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DOI: 10.1177/0047287509353192
2010 49: 31 originally published online 3 December 2009 Journal of Travel Research
Egon Smeral
Impacts of the World Recession and Economic Crisis on Tourism: Forecasts and Potential Risks
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ln MR
t1
g
1
1g
2
g
3
g
4
1g
2
ln BIPR
t1
g
5
g
6
1g
2
ln MP
t1
g
7
g
8
1g
2
ln BIPDt1
0
B
@
1
C
A
Dummies m
t
;
(2)
m
t
is an error term (white noise).
The ECM (equation [2]) covers short- and long-term rela-
tionships: the coefficients of the level variables reflect the
long-term demand elasticities, while the coefficients of the
differentiated variables reflect the short-term demand elas-
ticities. The expression - (1 - g
2
) is known as the error
correction parameter, the expression in the brackets is known
as the error correction mechanism. The error correction term
is greater than 1 and less than 0. Because of this, the system
will adjust itself in the direction of the equilibrium state by
considering the error correction parameter and the errors
made in the previous periods.
The estimates for the ECM (equation [2]) produced
insignificant parameters (based on the t-values) for the
level variables. Because the lagged level variables repre-
sent the cointegration as well as the long-term relationship,
eliminating these insignificant variables would violate the
ECM approach.
To produce reliable estimates, an elimination process is
used that eliminates variables with nonplausible signs as pro-
vided for in economic theory and statistically insignificant
parameters. At the end of this elimination process we obtain
a model structure that is known in the literature as the growth
rate model, which covers more or less only short-term rela-
tionships and considers principally the income and price
effects (Song and Witt 2000). To avoid multicollinearity, the
price indices are captured by a relative price index variable.
In a second version of this growth rate model, the
medium-term development of the foreign traveling habit
was modeled using a HodrickPrescott (HP) filter for the
dependent variables (tourism imports at constant prices and
exchange rates; Enders 2004; Hodrick and Prescott 1997;
Smeral 2009). The latter operation delivered a long-term
flexible trend for the development of the habits of outbound
traveling (HPMR; Smeral 2009).
Visiting foreign destinations is subject to trends that change
over time. Such flexible trends are captured using an HP filter.
Since medium-term development of the demand to travel
to foreign destinations is best described and captured by
a flexible trend of the dependent variable, this flexible
patternisolated by the HP filter methodwas used instead
of the lagged dependent variable as an indicator for the pat-
tern of habit effects (Smeral and Wger 2005; Smeral
2007, 2009).
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34 Journal of Travel Research 49(1)
The relationships formulated above were estimated
econometrically on an OLS base, using the absolute
differences of the natural logarithms of annual values for
the period from 1978 to 2008, where one model
variant (equation [4]) considered the development of travel
habits:
ln MR
t
a
1
a
2
ln BIPR
t
a
3
ln
MP
BIPD
t
Dummies e
t
;
(3)
ln MR
t
b
1
b
2
ln BIPR
t
b
3
ln
MP
BIPD
t
b
4
ln HPMR
t
Dummies e
t
;
(4)
e
t
is an error term.
The estimation results for the models based on equation (3)
can be considered as very satisfying: the variances of the
exogenous variables could explain 70% to 80% of the
variances of the tourism imports of the different source
markets (Table 1). The coefficients of the estimated equations
were found to be statistically significant. The estimates for
the income and price elasticities had plausible dimensions
and signs such as can be expected from economic theory.
The equations for Canada and Japan were estimated with-
out constant terms because when considering the constant
term the estimations delivered insignificant coefficients and/
or coefficients with implausible magnitudes.
The highest income elasticities were measured for the
United States (3.4) and Japan (3.3). For Europe and Austra-
lia, the elasticity of tourism import with respect to changes in
GDP amounted to 2.2. The estimated income elasticities
were relatively low for Canada (1.0).
