 5
2 San Diego Tourism Outlook 2.1 Visitor Trends Visitation to San Diego totalled 35.0 million in 2017, slightly above our previous forecast. Visitation growth was strongest in the second quarter, registering 3.5%, while the first and third quarters posted declines. However, Q4 showed a slight increase of 0.8%, setting the stage for the robust growth of 8.4% in Q1 2018. Modest visitation growth of 0.3% in 2017 resulted from lacklustre overnight visits (1.2%), coupled with a strong decline in Mexican day visitors (down 5.3%). However, this slowdown appears to be reversing. The first quarter of 2018, boosted in part by the early Easter holiday as compared to 2017, saw a rebound in day visitors, with domestic day visitors increasing by 16.1% and Mexican day visitors increasing by 7.9%. Total overnight visitors also grew by 4.1% in Q1 2018, setting the stage for stronger growth ahead. Overnight Visitor Market % growth 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% Overnight & Day Visits % growth 15% Average GDP growth by origin markets ADR Overnight visits -20.0% 2009 2011 2013 2015 2017 2019 2021 2023 Source : Tourism Economics/CIC Research Forecast Forecast Total visitation to San Diego is expected to grow 3.5% in 2018, an upward revision compared to our December 2017 forecast of 1.1%. This is due in part to strong domestic fundamentals, particularly wage growth, solid consumer confidence, and strong consumer spending. Strong visitation growth in Q1 2018, particularly the rise in visits from Mexico after their decrease in 2017, also contributes to our upward revision. Weighing on the near-term outlook are rising energy prices and trade tensions, but we look to strong economic conditions at home to support visitor growth. Looking forward, day and overnight growth are expected to grow by 4.7% and 2.4% in 2018, and 2.2% and 2.1% in 2019, respectively. Our current forecast represents an upward revision to day visitation in both 2018 and 2019 and to overnight visitation in 2018. Strong domestic economic conditions look likely to support growth, as we expect just under 3.0% GDP growth for 2018, along with 2.5% growth in consumer spending and over 6% growth in business investment. With consumer confidence remaining high, the outlook for travel looks positive. However, current economic conditions are not devoid of risk, as rising energy prices take up a greater share of consumers discretionary income and the threat of tariffs weighs on business investment. International conditions also pose 10% 5% 0% -5% Overnight visits Day visits -10% 2009 2011 2013 2015 2017 2019 2021 2023 Source : Tourism Economics / CIC Research Day Visits by Origin % growth 8% 6% 4% 2% 0% -2% -4% -6% -8% San Diego day visits (excl Mexico) -10% 2009 2011 2013 2015 2017 2019 2021 2023 Source : Tourism Economics/SDCVB Day visits from Mexico Forecast 6
risks. Slowing GDP growth in Germany and the UK, as well as trade uncertainty and protectionism in the US, weigh on international travel numbers. Despite these risks, however, we look for visitation to average 3.5% growth in 2018 before easing to 2.1% in the outer years. 2.2 Expenditures Expenditures posted strong growth in 2017, with an average of 4.1% growth supported mainly by overnight spending. Day visitor expenditures lagged, registering 1.7%, dragged down by a 6.3% decrease in Mexican day visitors expenditures. Markedly high growth of 6.5% in Q2 2017 lifted annual growth, buoyed by 10.9% growth in domestic day visitors spending and 8.9% growth in household and other overnight visitors spending. All visitor segments demonstrated growth from Q2 onwards except Mexican day visitors, whose expenditures fell in each quarter, averaging a 6.3% decline for the year. The first quarter of 2018 showed an uptick in spending for all visitor segments, with average growth of 5.3%, led by a 15.8% increase in day visitors spending. Overnight spending ticked up as well, registering a 4.4% increase over Q1 2017. Expenditure growth in Q2 2018 looks likely to taper slightly to 5.0% still a strong showing but slower than Q2 2017 s 6.5%. We expect 2018 to carry Q1 s momentum forward with 5.0% average growth for the year, buoyed by growth of at least 4.3% across all visitor segments. In the years following, growth will gradually taper off, yet is expected to remain above 3.7%, with all sectors continuing to grow. High consumer confidence and a weakened dollar will contribute to growth, although higher energy prices and restrained overall visitor growth may subdue spending. Overall, we expect total visitor spending to grow 5.0% and 4.4% in 2018 and 2019, respectively. Overnight Visits & Expenditures % growth 20% 15% 10% 5% 0% -5% -10% -15% Overnight spending -20% 2009 2011 2013 2015 2017 2019 2021 2023 Source : Tourism Economics / CIC Research Average Visitor Spending % growth 15% 10% 5% 0% -5% Average income growth for origin markets Average spend (overnight visits) Forecast Overnight visits -10% 2009 2011 2013 2015 2017 2019 2021 2023 Source : Tourism Economics Forecast 7
2.3 Hotel Performance San Diego room demand grew 1.3% in 2017, holding steady at 2.4% growth in Q1 2017 and 2.3% in Q2 2017 before slowing to 0.7% in Q3 and falling by 0.4% in Q4. However, room demand grew again by 3.0% in the first quarter of 2018 and is expected to post 2.1% growth in the second quarter. Room supply growth remained constant, averaging 1.0% in 2017 (1.1%, 0.9%, 0.8%, and 1.1% for Q1-Q4, respectively), and continued that trend into the first quarter of 2018, posting a 0.8% increase over 2017 Q1. Room demand growth outpaced that of supply until Q3 2017, when it fell below supply before again rising above it in Q1 2018. In 2017, occupancy averaged 1.3% through the first half of the year before falling in the second half, as demand s rate of growth Hotel Room Supply & Demand % growth 10.00% 5.00% 0.00% -5.00% -10.00% slowed. Average daily room rates (ADR) averaged 3.3% growth for 2017, slowing in Q4 2017 as room demand fell. The first quarter of 2018 saw another slowdown, registering just 0.6%. Revenue per available room (RevPAR) tapered off in the second half of 2017, falling by 0.5% in the fourth quarter, but has since rebounded to 2.8% growth in Q1 2018. Room Supply Room Demand Occupancy rate, 12mma (rhs) -15.00% 2008 2010 2012 2014 2016 2018 2020 2022 Source : Tourism Economics / STR Forecast 80.00% 78.00% 76.00% 74.00% 72.00% 70.00% 68.00% 66.00% 64.00% 62.00% 60.00% We expect room demand to increase by 2.7% in 2018 before moderating to 1.9% growth in 2019 through 2021. Demand growth will outpace supply growth in 2018 before falling below it again in the following years; supply growth is expected to hit 2.4% in 2018 and 2019, and taper in the outer years. Occupancy should stabilize around 77%, registering 77.5% in 2018 before dropping to 77.2% in 2019 and 76.9% in 2020. ADR is expected to grow by 3.1% in 2018 before increasing to 4.0% in 2019, dropping again to 3.3% in 2020, and finally tapering off below 2.0% growth in the outer years. These numbers represent a downward revision from our previous forecast given a lower-than-expected 2017 performance, but we have revised our estimates slightly upwards for 2019 and beyond. Occupancy levels in particular have been revised upward, following our higher forecast for demand growth. Supply growth will continue to outpace demand, but not by the gap we had previously anticipated. These upward revisions are consistent with STR & Tourism Economics Top 25 hotel forecasts. Continuing previous trends, the San Diego hotel sector outperformed the US in occupancy in 2017 and looks on track to do so in 2018 and 2019. For Q1 2018, occupancy in San Diego was 77.0%, far above the national average of 61.6%. San Diego s 2018 occupancy is expected to reach 77.5%, higher than the 66.2% reported for the US market, and 77.2% in 2019, again higher than the US average of 66.2% for the same year. In room demand and supply, however, San Diego lagged the US in 2017, registering 1.3% growth in room demand compared to 2.7% for the US, and 1.0% growth in room supply compared to 1.9% for the US. ADR growth in San Diego was 3.3% in 2017 and is projected to be 3.1% in 2018 and 4.0% in 2019, ahead of the nation s average growth of 2.2%, 2.5%, and 2.3% in 2017, 2018, and 2019, respectively. Supply in the US hotel market is projected to stabilize around
2.0% growth in 2018 and 2019, with demand slowing from 3.0% in Q1 2018 to 1.2% in Q4 2018, then hovering around 2.0% in 2019. We continue to anticipate that uncertainty in international and domestic markets may weigh on hotel sector performance, although increased business investment due in part to recent deregulation efforts and the decrease in corporate taxes paints a positive picture for business travel. In addition, the weakening dollar is likely to attract inbound travel spending. Overall, we expect steady but restrained growth in the San Diego hotel sector, with occupancy at 77.5% for 2018 and 77.2% for 2019, ADR growth at 3.1% and 4.0% for 2018 and 2019 respectively, and RevPAR growth at 3.4% and 3.5% for 2018 and 2019, respectively. 3
3 US Tourism & Lodging Outlook Domestic Person Trips in the US (Millions) 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Total 1900.1 1963.7 1997.5 2030.3 2059.6 2109.3 2178.7 2206.6 2248.7 2292.8 2334.5 2369.4 2404.7 2445.2 % change -3.3 3.3 1.7 1.6 1.4 2.4 3.3 1.3 1.9 2.0 1.8 1.5 1.5 1.7 By purpose Business 434.3 446.6 440.7 439.4 445.6 451.4 459.8 456.1 462.0 471.5 479.5 485.6 491.9 499.4 % change -5.8 2.8-1.3-0.3 1.4 1.3 1.9-0.8 1.3 2.1 1.7 1.3 1.3 1.5 Leisure 1465.9 1517.1 1556.8 1590.9 1614.0 1657.9 1718.9 1750.4 1786.7 1821.2 1855.1 1883.9 1912.8 1945.8 % change -2.5 3.5 2.6 2.2 1.5 2.7 3.7 1.8 2.1 1.9 1.9 1.6 1.5 1.7 Hotel room demand Roomnights 940.7 1008.1 1058.3 1087.0 1107.9 1152.5 1181.5 1200.3 1232.4 1262.0 1287.1 1307.2 1329.7 1352.2 % change -6.2 7.2 4.6 2.7 1.9 4.0 2.5 1.6 2.7 2.4 2.0 1.6 1.7 1.7 Forecast period June 2018 Summary US Lodging Forecast (Millions) 2017 2018 2019 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Room Demand (roomnights, mn) Room Supply 453.9 466.2 475.2 473.2 463.1 475.7 484.8 482.7 471.9 484.9 494.1 492.0 Room Demand 277.0 324.1 339.2 292.1 285.2 333.0 348.2 295.6 291.1 339.3 354.9 301.9 Occupancy (%) 61.0% 69.5% 71.4% 61.7% 61.6% 70.0% 71.8% 61.2% 61.7% 70.0% 71.8% 61.4% ADR ($) $ 124.25 $ 127.23 $ 128.88 $ 125.22 $ 127.37 $ 130.64 $ 132.30 $ 128.00 $ 130.45 $ 133.39 $ 135.34 $ 131.14 RevPAR ($) $ 75.83 $ 88.45 $ 91.99 $ 77.29 $ 78.46 $ 91.47 $ 95.02 $ 78.37 $ 80.46 $ 93.33 $ 97.20 $ 80.47 (year-to-year % growth) 2017 2018 2019 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Room supply (roomnights, mn) 1.8% 1.8% 1.9% 1.9% 2.0% 2.0% 2.0% 2.0% 1.9% 2.0% 1.9% 1.9% Room Demand (roomnights, mn) 2.6% 2.2% 2.3% 3.7% 3.0% 2.8% 2.7% 1.2% 2.0% 1.9% 1.9% 2.1% Occupancy (% balance) 0.8% 0.4% 0.4% 1.7% 0.9% 0.7% 0.6% -0.8% 0.1% -0.1% 0.0% 0.2% ADR ($) 2.6% 2.2% 1.4% 2.4% 2.5% 2.7% 2.7% 2.2% 2.4% 2.1% 2.3% 2.5% RevPAR ($) 3.5% 2.6% 1.8% 4.2% 3.5% 3.4% 3.3% 1.4% 2.6% 2.0% 2.3% 2.7% Forecast prepared in June 2018 4
4 Key Origin Economies 4.1 US Market Summary Economic momentum accelerating in Q2 Real GDP grew 2.2% in Q1, with final sales up 2.1% and inventories adding 0.1pp to headline growth. The softness was primarily driven by slower consumer spending, up only 1.0%. Meanwhile, business investment grew a very strong 9.2%, more than offsetting the 2.0% contraction in residential investment. Despite the slow start, real GDP was up 2.8% y/y in Q1, the strongest pace since Q2 2015. For 2018 as a whole, we expect GDP growth to average a fraction below 3.0%, up from 2.3% in 2017 and 1.5% in 2016. Incoming data point to a buoyant pick-up in real GDP growth in Q2, nearing 4.5% on an annualized basis. Recent employment and consumer spending data underpin a consumer-led rebound. At the same time, the fiscal stimulus is having an increasing impact on outlays and investment. We foresee a 0.7pp contribution from the Tax Cuts and Jobs Act and Bipartisan Budget Act in 2018. However, recent actions to allow the steel and aluminum tariff exemptions to expire on Canada, Mexico, and the Eurozone, plus the announcement of tariffs on $50 billion of imports from China, have raised the odds of escalating trade tensions. Solid fundamentals, rising trade risks Overall, US economic fundamentals remain solid and fiscal stimulus will provide further support to growth, though trade protectionism and higher oil prices pose downside risks. Key economic indicators include: Solid consumer spending but low savings: fiscal stimulus, robust employment growth, gradually firming wages, record confidence levels and low interest rates should combine to support household outlays in the near term. Consumer spending is 5
