Australia's tourism sector looks set to boom as the dollar busts

While it is making overseas travel for Australians more expensive, the 25% decline in the Australian dollar since mid-2014 is having a direct positive impact on Australia’s enormous tourism industry, increasing overseas arrival numbers, boosting sector employment and assisting Australia’s economy in its transition away from the mining investment boom.

With many expecting the Australian dollar to continue to slide in the year ahead, the outlook for the sector appears to be improving.

Gareth Aird, an economist at CBA, has produced an excellent note today in which he has examined the impact of the falling Australian dollar on Australia’s tourism sector.

He believes that the lower AUD provides assistance to the Australian tourism industry in two ways:

• By encouraging international holidaymakers to visit Australia because it reduces the relative cost of a trip and;
• Making a domestic holiday more attractive to Australian residents because the relative cost of an overseas holiday rises.

It’s a pretty simple scenario. The relationship that Aird points to is demonstrated in the chart below:

It shows Australian tourism arrivals and departures expressed as a ratio going back to 1985. As it clearly shows, up until the past decade, there were far more arrivals coming to Australia than there were departures going in the other direction.

The steep change in trend, seen from 2003, coincided with the Australian dollar beginning a steep appreciation which eventually culminated in it soaring above 110 US cents in early 2011.

While the number of Australians heading overseas still outnumbers international arrivals, the trend, having bottomed in recent years, now appears to be moving in the opposite direction.

Clearly the fall in the Aussie is starting to have an impact, and in a good way for Australia’s tourism sector.

So aside from the boost in Australians choosing to holiday at home rather than abroad, where will the growth in international inbound tourism come from?

Aird has crunched the numbers and come up with an increasingly-common prediction – China.

“Tourists from Asia, and in particular tourists from China, are the major growth area for Australian tourism exports. In 2014/15, the number of short-term arrivals from China to Australia rose to 935k (compared with 770k in 2013/14). If current trends are maintained, 1 million Chinese residents will holiday in Australia in 2016. In our view, this is likely to happen. The number of holidaymakers from China was already rising steadily when the AUD was elevated. This was partly the result of rising Chinese household income which has generated a resultant lift in tourism-related consumption. Some softening around travel controls over Chinese residents also helped. The lower level of the AUD will simply serve to act as a tailwind on the growth in tourists from China”.

Aird also suggests that the lower Australian dollar may also assist inbound tourism from the US and UK.

“The lower AUD (and stronger GBP and USD) will see tourists to Australia from both the UK and USA lift. This has already started to happen with the number of tourists from the UK and USA rising on the back of stronger currencies against the AUD,” he said.

Aird suggests that all states and territories are likely to benefit from the lift in tourism numbers, particularly New South Wales and Queensland.

The lift in tourist numbers on the back of the lower Australian dollar is already being felt. The chart below reveals that that spending in Australian hotels and restaurants is now trending higher:

“It shows that since the AUD started heading lower, real spending on hotels, restaurants and cafes has lifted considerably,” Aird said. “The lift in QLD, in particular, is significant and illustrates the positive impact that a lower AUD has had on the tourism industry.

“We expect this trend to continue.”

The lift in tourist numbers and increase in tourism-related expenditure is also likely to boost capital expenditure across Australia’s tourism sector. In 2014, Aird noted that Australia’s tourism investment pipeline was estimated to have grown by 8.7% in 2014 to $53.7bn.

These are are all encouraging signs for the outlook for Australia’s large tourism sector.

In 2013/14, tourism represented 2.7%, or $43.4 billion, of Australian GDP, larger than the nation’s agricultural sector. It was also the third-largest export item behind iron ore and coal, and the largest of all services. It also employed 4.6% of all employed Australians – around 500,000 people.

These are all massive numbers, and ones that look to set to grow substantially should the pressure on the Australian dollar, along with the current trajectory for global economic growth, remain in place.

Source: Business Insider Australia, David Scutt, 17^th August 2015
Originally published as: Australia's tourism sector looks set to boom as the dollar busts