Equation (3)
Australia: ln MR
t
2:37 2:19ln BIPR
t
0:89ln
MP
BIPD
t
16:64D
2004
1:00 3:45 7:34 2:71
R
2
0:76; D:W: 2:00
Canada: ln MR
t
1:01ln BIPR
t
1:46ln
MP
BIPD
t
26:45D
1990
3:36 7:29 4:67
R
2
0:69; D:W: 2:01
United States: ln MR
t
6:21 3:36ln BIPR
t
0:88ln
MP
BIPD
t
2:95 4:91 7:25
R
2
0:87; D:W: 2:09
Japan: ln MR
t
3:34ln BIPR
t
0:90ln
MP
BIPD
t
33:24D
1988
24:23D
1991
28:65D
2006
5:26 5:15 3:08 2:39 2:87
R
2
0:76; D:W: 1:46
EU-15
a
: ln MR
t
1:38 2:22ln BIPR
t
1:12ln
MP
BIPD
t
9:36D
1980
11:00D
1992
1:29 5:32 4:74 3:86 4:52
R
2
0:79; D:W: 1:59
Equation (4)
EU-15
a
:ln MR
t
3:90 2:04ln BIPR
t
1:07ln
MP
BIPD
t
0:74ln HPMR
t
9:58D
1980
9:87D
1992
2:36 4:98 4:72 1:93 4:15 4:13
R
2
0:81; D:W: 1:71
MR .................. Real tourism imports (million $, at 2000 prices and exchange rates)
HPMR ............. Flexible trend of real tourism imports, derived using an HP filter
MP ................... Price index of real tourism imports ($ basis; 2000 = 100)
BIPR ................. Real gross domestic product (million $, reference year: 2000)
BIPD ................ GDP deflator ($ basis; 2000 = 100)
Dyyyy ............... Dummy variable for the year indicated (value = 1; for all other years value = 0)
b
t .................... Time index, 19782008
Table 1. Econometric Explanation of Real Tourism Imports of Five Different Source Markets for the Period 19782008
Source: IMF, OECD, UNWTO, WIFO, own calculations (EViews 6.0). t -statistics are in parentheses.
a. Excluding Austria.
b. The dummies are set for data irregularities.
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Smeral 35
The estimation results for the elasticities of tourism
imports with respect to changes in relative prices were in
most cases similar and amounted to about 1; the only excep-
tion was Canada, where the estimation delivered a
significantly different and higher value for the price elastic-
ity (1.5).
The estimation results for the models based on equa-
tion (4) were only satisfactory in the case of the EU-15 (see
Table 1); for all the other source markets the coefficients of
the flexible trends of the medium-term travel habit were
not significant. The estimation results for the elasticity of
demand for outbound traveling by EU-15 citizens could be
seen as realistic with respect to the medium-term habitual
flexible trend for foreign travel (0.74); the estimation of the
import elasticity with respect to the changes in the GDP
amounted to 2.0.
Future Outlook
Based on the estimated equations (3) and (4) (the latter is
only valid for the EU-15), a forecast for 2009 and 2010 can
be derived for the real tourism imports of the source markets
dealt with in this article.
The forecast starts out from the assumptions on GDP
development trends, where we follow the recent forecasts
of the OECD (OECD 2009; Table 2):
In Australia the impact of the international economic
and financial crisis will be less severe than in most other
advanced countries. Weak exports and, in consequence,
sluggish private consumption and a strong decline in
investment demand combine to shrink GDP in 2009
(0.4%), after a growth rate of 2.3% in 2008. For 2010 a
moderate recovery is expectedGDP will grow by
1.2%but unemployment will rise and reach a level of
almost 8% (2008: about 4%). To mitigate the impact of
the crisis, the country expanded its economic policy, as a
result of which the general government financial balance
switched from a slight surplus in 2008 (+1.2% in terms of
the nominal GDP) to a significant deficit in 2009 (4.9%
in terms of the nominal GDP). The budget deficit is not
expected to be reduced in 2010.
The global recession has had a severe effect on the
Canadian economy. Decelerating since late 2007, the economy
started to contract by the end of 2008. By the beginning of
2009, foreign demand and fixed assets investment began to
shrink heavily. Consumers reduced their spending (especially
on housing) in response to losses in the value of their assets
and because of a growing uncertainty about labor market
expectations. After a GDP growth of only 0.4% in 2008, the
Canadian economy will shrink by 2.6% in 2009 and grow
minimally only (by 0.7%) in 2010. Same as its Australian
counterpart, the Canadian government turned the slightly
positive general government balance (+0.1%) into a
significant deficit (4.8%), in order to mitigate the effects of
the crisis.
