The Economy: How Worried Should We Be?

As fall gets into full swing and we start planning for 2020, I know that many of us are feeling the winds of uncertainty about the economic outlook—for the travel industry and for the world at large. Political instability in the U.S., Brexit, trade wars, the Hong Kong protests, the collapse of Thomas Cook—those and many other factors are contributing to a sense of trepidation, tingeing whatever optimism we may have about future bookings.

The guarded mood reminded me of a speech given recently by the celebrated British economist Gerard Lyons . The talk, which was presented at an Accor-sponsored event for travel industry thought leaders, was sanguine about the various challenges faced by the global economy. But it also stressed the many positive underlying factors that should reassure those of us who are unsure how to plan for 2020 and beyond.

We’ve posted the full transcript of the talk here, but I’ve summarized its principal conclusions in this letter. I also share some further takeaways from Henry Harteveldt, the respected travel industry analyst and president of Atmosphere Research Group.

In his speech, Lyons pointed out two underlying megatrends to provide context. One is that the recovery from the 2008 global financial crisis has been very long, but also fairly weak by historical standards, with interest rates remaining very low. The other is that what growth we’re seeing is largely coming from the developing world—China and India in particular—leading to a shift in the balance of power.

With that in mind, he identified several factors that are causing great uncertainty about the global economy. One is that China’s growth has slowed significantly, and it has eased monetary policy in response.

Another is the trade war between China and the U.S., which is taking a bite out of both global growth and industrial production. Nobody is certain what either side’s next move will be, which is adding to the overall lack of confidence. So are Brexit (of which Lyons is a strong proponent) and the unconventional, unpredictable political situations in many other parts of the world. Another consideration is that interest rates are going down again, which helps stabilize economies but limits central banks’ ability to intervene further, if necessary. Also an X factor: the weakening of the Chinese currency, the renminbi, and whether the government will depreciate it further.

On the plus side, there are larger forces at play that, according to Lyons, indicate that the economy should strengthen, at least in the long term. One is demographics: On the one hand, you have very large youth populations in Asia and Africa, which will provide both labor to produce and markets to sell to. On the other, the aging populations in the West retain a large proportion of global wealth, which they will continue to spend. Lyons also took comfort in the lessons of past industrial revolutions, when technology caused short-term disruptions but ultimately created economic opportunities. Lastly, he pointed to China’s enormous Belt Road infrastructure project and the country’s rapid urbanization as key advantages for future growth.

Lyons concluded that the travel industry is well positioned to benefit from many of these trends in the long term. For now, he recommended being pragmatic, not pessimistic: Accept that there will be a slowdown, followed by a policy response, and accept that how the global markets respond will affect consumer spending. He advised us to embrace the change, remember the underlying forces that point to long-term opportunity, and exercise our own power to influence the outcome by reaching out to policymakers.

Henry Harteveldt largely agreed with Lyons’s conclusions, particularly about what to expect in the short term. He told me that among the economists he regularly confers with, “nobody believes we will go into a full-fledged recession. Instead, there is concern that economic growth will flatten, and that it will be a noticeable slowdown. But there’s so much uncertainty out there, and any one thing could impact that, either in a positive way or negative way.” For example, a geopolitical event like the Saudi oilfield attack, a development in the U.S.-China trade war, even a tweet from President Trump.

Harteveldt cautioned that there is no single view of the economy, and what people are feeling in Europe or Asia can be quite different from what’s happening in the U.S. “Europeans are extremely concerned about Brexit, because it will likely have a far more immediate effect on them,” he said. Meanwhile, in Asia, he’s seeing an impact on intra-Asia travel, or at least the perception of one, due to questions about China’s economy. The troubles in Hong Kong haven’t helped either. But in the United States, he said, businesses are far more optimistic, albeit with concerns about China and the political environment. Overall, he said, business travel and luxury travel are the two bright spots in the industry.

According to Harteveldt’s own research, travel consumers retain largely optimistic attitudes about their own economic circumstances, although that optimism is starting to wane. For example, in 2019, 69% of high-income travelers his firm surveyed in the U.S. felt optimistic, down from 72% last year. In the United Kingdom, the drop is more precipitous: 45% this year vs. 57% in 2018. “There’s a lot of nervousness in Britain right now because of Brexit, with a lot of people saying they’re going to be very cautious about personal spending,” Harteveldt told me.

Taking a longer view, Harteveldt sees higher-income consumers changing their travel spending habits over time. He calls the last 20 years or so “lost decades,” starting with 9/11, followed by the SARS epidemic in Asia in 2002, and then the global financial meltdown of 2008-09. As Lyons also pointed out, the recovery from that crisis has been uneven and limited. Wage growth for many has stalled, many people are still waiting for their investments to recover, and rising health care costs in the U.S. have eaten into disposable income.

“You certainly have people who can afford premium cabin airfare and the very finest resorts and hotels out there,” Harteveldt said. “But you’re also seeing a lot of these people trading down, who now feel business class is good enough. They may still stay at a five-star luxury resort, but they’ll move their travel dates around to get better airfare and better hotel rates. They’re being more careful.”

“It would be wrong to say things are going to be fine,” he said in summary. “But I think it’s equally wrong to paint an unnecessarily bleak picture. I do believe some segments of the industry are going to face a much more difficult environment through the remainder of 2019 and into 2020. I don’t believe that the luxury sector will be as widely affected as the middle and lower ends of the industry.”

So how should those of us in the travel business prepare for any economic eventuality? Harteveldt had some suggestions:

● Be Prepared. “Don’t take anything for granted and don’t believe your own data. Every travel company is going to have to be nimble. On a regular basis, the leadership of these brands should be meeting with their top direct reports to do some scenario planning. What happens if this? What happens if that?”

● Keep an Eye on Forward Bookings. “The travel industry remains one of the greatest economic indicators for any business, because we are often one of the first categories to be cut back if consumers sense an economic slowdown. No two travel companies will see things exactly the same way, but pay attention to the forward booking data.”

● Amp Up Marketing Now. “One of the great ironies is that now may be the most important time to increase marketing, PR and promotional sales spending in order to maintain awareness and preference among your target customers. This is also a great time to audit your customer data and figure out what you’re lacking to make the decisions you need to make.”

● Avoid Stupid Pricing Decisions. “Don’t press the panic button. Look at value-added offers [such as third-night-free deals or property credits] as opposed to flat-out discounts, perhaps even targeting those towards off-peak times. Focus on incremental spending: How can you get someone to buy something that is in addition to—as opposed to a replacement for—something that they would already do.”

● Be an Avid Consumer of Business Journalism. “We should all be looking at bona fide media outlets that are credible and trustworthy. You can’t necessarily make day-by-day decisions from the news, but step back a little bit and look at the information in aggregate. You know your source markets, so make adjustments based on where your business is coming from, as well as where it is going.” What about you? What does your forecast tell you about 2020 and beyond? How do your clients feel? What is your company doing to prepare? Let’s keep the conversation going!