Signs of strength in Spain’s tourism industry
Tourism ended this year’s summer season in great shape with international tourist arrivals coming very close to the records set in 2019, a year that was extremely positive for the industry. Domestic tourism has also continued to post very good figures. However, the macroeconomic scenario represents a risk for the trend in tourism activity over the coming quarters due to high inflation and the economic slowdown in Europe. Nevertheless, we believe that tourism demand still enjoys significant levers for growth in the coming year and we therefore expect the sector to complete its recovery in 2023.
The situation in the tourism industry has altered dramatically. After an extremely difficult 2020 and a 2021 in which the recovery was far from satisfactory, 2022 has categorically confirmed that the sector continues to be a driver of growth for the Spanish economy. Official business indicators published by Spain’s National Statistics Institute (INE) point to the fact that, this summer, real tourism demand (without the price effect) was very close to the figure recorded in the same period of 2019. Total overnight stays in hotel and non-hotel accommodation during the months of July, August and September were just 1.3% below those of summer 2019. These good figures were further cemented by dynamic domestic tourism, whose volume of overnight stays was 6.6% higher than in 2019. However, this figure was slightly down on the one posted in the summer of 2021, probably due to an increase in trips abroad thanks to the recovery in international travel. For its part, international tourism performed much better than in 2021, reaching a level of overnight stays just 5.9% lower than in 2019.
Tourist overnight stays
If we look at which countries lie behind this strong recovery in international tourist arrivals in recent months, we can see some interesting trends. Based on passenger data for flights operated in Spain (see the table below), we note that improvements in tourist arrivals from the EU have been key. The figures are still 9% below those of 2019 (coming from –42% in 2021), mainly due to the saturation problems experienced at northern European airports.1 The impact of this saturation can be seen most clearly in UK passenger arrivals which, in the summer, were 14% below those of the same period in 2019. The situation appeared somewhat similar for arrivals from Germany, with numbers still 15% lower, but this was not the case for arrivals from countries with less saturation, such as France and Portugal. It should be noted that the sharp drop in the number of passengers from countries under the «Rest of Europe» heading since Q2 2022 reflect the cutting of air connections with Russia since the start of the war in Ukraine, although this decline is not noticeable in the overall figure due to its small relative weight.
On the other hand, 2022 has also been a turning point for long-haul tourism. After the extremely low number of arrivals in 2021, the most recent figures for 2022 are highly positive for tourism from the Americas, and particularly from Latin America. We therefore anticipate that, looking ahead to 2023, the recovery in non-European international arrivals will be one of the key levers of growth. This will also mean the return of the emerging markets prior to the pandemic, which were the ones offering the greatest growth potential for some Spanish tourist destinations.
- 1. See the article «Europe’s saturated airports: a brake on the summer’s recovery», in this Sector Report.
This good performance by tourism demand is surprising because of two factors: it has been achieved in an environment of sharp price rises and also a loss of purchasing power among consumers throughout the EU. Tourism prices were no exception, reaching record highs during the last summer season. Consequently, for the time being it seems that the tourism sector has been able to raise its prices without too much impact on demand.
Although tourism prices have responded to the rise in production costs, according to our analysis the increase seen in prices has been mainly due to the strong recovery in international demand which, together with domestic demand, filled the market in many Spanish tourist destinations. This has been the case in the hotel sector, achieving occupancy rates above 80% in a third of the more than 100 tourist municipalities analysed by Spain’s National Statistics Institute in its hotel occupancy survey. CPI accommodation prices were more than 17% higher than those recorded in summer 2019 and this situation can also be seen in other prices related to tourism, such as hospitality and air travel, as shown in the chart below.
Trend in tourism-related prices of the CPI
Looking ahead to the next few months, the indicators for interest in travelling to Spain we produce based on Google search results have remained dynamic, albeit somewhat less «euphoric» for European tourism. The interest indicator places searches from the United Kingdom and EU within the benchmark range,2 which is very good news given the economic situation in Europe, especially in the United Kingdom with sharp increases in inflation and an economic slowdown, in addition to the depreciation of the pound for British tourists. Given this situation, one would expect a decline in interest in travel from European countries, something which is not being observed, however.