The US economy is going through a severe recession,
although there are hopes that it will bottom out by the end of
2009 at the latest. Consumer demand is very weak already
for the second year: general uncertainties about the future, a
weak labor market and rising unemployment, an enormous
loss in wealth and tight credit conditions collude to keep
private households from spending money. The household
savings ratio (as a percentage of disposable income) amounted
to 0.6 in 2007, rose to 1.8 in 2008, and will reach a level of
5.4 in 2009; for 2010, it is expected to increase by an addi-
tional percentage point. Residential construction investments
plummeted by around one-fifth in 2008, and a contraction of
similar magnitude is expected for 2009. Investment in equip-
ment will shrink by 19% in 2009. Fiscal policy inflated the
negative general government balance to a level of 10% of the
GDP, providing a considerable boost for the economy, so
that GDP will decline by only 2.8% in 2009. A gradual
recovery should take hold in 2010, to result in an expected
GDP growth of 0.9%. The recovery will depend on financial
conditions staying stable and financial systems gradually
regaining investor confidence.
Japan is laboring under the most severe recession since
the Second World War. The slump in world trade will trigger
a sharp decline in exports by more than 30% in 2009. Invest-
ment in equipment will fall by almost 20%. Increasing
unemployment and lower wages lead to private spending on
consumption shrinking by 1.7% in 2009. In total, GDP will
decline by 6.8% in 2009. Thanks to its expansive fiscal
policy, the recession should bottom out by the end of 2009 at
the latest. There is a slight recovery on the horizon for 2010,
with an expected GDP growth of 0.7%. Moderate export
growth should balance out the decline in business invest-
ments and decelerate the fall in employment and wage rates.
In the Euro area, the downturn appears at present to be
slackening and might become less steep compared to the
plunge the economy took at the start of 2009. In general,
weak consumption, shrinking investment, and an unemploy-
ment rate surging from 7.5% (2008) to 10% (2009) make it
impossible to draw a favorable economic outlook. Neverthe-
less, the decline in economic activity should level off by the
Table 2. Real GDP 20082010
Percentage Changes from Previous Year
2008 2009 2010
Australia +2.3 -0.4 +1.2
Canada +0.4 -2.6 +0.7
United States +1.1 -2.8 +0.9
Japan -0.7 -6.8 +0.7
Euro area +0.5 -4.8 0.0
Source: OECD Economic Outlook, Vol. 2009/1, No. 85, June 2009.
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36 Journal of Travel Research 49(1)
end of 2009, an expectation supported by recent business
surveys that suggest that the slump is approaching its bottom
line. After a slight GDP growth by 0.5% in 2008, economic
forecasts predict a decline by 4.8% for 2009 and stagnation
for 2010.
When analyzing the above forecasts, expectations are that
the recession in these source markets will bottom out by
2009 and their economies recover by 2010. GDP rates are
about to plunge in Japan and the EU-15, decline moderately
in the United States and Canada and decrease slightly in
Australia. By 2010, GDP rates should grow again by about
1%, whereas the economies of the EU-15 might stagnate. In
spite of the recovery, unemployment will continue to rise,
and no concepts have so far been developed to get people
back to work. Budget deficits will rise as well, and once
again there are no strategies on hand of how the debt burdens
could be reduced to a manageable size.
This evaluation of GDP forecasts improves confidence in
their development pattern for 2009 (yearly averages), but (in
the authors opinion) the shrinking process may well proceed
until 2010. For that reason, a pessimistic version (variant 2)
is calculated for 2010, which assumes that the forecasts are
lower by 1 percentage point than the OECD forecasts (vari-
ant 1; see Tables 2 and 3).
As to tourism prices, relative prices for outbound travel will
fall by at least 1% in 2009 and 2010. This negative trend is
based on the assumption that excess capacities, low occupancy
rates, and high fixed costs will depress relative tourist prices.
Regarding flexibility of travel habits, after a medium-term
growth rate of 2.5% per year since 2000, variant 1 assumes a
stagnation in 2009 and 2010. If, however, the recession takes
longer (variant 2), habitual foreign travel will decrease by at
least 1% in 2010 (following stagnation in 2009).