expected to grow 2.5% in 2018, but we note the risk posed by the savings dip amid widening inequality and rising gasoline prices. Healthy but maturing labor market: healthy job growth and firmer wage gains will support household income and outlays in 2018. Strengthening business investment: stronger global growth, the corporate tax cuts, and a competitive US dollar will support business investment growth of more than 6% this year, up from 4.7% in 2017. Moderate housing activity: income growth will remain supportive of housing activity but tight inventories and elevated home prices are important headwinds. We see residential investment adding 0.1pp to growth in 2018. Trade flows still improving: firm global activity will support exports, but we expect net international trade to exert a slight drag on GDP growth this year as increased domestic activity pulls in more imports. Firming inflation: headline and core personal consumption expenditure (PCE) inflation are expected to reach the Fed s 2.0% target by year end. Policy risks: trade protectionism will curtail growth, especially if met by further retaliation from China and other key partners. Stringent immigration policy also remains a risk. Fiscal overdrive: late-cycle fiscal stimulus could spur higher inflation, tighter monetary policy and a wider deficit, thereby weighing on growth in 2019-20. Weakened dollar: The US dollar is about 5% weaker than at the start of 2017, but has appreciated since April this year. Given current global prospects for growth and re-emerging twin deficits in the US, we think the trade-weighted dollar will resume its depreciation over the next couple of years. 6
Four Fed rate hikes in 2018 The FOMC kept the fed funds target range unchanged at 1.5-1.75% during its May meeting. The policy statement sent a clear message that the Fed does not intend to overreact to a rise in inflation above the symmetric 2% target, further supporting our call for a total of four hikes in 2018. We expect the FOMC to implement its second rate hike at the upcoming June 12-13 meeting, while also issuing updated economic and dot plot forecasts that will warrant close scrutiny from market participants. Overall, with inflation expected to reach the Fed s 2% target, we forecast a total of four rate hikes in 2018. Long-term factors The US economy should grow around 1.9% pa in 2022-2030 as the economy grows broadly in line with its potential. Flexible labor force: the US will maintain the flexibility of its labor force, giving it an advantage over its peers. Business investment and productivity: we continue to foresee a modest rebound in US productivity growth. Potential GDP and Its Components Average Percentage Growth 2007-2016 2017-2026 Potential GDP* 1.5 1.8 Employment at NAIRU 0.5 0.6 Capital Stock 1.6 1.6 Total Factor Productivity 0.6 0.9 *ln(potential GDP)=0.65*ln(Employment at NAIRU) +0.35*ln(Capital Stock)+ln(Total Factor Productivity) What to watch out for Protectionism: implemented and announced tariffs along with retaliation from the European Union, NAFTA partners, and China could harm growth and employment, especially if the heightened tensions lead to a trade war, or a unilateral withdrawal from NAFTA. Weaker income and consumer spending growth: real income and consumer spending growth should continue to converge in coming months thus alleviating pressures from an unsustainable savings dip though we do not discount the possibility of slower outlays if wages and incomes do not rise sufficiently in the near term. GDP growth CPI inflation Current account balance Government balance Government debt External debt Risk warnings Modest domestic demand and external background Inflation pushed up by energy prices Current account deficit to widen beyond 3% of GDP Expansionary fiscal policy widens budget deficit Federal debt remains under 80% of GDP US is a net debtor, but generates income surplus Financial risk: a sizeable reversal in asset valuations from record highs could have a negative impact on wealth for high-income households, while the knock-on effects would disproportionately impact lower-income families. Higher energy prices: if WTI crude averages $70 a barrel in 2018, the net drag on GDP growth could reach 0.3pp, and wipe out half of the boost from the fiscal stimulus. The strain would be felt most acutely by lower income households. 7
Fiscal stimulus: a lower fiscal multiplier, more crowding-out effects, or a more aggressive Fed, could limit the expected 0.7pp GDP growth upside from fiscal stimulus in 2018. Immigration: a material change in immigration policy threatens potential labor supply and could limit growth. Growth exhaustion in 2019-20: late-cycle fiscal stimulus could spur faster Fed tightening and limit GDP growth. 4.2 Mexico Stronger-than-expected GDP growth for Q1 led us to upgrade our forecast for 2018 to 2.4% from 2.3%, while keeping our 2019 estimate at 2.3%. However, US metal tariffs have resulted in retaliation, while the NAFTA talks have stalled and the presidential elections take place on 1 July. This febrile environment, exacerbated by the dollar rally, has led to a severe weakening in the peso. As a result, we have revised up our end-2018 inflation and policy rate forecasts to 4.1% and 7.75% respectively (from 3.8% and 7.50% previously). Mexico: GDP and components % year 12 Despite renewed trade tensions among NAFTA partners, our baseline view remains that a NAFTA deal -15 will be reached in 2019. The lack of progress in the Source: Oxford Economics trade talks so far does not mean that the three countries cannot finalize an agreement. Historically, most trade agreements take several years to be concluded, suggesting expectations that NAFTA could be renegotiated in a year were overly optimistic. Inflation decelerated further in May to 4.5% y/y, but the pace of the orderly disinflation process is set to waver during the rest of the year, as a weaker exchange rate and higher oil prices gradually filter through the economy. Mexico s central bank (Banxico) refused to pull the rate-hike trigger in May, but its statement warned that an adverse scenario could materialize. Indeed, we now expect Banxico to hike the policy rate by 25bp to 7.75% at its June meeting, and to stay on hold during the rest of 2018. The victory by Mexico s left-wing presidential candidate Andrés Manuel López Obrador (AMLO) was larger than expected, according to preliminary results. His Morena-led coalition s success in Congressional elections suggests it is likely to have won a majority in the Chamber of Deputies and the Senate, but AMLO will lack a supermajority to enact constitutional amendments. A moderate AMLO administration remains our baseline scenario. We expect a smooth presidential transition until he takes office in December. Yet potential risks 9 6 3 0-3 -6-9 -12 Investment Consumption GDP F'cast 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 8
