Tourism, public debt and Covid19

Tourism and Covid 19 macro flash note.JPG
88 days ago (15 Apr 2020)  |  

In this Macro Flash Note Stefan Gerlach and GianLuigi Mandruzzato argue that the outlook is poor for economies where tourism is an important contributor to GDP and note that they often have large public debts.

It is now recognised that once the coronavirus epidemic has been brought under control and health systems are no longer under stress, many governments will decide to gradually reopen their economies. This will prevent further job losses and perhaps even start the reabsorption of recently unemployed workers back into employment, forestall a wave of bankruptcies and limit the loss of GDP.

Needless to say, this will require strict social distancing safeguards, greatly expanded testing for the virus and antibodies; and perhaps the use of big data and apps to provide information about contagion risks. The return to work will be gradual, starting with younger workers, workers without pre-existing medical conditions and those identified as being immune. It is likely to involve the compulsory use of face masks.

Reopening an economy is likely to lead to a quick rebound in activity, in particular for the manufacturing sector. The service sector will lag because social distancing makes it harder to provide some services. The last sector to recover will probably be tourism since very few people will want to fly in crowded airplanes, eat in full restaurants or relax in packed bars if it brings with it a risk of contracting a potentially deadly illness.

This raises the question of how important tourism is for the European economy and which European economies might be most exposed?1 To answer, we looked at three sectors:

  • Accommodation and food service activities
  • Travel agencies, tour operators and other reservation service and related activities
  • Air transport

Tourism directly accounts for 3.4% of total gross value added in the European Union and employs about 11m people, or 5.3% of EU total employment. However, the aggregate data hides important differences between member countries.

For 31 European countries, Chart 1 shows the contribution of tourism to total gross value added on the horizontal axis, the general government gross debt-to-GDP ratio on the vertical axis, and the size of the bubbles indicates the share of total employment related to tourism.

Chart 1. Tourism and government debt

Source: Eurostat, EU Commission Autumn 2019 Economic Forecasts, Swiss National Bank, Refinitiv and EFGAM calculations as at 14 April 2020.

Chart 1 is divided into four quadrants according to the importance of tourism (more or less than 5% of gross value added) and the ratio of government debt to GDP (more or less than the 60% threshold set by the Maastricht Treaty). It is striking that countries where tourism is an important contributor to GDP and employment also tend to have larger public debt-to-GDP ratios.2 This is unfortunate because government support to the economy might be constrained where it would be most needed.

The red bubbles in the chart identify the so called “Club Med” countries - Italy, Spain, Portugal, Greece, Malta, Cyprus and Croatia - and five of them fall in the upper right quadrant. In the Mediterranean countries, on average tourism contributes 6.4% to gross value added and 8.4% to total employment. Their average government debt-to-GDP ratio is 105%, but the ratio is equal to or higher than 120% in Italy, Greece and Portugal.

If tourism is slow to recover as the economies are reopened, these countries may face more severe economic contractions than in countries less exposed to travel and tourism. They may potentially even face difficulties servicing or rolling over their public debt.

In contrast, three of the so called “frugal four” – Germany, Netherlands, Austria and Finland – which are identified by the dark bubbles in the chart, fall in the lower left quadrant. In these countries, tourism contributes on average only 3.4% to gross value added and 5.2% to total employment, and their average public debt-to-GDP ratio is less than 60%. The outlier is Austria, where the tourism sector accounts for more than 5% of gross value added and almost 7.5% of employment. The “frugal four” are the most opposed to providing financial support to the southern EU countries.

The overall conclusion is that the periphery of Europe is again in peril. The impact of Covid19 on tourism will exacerbate the dispersion of economic performance across EU member countries, raising risks to its stability and cohesiveness. Much will depend on how the EU reacts. That is still uncertain.

Table 1. Tourism and government debt in Europe

Source: Eurostat, EU Commission Autumn 2019 Economic Forecasts, Swiss National Bank, Refinitiv and EFGAM calculations as at 14 April 2020.

1 The sample includes the 27 EU countries, United Kingdom, Switzerland, Norway and Iceland. Tourism sector data refer to 2017 but for Italy and UK gross value added which refers to 2016. Debt to GDP ratios refer to 2019. Table 1 contains the full data set.

The correlation between the contributions of tourism to gross value added and employment is equal to 0.85.

Important source information: The sources for data used in this publication are EFG Research and Bloomberg, as at publication date, unless otherwise stated.

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Tourism and Covid 19 macro flash note.JPG