According to the forecast based on equation (3), demand
for outbound travel (real tourism imports) in the five source
markets (Australia, Canada, United States, Japan, EU-15) in
total will decline by about 11% in 2009, after a stagnation in
2008 (see Table 3). When accounting for the medium-term
development of travel habits in the EU-15, the total fall in
imports could be about 12.5%. It can be assumed that overall
international tourism will shrink by a slightly lesser extent as
some emerging countries can expect a positive development:
a decrease of some 10% seems to be likely.
The sharpest fall in demand for foreign travel in 2009 is
estimated for Japan (22%) and the United States (14.5%),
partly because of their relatively high income elasticities. In
the EU-15, demand for foreign travel will fall off by 11%;
when considering stagnating medium-term travel habits, the
decline will be even sharper and amount to 12.5%. These
EU-15 figures are more pessimistic by 1 to 1.5 percentage
points than those of the previous study carried out at the end
of March 2009 (Smeral 2009). In general, it needs to be
pointed out that if EU-15 imports could be split into overseas
and European destinations (which is a difficult statistical
problem), travel to overseas destinations would show a greater
decline than travel to nearer-situated neighboring countries.
Canadian tourism imports will be only just dented (1%),
Australias demand for foreign travel will decline by 2.5%.
In 2010, demand for foreign travel in the five source mar-
kets (whose spending on outbound travel accounts for some
80% of the total captured international tourism) should stag-
nate if the expected recovery occurs (variant 1), or wane at a
magnitude of 2.5% if the recovery of the economy takes
longer. When considering the medium-term development of
travel habits in the EU-15, total imports could shrink at a rate
of 2% to 4.5%.
According to variant 1, tourism imports of Japan will
increase by 3%. The Canadian demand for foreign travel will
rise by 2%, and tourism imports of Australia will grow by
only 1%. The more pessimistic view of variant 2 sets the
import development of Australia at 1% and Canada at only
+1% for 2010, and foresees stagnation for the imports of
Japan. Real outbound spending in the United States will
decline by another 2.5% in variant 1, or by 5.5% in the pes-
simistic variant 2.
Tourism imports in the EU-15 will shrink slightly in vari-
ant 1 (0.5%); when considering stagnating travel habits,
there will be a decrease of 3%. In variant 2, demand for for-
eign travel in the EU-15 will decline by 2.5%, or, if habitual
travel falls by 1%, by 5.5%.
Conclusions
Tourism has taken a bad battering from the global recession.
Yet surprisingly enough, the impact on international tourism
has so far been substantially softer than the slump experi-
enced by foreign trade and industrial production. One major
Table 3. Forecast Results for Real Tourism Imports for Five
Different Source Markets for the Years 2009 and 2010
Percentage Changes
from Previous Year
2009 2010
Variant 1 Variant 2
Equation (3)
Australia 2.4 +1.1 1.0
Canada 1.2 +2.2 +1.2
United States 14.7 2.3 5.7
Japan 21.8 +3.2 0.1
EU-15
a
10.9 0.3 2.5
Total 5 (added up) 11.2 0.2 2.5
Equation (4)
EU-15
a
12.6 2.8 5.6
Total 5 (added up) 12.3 1.9 4.6
Source: Own calculations.
a. Excluding Austria.
by Nita Valentin on October 15, 2010 jtr.sagepub.com Downloaded from
Smeral 37
reason might be the severe effect that the massive destocking
process has had on trade and production, whereas tourism
services, being perishable goods, cannot be stored (an empty
hotel bed, aircraft, or restaurant seat is lost forever and
cannot be double-booked the next day). In other words: as
tourism did not have to go through this vast destocking pro-
cess, the impact was much more muted. But there is another
side to the medal: the recovery process might take longer in
tourism than in production and trade because there is no
stock-building process going on in tourism.
A slower recovery of tourism compared to other economic
activities may also follow from the rise in unemployment until
2010 (possibly followed by stagnation at a high level) and a
freeze on incomes. Tight consumer budgets will obviously be
first spent on the necessary consumer goods (food, apparel,
rent, heating, etc.), while little or nothing will go into nonnec-
essary purchases such as travel or luxuries. Furthermore, the
loss in wealth (savings for retirement, for the childrens educa-
tion, for rebuilding the house, etc.) will increase the savings
ratio in the medium term, which will depress consumer
demand. Governmentsstill actively engaged in stabilizing
the economymust sooner or later reduce the huge debt
burden currently accumulated by increasing taxes and cutting
public spending (all this against a background of unsolved
problems in financing the social back-up systems), which will
in turn limit consumer expenditures.