include the ongoing NAFTA negotiations, budget discussions to implement his ambitious campaign proposals and tensions in the external environment. With the election over, markets can now focus on Mexico s most pressing challenge: the NAFTA negotiations with the US and Canada. Some positive signals recently from the US and Mexican sides reinforce our view that a deal is likely to be approved in 2019. According to US officials, the current paralysis in the talks is likely to end now that Mexico s election has been decided, with a lifting of US tariffs on imports of Canadian and Mexican metals once a revitalized NAFTA is in place. AMLO s would-be trade negotiator, Jesús Seade, said there could be a deal in a couple of months. If this occurs, it means an agreement would be reached before AMLO s inauguration, which would prevent the president-elect s team from putting forward any populist measures in the talks. 4.3 Canada Tensions with the US rose unexpectedly at the start of the month after the US administration imposed tariffs on steel and aluminum imports from Canada. The Canadian government has countered aggressively by implementing a reciprocal response and taking the US tariffs to the arbitration dispute panels of the WTO and NAFTA. These tariffs don t have a major impact on the broad shape of our forecasts since steel and aluminumrelated activity account for only a small share of the economy. The bigger question is whether President Trump s decision marks the opening salvo in a series of protectionist trade policies. Trump s recent threat to impose tariffs on auto imports would if implemented have a much larger impact on the Canadian economy. Canada: Contributions to GDP growth % year 6 5 4 3 2 1 0-1 -2-3 Net exports Domestic demand F'cast -4 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Source: Oxford Economics On the bright side, the economy looks like it entered the current environment of heightened trade uncertainty with reasonable momentum. Real GDP advanced 1.3% annualized in Q1, only a mild slowdown from the 1.7% pace seen in Q4 2017. The main reason for the more moderate growth was the continued slowdown in consumer spending, which grew at its slowest pace in three years. Outside of this, the details of the report were mixed as business investment grew at a double-digit rate but exports and residential investment slowed. Overall, the economy looks to be settling into a growth track of just below 2%, compared to the 3% expansion recorded last year. A positive resolution on the NAFTA front looks more in doubt given the Trump administration s keen desire to pursue protectionist policies. In addition, the US looks to be insisting on a five-year sunset clause and prefers to negotiate the trade deal separately with Canada and Mexico, both of which are unwelcome proposals in 9
Ottawa. We are, for now, holding onto our view that NAFTA will be successfully renegotiated, but the risk that the trilateral agreement will be ended has increased. 4.4 Japan A reasonable outlook for consumption and investment will support growth during the rest of 2018 even as rising oil prices and protectionism weigh on the economy. In Q1 sluggish domestic demand led to the first q/q contraction in GDP since the end of 2015, but consumption and trade have picked up in early Q2 and we expect GDP to grow by 1.2% on average in 2018 and 1.1% next year. GDP contracted 0.2% quarter-on-quarter in Q1, hit by weak domestic demand. According to the second estimate of the national accounts, private consumption fell 0.1% on the quarter while total investment was flat, even as business investment expanded 0.3% q/q. Despite the soft outcome for Q1, we continue to look for -0.4-0.6-0.8 Inventories Fixed investment a pick-up in domestic demand, as the latest monthly indicators suggest a recovery in consumption and trade in Q2, while the investment outlook remains positive, given still solid levels of confidence and the boost from the 2020 Tokyo Olympics. However, there are notable downside risks to the outlook from protectionism (which may weigh on trade and undermine sentiment) and a larger than expected slowdown in global growth. In particular, recent threats by the US administration to explore tariffs on Japanese car exports may dampen confidence and investment spending. In addition, the planned consumption tax increase will weigh on growth in 2019, although Prime Minister Abe has made it clear that he is ready to provide additional stimulus to offset the negative impact. Inflation remains below the Bank of Japan s (BoJ) 2% target, so we see no change in monetary policy for the foreseeable future. Meanwhile, eurozone instability and rising protectionism are bolstering the yen s safe-haven properties. We have adjusted our forecast and now see the Japanese yen at 108 per dollar over 2018-2019. Japan: Contributions to quarter-on-quarter GDP % pt 1.0 0.8 0.6 0.4 0.2 0.0-0.2 Private consumption Net exports Government consumption GDP Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Source: Oxford Economics/Haver Analytics 4.5 United Kingdom 10
