Magazine Columns

The Tsunami on the Horizon (Destination UK Article)

Wednesday 15 October 2008, 9:24 AM

I recently attended a UKinbound meeting to talk to their members about the state of the tourism sector. During the talk I produced a number of slides which showed the dire state of the US property market, the enormous growth in securitised mortgages and the resultant emergence of the toxic Collaterized Debt Obligations that are now choking the whole financial system.

The graphs that I showed were from a presentation given by a leading US financial research firm early this year entitled “Why We Are Still in the Early Innings of the Bursting of the Housing and Credit Bubbles”. The argument they present in their presentation was both compelling and dire – that there is US$3.2 trillion in CDOs in the financial system that are backed by subprime mortgages and the unrealistic assumptions of an ever increasing US property market. They concluded the report by stating “today we are only seeing the tip of the iceberg: an enormous wave of defaults, foreclosures and auctions is just beginning to hit the United States. We believe it will get so bad that large-scale federal government intervention is likely”. Nine months later the only fault I can find in their analysis is that they were probably overly optimistic – they predicted the Government bailing out the mortgage based securities market not the whole financial system. Which brings us on to the impact on tourism. At the UKinbound meeting, members where asked if they had experienced a downturn in business as a result of the credit crunch. The overwhelming majority said that they hadn’t and the summer season had been pretty much the same as last year. And, indeed, this experience is borne out by the official statistics. The latest International Passenger Survey figures show that inbound visitor numbers are up 1% so far this year while outbound numbers are up a similar amount. And in the domestic market, visitor numbers are up 7% (and spend is up a massive 16%). So has taking a holiday crossed that gap from being a discretionary activity to becoming a necessity for modern life. Unfortunately, I don’t think so. One of the interesting things about the credit crunch has been the desperate attempts by the Government to prevent the banking crisis spilling over into the “real economy”. But they can’t stave off the inevitable for too much longer and there are ominous signs that the stormwall that has been erected is starting to crumble. One of the most telling statistics that has come out is that the Official Savings Rate has turned negative (-1.1%) for the first time since 1958. This means that people are having to use their savings to pay for their outgoings – discretionary expenditure is being squeezed as pay levels are static while the price of food, energy, fuel and mortgages has risen considerably over the last year. As living off ones savings is unsustainable, people are going to have to cut back on things like holidays. The second ominous sign is that new car sales fell almost 20% in September. As a new car is about the biggest discretionary item people purchase, you would expect it to be one of the first items to experience a fall in sales as people tighten their belts. That sales have reduced by 20% in a single month shows just how quickly this belt tightening is occurring. The third ominous sign is that unemployment is on the rise again with Ernest and Young forecasting that there will be more than 2 million unemployed within the next 18 months. So with rising costs, falling discretionary expenditure and growing unemployment, the outlook for the tourism industry next year is challenging to say the least. The rescue package that the Government has launched for the banking industry may soften the downturn, but it won’t prevent it. What DCMS needs to do now is develop a plan for supporting the tourism sector. Hopefully we won’t need it - but we just might.

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