The implications of sustained travel restrictions - Capital Economics
Global Economics

The implications of sustained travel restrictions

Global Economics Update
Written by Jennifer McKeown

Taken alone, prolonged restrictions on international travel would do little to hinder the global recovery since overseas tourism is a small share of world GDP and some of the lost spending would be made up. But the aggregate masks a wide range of effects. Major economies including the US and China would be unscathed, some middle-sized ones like Thailand and Spain would see their recoveries delayed and a few small economies including the Maldives and Cambodia could face severe balance of payments strains.

  • Taken alone, prolonged restrictions on international travel would do little to hinder the global recovery since overseas tourism is a small share of world GDP and some of the lost spending would be made up. But the aggregate masks a wide range of effects. Major economies including the US and China would be unscathed, some middle-sized ones like Thailand and Spain would see their recoveries delayed and a few small economies including the Maldives and Cambodia could face severe balance of payments strains.
  • Falling virus numbers are prompting many economies to plan for the removal of restrictions on domestic activity. But varied success in containing the virus, differences in the speed of vaccine rollouts and the emergence of new region-specific variants have made governments far more cautious about removing restrictions on international travel. There is a growing risk that these remain in place for many months.
  • On the face of it, this might put a serious dent in the global recovery since, according to the World Travel and Tourism Council (WTTC), tourism was directly or indirectly responsible for 10.3% of world GDP in 2019. But much of this reflects related activities such as dining out and visits to museums, which should pick up sharply in the months ahead even if people are restricted to spending at home rather than abroad.
  • The direct contribution of tourism is 3.3% of world GDP. And within that, much of the activity relates to domestic tourism, which the WTCC estimates accounts for around 70% of total tourism spending. So for the world as a whole, the potential effects of sustained international travel restrictions should be fairly small compared to our forecasts that most of those restrictions are removed in the months ahead. We also believe that oil prices would hold up even if travel restrictions remain in place, as we explained here.
  • Of course, there are major differences by country and the most significant implications of a delay to international travel will be in the distribution of economic activity around the world. Chart 1 shows tourism services exports (i.e. spending by tourists from overseas) as a share of GDP for a selection of large economies. Among the least exposed are the US, China, Japan and the UK whereas the most vulnerable of these economies are Thailand and some in Southern Europe and North Africa.
  • For the first group, the absence of foreign tourism will not be a significant issue. The loss of spending by tourists from overseas should be at least partly offset by domestic tourism – note that tourism receipts in all of these economies are usually smaller than their spending on tourism abroad. (See Chart 2.) Admittedly, data from the UK suggest that domestic holidays might not fully compensate for the loss of foreign tourists – hotel occupancy rates were still lower than normal last summer despite many British people holidaying at home. (See Chart 3.) What’s more, the output of services like travel agencies will remain depressed.
  • But, if domestic restrictions are removed in these countries as seems likely, then this drag should be offset (or perhaps even more than offset) by higher spending on staycation activities such as museum or theme park visits or by spending on alternative goods and services including home improvements. This is particularly the case given current high levels of household savings in the major advanced economies.
  • For the second group, however, domestic spending is highly unlikely to make up for the loss of tourists from overseas. Their tourist receipts are normally far higher than their spending on tourism abroad. What’s more, the income of their domestic populations is typically lower than that of the average tourist. We have already revised down our forecast for GDP growth in Thailand this year. There are significant downside risks to our forecasts for Turkey, Spain, Greece and Italy, particularly since Europe’s peak tourist season starts in a few months’ time. While Mexico’s reliance on tourism is not as strong, lost tourist revenues could still see the current account swing back into a deficit, putting downward pressure on the peso.
  • But by far the greatest risks are to smaller economies with a particularly high reliance on tourism and in many cases very low domestic incomes. (See Chart 4.) Belize restructured its debt last year and the risk of sovereign default is high in the Maldives and Cambodia. Both have very large external debts and could suffer more severe balance of payments problems if tourism fails to recover in 2021.

Chart 1: Tourism Services Exports (% of GDP)

Chart 2: Net Exports of Tourism Services (% of GDP)

Chart 3: UK Hotel Occupancy (%)

Chart 4: Tourism Services Exports (% of GDP)

Sources: ONS, World Bank, WTCC, Capital Economics


Jennifer McKeown, Head of Global Economics Service, jennifer.mckeown@capitaleconomics.com