We have cut our near-term forecast for GDP growth due to the recent rise in oil prices and an escalation of geopolitical tensions. We now expect the UK to grow by 1.3% in 2018 and 1.4% in 2019, down from 1.5% and 1.7% respectively last month. The MPC is still likely to press ahead with an interest rate hike in August, but we now expect only one 25bp rise next year. The second estimate for Q1 confirmed that quarterly GDP growth was just 0.1%, the weakest outturn for more than five years. But we continue to attribute the bulk of the slowdown to temporary factors namely the week of snow at end-february/early-march and the collapse of Carillion, the UK s second largest UK: Contributions to GDP growth %pts 4.0 construction company and expect growth to rebound in Q2. April s robust, postsnow, recovery in retail sales offers strong backing for this view. The MPC had conducted a prolonged communications campaign to prepare financial markets for a May interest rate hike, but pulled back as evidence of the Q1 weakness in activity began to mount. However, with the Committee expecting growth to rebound in Q2 and the May Inflation Report seeing little change to the MPC s medium-term forecasts, we expect it to press ahead with a 25bp rate hike in August. The Committee has lowered its forecasts for inflation, bringing them closer to our own, having accepted that the impact of the 2016 sterling depreciation was likely to fade more rapidly than it had previously thought. With the MPC s new forecasts showing inflation in line with the target over the medium-term, in contrast to the February projections that showed inflation consistently overshooting, it has offered tacit approval of the market curve. We see this as a signal that policy is likely to be tightened more slowly and now assume only one 25bp rate hike in 2019. 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0 1997-2007 Net trade Govt. consumption Consumer spending 2007-2017 Source : Oxford Economics Other (inc inventories) Investment GDP 2017 2018 2019 2020 2021 11
4.6 Germany The German economy started Q2 on a weak note, with industry feeling the pain from slowing global growth and worries over tariffs weighing on investment intentions. A jump in April retail sales and solid labor market data point to robust domestic demand, but rising oil prices are set to weigh on real incomes in H2. We have lowered our Q2 GDP growth estimate to 0.5%, as we see less scope for transitory factors to fade, and 2018 GDP is now seen rising only 2.0%, down from 2.2% previously. But we have raised our 2019 projection to 1.8%. German GDP growth composition % q/q, %-pts 2 Net Exports Inventories Construction Equipment investment 1.5 Government Consumption Private Consumption GDP 1 0.5 0-0.5 It increasingly appears that industrial firms have begun -1 to cut investment plans due to the threat of a trade war and are limiting their inventories because of moderating demand. Backlogs should cushion the near-term impact on output but, with sentiment still heading lower in early June, growth looks unlikely to pick up in H2. Good news came from the domestic economy. Retail sales and construction activity rose by over 2% and 3% respectively in April, while monthly employment figures remain consistent with annualized gains of over 1%. Even signs of labour market demand easing are not a worry as vacancies rose to yet another high in Q1. This supports the outlook for private consumption. But rising oil prices pushed inflation to 2.2% in May. We now expect inflation to average 2.0% in 2018, and well above that in H2 as we have raised our oil price forecast, which will dent consumers real incomes. This month we also significantly raised our long-term forecasts. A baby boom and supportive migration flows will ease the demographic headwinds from a declining labour force. As a result, potential output could grow by 1.0% p.a. in the 2020s, before slowing to 0.6% in the 2030s, still 0.1-0.2pp higher than previously assumed. 2014 2015 2016 2017 2018 Source: Oxford Economics/Haver Analytics 12
4.7 Switzerland The Swiss economy grew at a healthy pace in Q1 2018, with real GDP expanding by 0.6% quarter-on-quarter broadly in line with our forecast. The outlook for the second half of the year remains favourable due to strong domestic demand and we have maintained our GDP growth forecast for 2018 at 2.3%. However, fading global trade momentum, rising worries about tariffs and higher oil prices will increasingly weigh on investment and exports in 2019. Therefore, we have slightly lowered our forecast for next year to 1.5% (down from 1.6% previously). Switzerland: GDP % year 6 4 2 0-2 F'cast Switzerland s real GDP grew 0.6% in Q1 2018, resulting -4 in a year-on-year rise of 2.4%. Growth was broad-based Source: Oxford Economics across the different business sectors and underpinned by consumption and investment in equipment. However, foreign trade had a slightly negative impact on growth due to a considerable increase in imports. 1995 1998 2001 2004 2007 2010 2013 2016 2019 According to PMI surveys, many Swiss companies still have a backlog of orders that is well above their normal levels. Moreover, they are increasingly hiring people. This is reflected in the continued fall in the unemployment rate (down to 2.6% in May, compared to 3.2% a year earlier). Robust employment growth is expected to boost private consumption in the coming quarters. However, the external economic environment is becoming more challenging and fading global trade momentum and higher oil prices are expected to weigh on Swiss exports and investment activity in 2019. 13
4.8 Eurozone The slowdown in quarterly GDP growth to 0.4% in Q1 was driven by a plunge in exports as Europe started to feel the pinch from the slowing global economy. Recent indicators confirm our view that downside risks are materialising so we expect growth to remain broadly stable at the rate seen in Q1. As a result, we have nudged down our 2018 GDP growth projection for the eurozone to 2.1% (from 2.2% previously) and for 2019 we see growth slowing to 1.8%. A breakdown of the national accounts showed the slowdown in Q1 was driven by a plunge in exports, which contracted for the first time in six years. On a positive note, household spending was stronger than anticipated, although we expect it to weaken again as the impact of higher inflation feeds through to consumers. Eurozone: Contributions to GDP growth Following some signs of stabilisation in April, latest survey data has dampened hopes of a bounce-back in activity. Momentum is clearly on a downward trend, with the