Quarantine is not the source of the tourism industry’s woes - Capital Economics
UK Economics

Quarantine is not the source of the tourism industry’s woes

UK Economics Update
Written by Andrew Wishart

The sudden imposition of quarantine on people arriving from France highlights the risks involved in foreign travel while the virus is still circulating. This uncertainty is likely to mean it takes a very long time for international travel to recover from its Covid-19 plunge. The reduction in foreign travel will not hinder the domestic tourism industry, but the wider effects of the virus will.

  • The sudden imposition of quarantine on people arriving from France highlights the risks involved in foreign travel while the virus is still circulating. This uncertainty is likely to mean it takes a very long time for international travel to recover from its Covid-19 plunge. The reduction in foreign travel will not hinder the domestic tourism industry, but the wider effects of the virus will.
  • The UK’s policy of taking countries off the “exempt” (safe) list at short notice when the circulation of the virus increases beyond a certain threshold will be a major source of uncertainty for would-be holidaymakers both coming to and getting away from the UK. As a result, flights to and from the UK, which are still 50% below pre-virus levels, will probably take a long time to recover and continue to lag behind the recovery in car journeys and public transport usage. (See Chart 1.)
  • But given the contribution of foreign visits to the UK economy is small this is unlikely to hinder the recovery much. Foreign tourism directly accounted for just 0.5% of GDP 2019. After including the indirect impact (such as through supply chains, investment, and the spending of employees in the sector) the total contribution to GDP rises to 1.3%. Domestic tourists are much more important for the tourism industry, which accounts for about 9% of GDP in total. (See Chart 2.)
  • In fact, the reduction in foreign travel may even provide a boost to the UK economy as Brits forgo overseas trips for domestic holidays or so-called “staycations” in the UK. And since UK residents usually spend more money abroad than foreign visitors do here, there is a favourable substitution effect. (See Chart 3.) For example, if all of the £60bn Brits spent on overseas holidays in 2019 was spent in the UK instead it would have boosted GDP by 2.8ppts, more than offsetting the 1.3ppt loss from overseas visitors. This has been a significant boon to places like Blackpool and Cornwall. Indeed, hotels in those areas are reporting very high occupancy and recreational premises are seeing high visitor numbers according to google mobility data. (See Chart 4.)
  • However, the tourism sector overall will still be hindered by the virus for three reasons. First, not all the money that Brits would usually spend abroad will be ploughed back into the domestic tourism sector. Some may have downgraded their week in a 5* Dubai hotel to camping in Skegness, while others who are more cautious due to the virus may go without a holiday altogether.
  • Second, not all parts of the domestic tourism sector have benefitted. While coastal resorts have done well, city breaks are off the agenda as consumers avoid (normally) densely populated areas. Visits to attractions in London are still down by 40% compared to pre-virus levels. (See Chart 4 again.) Moreover, day trips are an equally important source of demand for tourist attractions. In a normal year UK residents and foreign visitors typically spend about £80bn on holidays in the UK, and revenue from day trips accounts for a further £80bn. The recovery in this sort of activity will not depend on quarantine rules, but on the spread of the virus, associated restrictions, and the public’s caution due to the pandemic.
  • Third, there is some evidence that consumers have also substituted spending away from the tourism sector into other areas, such as the purchase of goods (retail sales are already above pre-virus levels) and the expenditure associated with moving house following the surge in housing transactions.
  • Overall, the substitution of staycations for holidays abroad is a welcome boost for parts of the tourism industry. But it will be outweighed by the combination of the reduction in day trips and the loss of foreign visitors. So, as is the case for the economy as a whole, the most crucial determinant of the recovery in the tourism industry will be the spread of the virus, restrictions to counter it, and consumer’s willingness to go out and spend.

Chart 1: Travel (Pre-virus level=100)

Chart 2: Contribution of Tourism to GDP (% GDP)

Chart 3: Overseas Tourist Spending (£bn per month)

Chart 4: Visits to Recreation Locations (% vs January)

Sources: Apple, EUROCONTROL, WTTC, Refinitiv, Google, CE


Andrew Wishart, UK Economist, +44 7427 682 411, andrew.wishart@capitaleconomics.com