Tourism collapse could trigger next stage of crisis


Last summer, around this time, I did an interview with Ulf Lindahl, the managing director of currency manager AG Bisset. At the time, there was growing concern that the unwinding of the unprecedented corporate debt bubble created over the past decade could lead to a deep economic recession.

He put forward an original idea: Global tourism could be at the center of the storm when it struck. “Everyone goes on vacation,” he said, “but that’s also what you can cut back on quickly – unlike your car or your phone.”

If people stopped traveling due to an unanticipated economic shock, he claimed, the effects would ricochet across almost every industry and business, from manufacturing to real estate, restaurants, luxury goods, financial services – you name it. All of this would risk triggering a series of business failures, high unemployment and a deep recession.

While many may have agreed with his thesis, no one could have predicted the Covid-19 pandemic. Now, the collapse of global tourism linked to the coronavirus, which represents more than 10% of global economic production, according to the World Travel and Tourism Council, could well trigger the next stage of this crisis, in which we are passing from an emergency. from public health and mass unemployment to widespread insolvencies in a myriad of industries.

Countries like Italy, Mexico and Spain, which have some of the highest levels of tourism as a share of gross domestic product, will be hit hardest by the fact that few people cross borders this summer. However, the United States, which just posted the largest post-war contraction in the second quarter, will likely be at the center of the larger economic storm.

Congress cannot agree on the next stimulus package and viral cases are on the rise. Nearly 17 million American jobs are at risk due to the tourism slowdown alone. Countless businesses can also be at risk. Even with billions of dollars in government assistance programs, US business bankruptcies rose 43% in June compared to the same month of 2019. It’s hard to imagine what will happen when the bailouts stop.

At the top of this hierarchy of pain are companies like Boeing and Airbus. While global air traffic is expected to decline by 60% this year, the two major aircraft manufacturers face a flood of order cancellations as trade tensions between Europe and the United States escalate. This, of course, fuels trade disputes between the US and the EU in areas ranging from aircraft subsidies to digital taxation. It also puts pressure on manufacturing supply chains around the world.

The fact that people don’t travel – not even to the office – also affects real estate. Global real estate is worth more than stocks and bonds combined. According to Green Street Advisors, the unlevered value of commercial real estate in the United States has fallen 11% since the outbreak of the pandemic.

Transaction volumes in the second quarter of the year fell 68%, the lowest level since the post-2008 financial crisis. There was distress in all types of properties, in all parts of the country. Since most Americans hold the majority of their wealth in real estate, this will hurt consumption.

It will also affect public sector spending. Real estate is the biggest part of the tax base in New York and other cities. Neighborhoods with empty expensive office towers have a spooky and deserted feel. Big tech companies like Google, among the biggest real estate spenders in many major US cities, aren’t firing workers until next summer.

Some surveys estimate that 40 percent of US tenants face eviction if stimulus checks stop. The collapse of the housing market will affect the city’s budgets and services, most likely creating a 1970s-style snowball effect where wealth shifts, further degrading the tax base.

The travel crisis is also affecting the sharing economy. Brian Chesky, chief executive of Airbnb, which laid off 25% of its workforce in May, says mass cross-border travel may never return to pre-pandemic levels. This means less shopping for luxury goods and costly study abroad. This will deal a further blow to restaurants that are already struggling to stay open to the half-capacity required for social distancing. In the United States, the decline in manufacturing jobs over the past two decades has been accompanied by an increase in employment in restaurant services, but that increase has now clearly reversed.

As AG Bisset pointed out in a June research note, the collapse of mass tourism and the potential reverberations that flow from it are reminiscent of the grain price collapse of 1928 that ultimately helped trigger the stock market crash of 1929. and depression. At the time, a wheat bubble subsidized by easy credit led to overproduction and a sharp drop in prices, which ricocheted through the rest of the economy and ultimately sparked a sell off in stocks as investors watched the dominoes falling.

Many people still find a way to take a summer vacation, usually within driving distance. But the globetrotter as we once knew is unlikely to restart anytime soon. What we are seeing is the demise of an industry that has supported many other sectors. I suspect that once the holiday season is over, especially if the United States fails to deliver more stimulus money, we will see ramifications that go far beyond the travel and tourism business itself- same.

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