PMIs falling in May and a drop in the Sentix index in June pointing to further declines. The little hard data available for Q2 does not offer much hope either, with weak growth in retail sales and industrial production likely to have fallen in April. We expect GDP growth to settle at around 0.4% a quarter for the rest of the year. Inflation jumped to 1.9% in May. Although this was driven by a sharp rise in oil prices, core inflation is also back on an upward trend following the temporary dip seen in April. We expect both headline and core inflation to rise gradually as the year moves on and have raised our CPI forecast to an average of 1.8% for 2018. As a result, the ECB is now publicly discussing its exit strategy, which should be announced this month or next. We continue to expect bond purchases to end this year, but no interest rate hike is seen until H2 2019. % year Forecast 3 2 1 0-1 -2-3 Net exports Stockbuilding Government spending Investment Consumption GDP 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Oxford Economics 14
4.9 Australia The economy accelerated in Q1, growing 1% on the quarter after a 0.5% increase in the last three months of 2017. Net exports and inventories were significant drivers, contributing 0.35% pts and 0.2% pts respectively to the increase, but all of the major expenditure categories were supportive. With growth beating our expectations we now forecast that the economy will expand by 2.8% this year, up from 2.7% previously. Australia: Contributions to GDP % year 7 After a disappointing finish to 2017, export volumes -1 roared back in the first three months of 2018, growing -2-3 2.4% on the quarter. Resources were the main driver, up 4.6% q/q, but services were also positive (+0.7% q/q). Looking ahead, additional LNG capacity and broadly positive global growth momentum is expected to translate into a 4.9% rise in exports this year and a 6.6% increase in 2019. Private business investment grew 1.3% in Q1, recovering from a 2.1% fall in the previous quarter (although the latter was distorted by one-off construction activity in Q3 2017). With the business surveys still comfortably in positive territory and capacity constraints rising, we expect private sector investment to grow 3.4% this year and a further 3.2% in 2019. Households remain the weak link in the outlook, with consumption rising just 0.3% on the quarter in Q1. Consumers face headwinds from stagnant real wages, slower growth in employment and falling house prices, and, with no immediate relief in sight, we expect growth momentum to remain subdued consumption is forecast to increase 2.4% this year (helped by favorable base effects) and just 2.1% in 2019. 6 5 4 3 2 1 0 GDP Net exports F'cast 1995 1998 2001 2004 2007 2010 2013 2016 2019 Source: Oxford Economics / Haver Analytics Domestic demand 15
4.10 China Following the unexpected resilience in recent months, economic growth slowed in May on weaker investment, consumption and exports. Meanwhile, the latest statements and actions of policymakers suggest a slightly more moderate tightening of macro policy going forward amid increased trade headwinds. In light of this, and the stronger-than-expected performance of the economy so far this year, we now expect a slightly softer slowdown in China s economy in 2018 and 2019, with GDP growth averaging 6.4% and 6.1% respectively, up from last month s estimates of 6.3% and 6%. In May, goods exports grew a solid 12.6% y/y in US$ terms. But volume growth continued to moderate, confirming our view that global trade growth has peaked. Domestically, investment growth lost impetus, despite still solid momentum in real estate activity. Household consumption growth also slowed. Looking ahead, we think China s export outlook remains relatively positive, as global demand trends remain robust, if not as strong as in early 2018. But US-China economic frictions are weighing on the economy. The US administration announced on June 15 the implementation of 25% tariffs on US$50 billion of imports from China. It has also threatened to impose tariffs on another US$200 billion if China retaliates. China s policymakers have already shifted the policy stance a little bit in response to global headwinds and its leadership has indicated that policy should be flexible. While we still expect China s domestic demand to continue to cool over the rest of 2018, reflecting the tightening of financial policies and slower real estate construction, the resilience of economic growth this year and the slight easing of the macro policy stance warrant a small upward revision to our 2018-19 GDP growth forecasts. 16
5 G7 tensions come as world trade growth slows The rancorous atmosphere at the recent G7 summit comes at an inopportune time for the world economy. The decision by the US to press ahead with metals tariffs risks an escalating series of protectionist actions just as world trade growth has started to decelerate. The summit has failed to address the rising danger of highcost tail risks from trade and other factors like higher oil prices. Our world trade indicator slipped again in May, reaching its lowest level since early 2017, and unwelcome signs of a slowdown are also visible in key freight indicators and German industrial orders data. Tit-for-tat protectionism could deepen this slowdown. Although protectionist actions so far have been modest in scale, they risk escalating across a number of major US trade relationships: with China, with the EU and with the US s NAFTA partners Canada and Mexico. With rising oil prices also in the mix, the downside risks to global activity are significant. The G7 summit in early June was characterised by a tense, if not rancorous, atmosphere. For the first time in G7 history, there was no joint communique, as the US refused to sign it. There were also disagreements about US proposals to re-admit Russia to the G8. But most seriously, the summit did little to defuse the growing danger of tit-for-tat protectionist actions among the world s major economies. The US remains in dispute with all three of its major trading partners/partner groups China, the EU and its NAFTA partners. These trade tensions come at a very inopportune time, as signs of a marked slowdown in world trade growth are evident. World trade growth indicators have deteriorated over recent months, and signs of deceleration are now unambiguous. Our in-house world trade indicator, based on the export components of PMI-type surveys in the largest economies, fell to its lowest level in 16 months in May. As this indicator leads hard trade data by a few months, the latter look likely to weaken into Q3. Although 17