Evidence that, in general, domestic tourism was hit much
less than long-distance travel has made tourism boards real-
ize that campaigns to boost domestic tourism might help
boost the sluggish demand. Yet seen from an international
macroeconomic view, these measures have only expansive
effects: they influence people to travel in their own country
instead of staying at home and saving the hypothetical travel
costs. On the other hand, campaigns organized to influence
people to travel to domestic rather than foreign destinations
could be seen as protective measures. Similar schemes in the
1930s aimed at promoting domestic industries, called beggar
my neighbour policies in the literature (Robinson 1947), are
generally looked at askance.
Furthermore, it appears that tourists increasingly tend to
book at the last moment, partly because of their lack of con-
fidence in their future job situation, partly because of existing
overcapacities, and partly because they hope to profit from
last-minute bargains and cheaper deals. In other words: tour-
ists have become highly price sensitive, a trend that may well
survive the crisis so that there is a genuine risk of price
wars. The consequences of such developments are dramatic
as, sooner or later, the resultant liquidity crunch will make it
impossible to carry out necessary investments and service
quality might deteriorate.
The forecasts in this article show a decline in aggregated
demand of 11% to 12.5% for foreign travel in the five
source markets (Australia, Canada, United States, Japan,
and EU-15) in 2009. Total world tourism spending on for-
eign travel might fall by about 10%. Given the present facts,
these figures appear to be plausible. Uncertainties exist for
2010: can we expect a sustainable recovery or are we in the
middle of crossing a wide-trough valley? Two scenarios are
presented that cover these two alternatives: a more optimis-
tic best-case scenario that foresees stagnating tourism
imports in the five source markets overall, and a less favor-
able scenario that expects a decline of 2%. The more
pessimistic view of tourism development sets the decrease
of aggregated tourism imports in the five source markets at
2.5% to 4.5%.
The forecasts made here assume that tourism demand
elasticities are symmetrical, that is, that the elasticities in up-
and downturns have a similar magnitude. But it is important
to bear in mind that income elasticities do not remain stable
across the business cycle: the relative fall in tourism demand
during a severe economic downturnreflecting, as it does,
the greater threat to a persons financial situation and job
securitywill be steeper than the relative increase in demand
during an economic upturn of a similar magnitude (Smeral
2009). For all those reasons, we have to consider that the
above forecast results are optimistic irrespective of the sce-
nario chosen, simply because income elasticity in severe
downturns might be underestimated so that a steeper decline
is perfectly conceivable. Estimating income elasticities for
the different stages of the business cycle could be an impor-
tant topic for the future tourism research agenda.
A consideration regarding the medium-term development
is that the negative economic and social consequences of the
crisis will accompany us for a long time. It will be difficult
to reduce the current high unemployment rates to figures that
are socially more acceptable. The economy will need time to
recover, and the financial systems may well remain fragile for
an even longer time. In the medium term, only moderate
growth rates are expected, also in the tourism industries. The
latter may be faced with massive structural change as a new
consumer with more limited financial and economic means
might emerge from the crisisa development that inciden-
tally offers a stimulus for future research.
Acknowledgment
I would like to thank my research assistant Sabine Fragner
(Austrian Institute of Economic Research) for her work in prepar-
ing the data, tables and figures as well as formatting the text.
Declaration of Conflicting Interests
The authors declared no conflicts of interests with respect to the
authorship and/or publication of this article.
Funding
The authors received no financial support for the research and/or
authorship of this article.
by Nita Valentin on October 15, 2010 jtr.sagepub.com Downloaded from
38 Journal of Travel Research 49(1)
Notes
1. The study was completed by the end of August 2009.
2. EU-15, always excluding Austria, since data are available only
from 1995, owing to changes in the national accounts system.
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Bio
Egon Smeral is an economist at the Austrian Institute of Economic
Research in Vienna and university professor. His areas of research
are applied economic theory and politics (especially in the fields of
tourism economics, leisure and service sector economics), tourism
forecasting and modeling, impact analysis and Tourism Satellite
Accounts, designing and evaluating tourism policies and pro-
grammes, and marketing strategies.
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