Also noteworthy is the fact that interest in travelling to Spain seems to have returned to normal in the US market since March and, more recently, the interest of Japanese tourists appears to be picking up, after remaining at very depressed levels until last June. This is highly relevant since it suggests that two of the most important outbound markets (USA and Canada, Japan and Korea) that generated the most growth in the tourism sector before the pandemic, in the absence of the Chinese market, might recover throughout the course of 2023.
- 2. The benchmark range is constructed from searches recorded between 2017 and 2019.
The data point to recovery throughout the course of 2023 in two of the fastest growing pre-pandemic outbound markets (USA and Canada, Japan and Korea)
Weekly searches in Google for trips to Spain
The current scenario is difficult to interpret: It looks very positive judging by the recent trend in all indicators, both official and internal and also high-frequency, but negative due to the macroeconomic outlook of the outbound countries. Nevertheless, our forecast for 2023 remains positive, supported by the levers for growth we continue to see for the sector and tourism demand’s limited exposure to the macroeconomy.
- Improved air travel in northern Europe: tourist arrivals from northern Europe were trapped by a growth ceiling due to airport saturation in the summer (the figures for the United Kingdom and Germany, for instance, are about 20% below their pre-COVID air travel level). This situation should adjust in the coming quarters and could lead to a considerable improvement in international travel by European tourists.3
- High potential and great room for improvement in long-haul tourism: indicators point to the improving trend in long-haul tourism continuing over next few quarters. The room for improvement is still significant, with US tourist arrivals 20% below their pre-COVID levels and Korean and Japanese tourist arrivals more than 70% below.
- Low exposure to the macroeconomy: according to the sensitivity analysis we carried out in order to understand how declines in economic activity in outbound markets correlate with declines in tourism demand for Spain, we estimate that the tourism sector has only limited exposure to the economic slowdown in Europe. Specifically, we estimate that the drop in economic activity in the United Kingdom (GDP is expected to fall by 1.3% in 2023) will impact annual growth in British overnight stays by –2.9 percentage points. For Germany (GDP is expected to fall by 0.2% in 2023), we estimate an impact of –2.2 percentage points of growth in overnight stays.4 These impacts, which are certainly appreciable, are nevertheless relatively small compared with the margin for growth enjoyed by both the United Kingdom and Germany thanks to the improvement in airport saturation.
Taking all this into account, our tourism GDP forecast for 2022 stands at 98% of its 2019 level; i.e. just 2% below its pre-COVID level and 66% above the figure for 2021. It should be noted that we expect the sector’s dynamism to be somewhat weaker in Q4 this year as the economic difficulties faced by the EU are felt, albeit to a limited extent. However, we expect tourism activity to pick up strongly from Q2 2023 onwards, as well as some improvement in the economic tone of the EU, so we have placed our tourism GDP forecast 2% above the 2019 level of activity for the whole of next year.
- 3. See the article «Europe’s saturated airports: a brake on the summer’s recovery», in this Sector Report.
- 4. For each outbound country, we have estimated the linear sensitivity of the growth rate in hotel overnight stays to the year-on-year growth in that country’s GDP. To calculate the impact of our macroeconomic scenario on growth in tourism demand, we use the difference between our most recent growth forecast for each country and that of our counterfactual scenario (we have used our February 2022 scenario, prepared before the outbreak of the war in Ukraine).
Our tourism GDP forecast for 2022 is just 2% below its pre-COVID level and 66% above the figure for 2021.
Although the outlook is positive, we can only repeat the mantra that we are currently going through a time of great economic uncertainty. In the case of the tourism sector, the main source of uncertainty is related to costs, so managers of tourism firms will have to be vigilant in order to tackle any possible deviation from what has been budgeted for 2023. For the time being, the upturn in costs in 2022 is being handled without any major tensions in the sector as a whole, thanks to the significant increases in tourism prices we have seen. This has been very effective in combating the rising energy costs (which have more than doubled compared with the previous year), the cost of agrifood products (whose prices rose by 12% year-on-year in September) and renovation costs (with construction materials 16% more expensive than a year ago at the end of July).
Looking ahead to 2023, we expect production costs to remain high and, in some cases, to continue rising. There is also the potential impact from wage increases which, although they are expected to be contained, are the main cost for tourism businesses (on average, companies in the sector spend 21% of their revenue on wages), as can be seen in the next chart. As a result, if the sector wants to go on defending its margins, it will be forced to continue to raise prices.
The upturn in costs in 2022 is being handled without any major tensions in the sector as a whole, thanks to the significant increases in tourism prices we have seen.