our world trade indicator remains consistent with expanding trade, it now signals trade growth of around 4% y/y versus 6% in 2017. Other indicators suggest the risk of a steeper slowdown. Two key freight volume indicators the IATA air freight index and the RWI/ISL container index both showed trade growth grinding to a halt, on a six-month annualised basis, in March/April (Chart 1). German manufacturing orders have also worsened sharply. In April, orders dropped (on a six-month annualised basis) at the fastest pace since December 2015 when the world economy was growing much slower than now. Capital goods orders were especially weak, implying the upturn in investment in the eurozone may be ending (Chart 2). The trade slowdown visible in recent data is probably not directly connected to protectionist actions, which to date have been limited in scale. Rising oil prices are more likely to have been a driving factor. But an escalation of recent trade tensions would exacerbate the slowdown. Overall, high-cost tail risks to world growth have risen. The US and China have so far failed to agree on a deal to de-escalate their dispute, which threatens tariffs on up to US$200 billion of bilateral trade. China-US trade remains most at risk of severe measures due to China s dominant role in US trade deficits in sectors like electronics and machinery. But disputes with Canada, Mexico and the EU also have the potential to worsen. All have already announced retaliatory actions against US metals tariffs. Meanwhile the US is again talking about ending NAFTA and is threatening automobile and auto parts tariffs, with the EU the main target given it is a large contributor to the US vehicle deficit (Chart 3). Such actions would have large and widespread negative spillovers, either through supply chain effects or if the dumping of products outside the US led to counter-measures by third countries. 18
6 San Diego Forecast Tables San Diego Visitor Forecast (millions) 2017 2018 2019 2020 2021 2022 2023 Visits 35.0 36.2 37.0 37.8 38.6 39.4 40.1 Total Overnight 17.6 18.1 18.4 18.8 19.2 19.6 20.0 Hotel / Motel 10.0 10.2 10.4 10.6 10.8 11.0 11.2 Household 6.6 6.8 7.0 7.1 7.3 7.5 7.7 Other 1.0 1.0 1.1 1.1 1.1 1.1 1.2 Day Visitors 17.4 18.2 18.6 19.0 19.4 19.8 20.1 Day (excl Mexican) 13.1 13.8 14.1 14.4 14.7 15.1 15.3 Mexican Day Visitors 4.3 4.4 4.5 4.6 4.6 4.7 4.8 (year-to-year % growth) 2017 2018 2019 2020 2021 2022 2023 Visits 0.3% 3.5% 2.1% 2.1% 2.1% 2.0% 1.8% Total Overnight 1.2% 2.4% 2.1% 2.0% 2.1% 2.0% 2.2% Hotel / Motel 1.4% 2.3% 1.6% 1.8% 1.8% 1.8% 1.9% Household 0.5% 2.5% 2.6% 2.1% 2.5% 2.2% 2.4% Other 4.5% 2.8% 2.8% 2.8% 2.1% 1.9% 2.6% Day Visitors -0.7% 4.7% 2.2% 2.2% 2.1% 2.1% 1.5% Day (excl Mexican) 0.9% 5.4% 2.3% 2.3% 2.2% 2.2% 1.5% Mexican Day Visitors -5.3% 2.3% 1.9% 1.9% 1.8% 1.9% 1.5% San Diego Visitor Forecast (millions) 2017 2018 2019 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Visits 7.05 8.93 10.78 8.24 7.65 9.11 11.08 8.40 7.80 9.32 11.31 8.58 Total Overnight 3.83 4.41 5.09 4.32 3.98 4.49 5.19 4.41 4.06 4.59 5.29 4.51 Hotel / Motel 2.27 2.71 2.79 2.23 2.34 2.75 2.85 2.28 2.38 2.79 2.90 2.32 Household 1.35 1.44 2.00 1.85 1.43 1.47 2.03 1.88 1.46 1.52 2.08 1.93 Other 0.21 0.26 0.30 0.25 0.22 0.26 0.31 0.25 0.23 0.27 0.31 0.26 Day Visitors 3.94 3.23 4.52 5.69 3.92 3.66 4.62 5.89 3.99 3.74 4.73 6.02 Day (excl Mexican) 2.72 2.20 3.49 4.64 2.75 2.55 3.58 4.82 2.82 2.60 3.67 4.94 Mexican Day Visitors 1.22 0.0 1.03 0.0 1.03 0.0 1.06 0.0 1.17 0.0 1.11 0.0 1.04 0.0 1.07 0.0 1.17 0.0 1.13 0.0 1.06 0.0 1.09 0.0 (year-to-year % growth) 2017 2018 2019 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Visits -2.9% 3.5% -0.6% 0.8% 8.4% 2.0% 2.8% 2.0% 2.0% 2.3% 2.1% 2.1% Total Overnight 0.1% 2.1% 0.7% 2.0% 4.1% 1.8% 1.9% 2.1% 2.0% 2.2% 1.9% 2.1% Hotel / Motel 1.7% 2.2% 0.9% 0.7% 3.2% 1.8% 2.2% 2.4% 1.8% 1.4% 1.7% 1.7% Household -2.7% 1.3% -0.2% 3.2% 5.6% 1.7% 1.5% 1.8% 2.1% 3.6% 2.2% 2.6% Other 1.9% 6.6% 5.3% 3.8% 4.3% 2.2% 2.6% 2.4% 3.1% 3.2% 2.4% 2.6% Day Visitors -6.2% 4.9% -1.8% -0.5% 13.4% 2.3% 3.5% 1.9% 2.1% 2.3% 2.3% 2.1% Day (excl Mexican) -6.6% 8.7% -0.8% 1.0% 16.1% 2.5% 4.1% 2.9% 2.1% 2.5% 2.4% 2.1% Mexican Day Visitors -5.6% -6.2% -6.0% -3.7% 7.9% 1.2% 1.0% -0.3% 2.0% 1.6% 1.8% 2.1% 19
San Diego Visitor Expenditure Forecast ($ million) 2017 2018 2019 2020 2021 2022 2023 Expenditure 10,828 11,368 11,865 12,379 12,860 13,324 13,813 Total Overnight 9,814 10,298 10,759 11,237 11,684 12,113 12,572 Hotel / Motel 7,388 7,762 8,142 8,520 8,858 9,184 9,529 Household 1,432 1,494 1,546 1,602 1,672 1,736 1,803 Other 994 1,042 1,071 1,114 1,155 1,193 1,240 Day Visitors 1,014 1,070 1,106 1,142 1,176 1,211 1,241 Day (excl Mexican) 770 815 840 866 891 918 940 Mexican Day Visitors 243 256 266 276 284 294 302 (year-to-year % growth) 2017 2018 2019 2020 2021 2022 2023 Expenditure 4.1% 5.0% 4.4% 4.3% 3.9% 3.6% 3.7% Total Overnight 4.4% 4.9% 4.5% 4.4% 4.0% 3.7% 3.8% Hotel / Motel 4.1% 5.1% 4.9% 4.6% 4.0% 3.7% 3.8% Household 3.3% 4.3% 3.5% 3.6% 4.4% 3.8% 3.9% Other 7.9% 4.8% 2.8% 4.0% 3.6% 3.3% 4.0% Day Visitors 1.7% 5.6% 3.3% 3.3% 2.9% 3.0% 2.5% Day (excl Mexican) 4.5% 5.7% 3.1% 3.1% 2.9% 3.0% 2.4% Mexican Day Visitors -6.3% 5.1% 4.1% 3.7% 3.0% 3.2% 2.7% San Diego Visitor Expenditure Forecast ($ million) 2017 2018 2019 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Expenditure 2,361 2,853 3,180 2,435 2,486 2,997 3,330 2,555 2,615 3,125 3,463 2,662 Total Overnight 2,187 2,585 2,834 2,208 2,284 2,715 2,974 2,323 2,410 2,832 3,093 2,423 Hotel / Motel 1,693 1,973 2,099 1,623 1,753 2,076 2,217 1,716 1,871 2,163 2,317 1,791 Household 268 341 451 373 288 351 467 388 295 368 479 404 Other 226 271 285 213 244 288 290 220 245 301 297 228 Day Visitors 174 268 345 227 201 282 356 232 205 293 369 239 Day (excl Mexican) 119 213 286 153 140 224 295 155 140 233 306 160 Mexican Day Visitors 55 55 59 74 61 58 61 76 64 60 63 79 (year-to-year % growth) 2017 2018 2019 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Expenditure 3.6% 6.5% 3.9% 2.2% 5.3% 5.0% 4.7% 4.9% 5.2% 4.3% 4.0% 4.2% Total Overnight 4.3% 6.5% 4.2% 2.3% 4.4% 5.1% 4.9% 5.2% 5.5% 4.3% 4.0% 4.3% Hotel / Motel 5.1% 5.7% 4.0% 1.2% 3.5% 5.2% 5.7% 5.7% 6.7% 4.2% 4.5% 4.4% Household -1.4% 8.9% 1.8% 4.0% 7.4% 3.0% 3.6% 4.1% 2.4% 4.7% 2.6% 4.1% Other 5.4% 8.9% 9.4% 7.5% 8.1% 6.3% 1.8% 3.4% 0.2% 4.6% 2.5% 3.8% Day Visitors -4.3% 6.2% 1.9% 1.1% 15.8% 5.0% 3.0% 2.3% 1.8% 4.1% 3.8% 3.0% Day (excl Mexican) -3.1% 10.9% 3.9% 3.8% 18.2% 5.2% 3.1% 1.7% 0.1% 4.2% 3.7% 2.9% Mexican Day Visitors -6.6% -8.4% -6.8% -4.0% 10.7% 4.3% 2.2% 3.6% 5.5% 3.7% 4.0% 3.3% 20
San Diego Hotel Sector Forecasts 2017 2018 2019 2020 2021 2022 2023 Rooms (mn roomnights) Room Supply 22.4 23.0 23.5 24.1 24.6 25.1 25.6 Room Demand 17.3 17.8 18.1 18.5 18.8 19.2 19.7 Occupancy (% balance) 77.3% 77.5% 77.2% 76.9% 76.6% 76.6% 76.8% ADR $160.11 $165.07 $171.64 $177.38 $180.84 $183.08 $185.25 RevPAR $123.73 $127.99 $132.44 $136.32 $138.47 $140.21 $142.27 (year-to-year % growth) 2017 2018 2019 2020 2021 2022 2023 Room Supply 1.0% 2.4% 2.4% 2.3% 2.2% 2.1% 1.9% Room Demand 1.3% 2.7% 1.9% 1.9% 1.9% 2.1% 2.2% Occupancy (% balance) 77.3% 77.5% 77.2% 76.9% 76.6% 76.6% 76.8% ADR 3.3% 3.1% 4.0% 3.3% 1.9% 1.2% 1.2% RevPAR 3.6% 3.4% 3.5% 2.9% 1.6% 1.3% 1.5% San Diego Hotel Sector Forecasts 2017 2018 2019 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Rooms (mn roomnights) Room Supply 5.5 5.6 5.7 5.7 5.5 5.7 5.8 5.9 5.8 5.8 6.0 6.0 Room Demand 4.1 4.5 4.7 4.0 4.3 4.6 4.8 4.1 4.4 4.6 4.9 4.2 Occupancy (% balance) 75.3% 80.2% 83.2% 70.3% 77.0% 80.9% 82.7% 69.7% 75.9% 79.8% 82.6% 70.4% ADR ($) $ 153.2 $ 160.8 $ 179.1 $ 144.1 $ 154.1 $ 166.6 $ 186.6 $ 149.5 $ 160.2 $ 172.8 $ 194.0 $ 156.1 RevPAR ($) $ 115.4 $ 129.0 $ 149.1 $ 101.4 $ 118.7 $ 134.8 $ 154.3 $ 104.3 $ 121.7 $ 137.8 $ 160.2 $ 109.9 (year-to-year % growth) 2017 2018 2019 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Room Supply 1.1% 0.9% 0.8% 1.1% 0.8% 1.3% 3.3% 4.2% 3.8% 2.9% 2.0% 1.2% Room Demand 2.4% 2.3% 0.7% -0.4% 3.0% 2.1% 2.6% 3.3% 2.3% 1.5% 1.9% 2.1% Occupancy (% balance) 1.3% 1.4% -0.1% -1.4% 2.2% 0.8% -0.7% -0.8% -1.4% -1.3% -0.1% 0.9% ADR 6.1% 3.3% 3.1% 0.9% 0.6% 3.6% 4.2% 3.8% 4.0% 3.7% 4.0% 4.4% RevPAR 7.5% 4.7% 2.9% -0.5% 2.8% 4.5% 3.5% 2.9% 2.5% 2.3% 3.9% 5.4% 21
7 Forecast Methodology Overview Forecasts reported in this document represent the baseline outlook with a business as usual marketing effort. This does not take any specific marketing programs directed at key markets into account. The forecasts are primarily based upon expected economic developments in key origin markets as well as anticipated costs. Previous tourism trends relative to economic demand and travel conditions have been tracked and relationships have been quantified. Estimated relationships are applied to the economic and broader tourism forecasts. Forecasts do account for the impact of important events which would influence visits and/or spend, such as air service restrictions and special events in San Diego such as hosting the Superbowl or US Open. Summary of Main Model Relationships Oxford Economics & Tourism Economics Existing models Economic trends by market (income, output, spend employment etc) Outbound trends by market Visits Day visits Overnight visits Visitor Spending Combine forecasts of average spending by market with visits Hotel ADR Supply-side factors New attractions Events, conventions etc Travel Constraints Hotel room demand Hotel room supply Hotel Occupancy Overnight Visitors. Trends in overnight visits have been identified and are forecast separately for stays in hotels and in private households. Forecasts account for different trends according to purpose of visit (business and leisure) as well as by origin market. Economic developments in key origin markets at the city, state, national and international level are included. Day Visitors. Travel patterns from nearby drive markets tend to differ from those from longer-haul markets. For day visitors the impact of economic developments in key origin markets and tourism costs (such as hotel room rates) differs from the impact on overnight visits. Mexican visitors represent a significant proportion of day visitors to San Diego and trends have been separately identified. For non-mexican day visitors, business and leisure trends 22
have again been separately identified taking developments in origin markets into account. Visitor Days. Visitor days spent in San Diego are calculated from the number of overnight visits multiplied by average length of stay, plus day visits. Differences in the average length of visit according to origin markets are taken into consideration as well as any impact of economic developments. Visitor Spending. Average spending per day is calculated for different market segments and applied to visitor days. This takes tourism-related price inflation in both San Diego into account (such as hotel room rates), as well as spending patterns according to origin market and the impact of more general tourism costs (such as airfares and fuel costs). Hotel Rooms sold. Hotel room demand largely follows the trend in overnight visitor days. The impact of local demand on rooms is also accounted for as locals tend to use more rooms in economic downturns as a replacement for longer-haul travel. Hotel Rooms supply. Supply is calculated as the current stock of hotel rooms plus planned and current hotel construction. Probabilities are applied to the current timetable of projects underway to determine when new capacity will be available. It is assumed that almost all hotels under construction are completed, while a smaller proportion of those in the planning stage are completed according to plan. Hotel Occupancy. Occupancy is simply determined as the ratio of room demand to supply in terms of room nights. Hotel Average Daily Rate (ADR). The cycle in daily rates follows occupancy closely, with a slight lag. Over time, more general price inflation also needs to be taken into consideration and price developments in San Diego as well as in origin markets are important factors. 23
8 San Diego Convention Center Attendance Forecast 24
9 San Diego Hotel Project Pipeline 25
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