CBA: Travel restrictions no disaster for Aussie economy

Gareth Aird, head of Australian economics at CBA, has released research showing that the impact of international travel restrictions on the Australian economy are not as bad as commonly feared:

Key Points:

Both tourism exports and imports have collapsed due to international border closures, but education exports remain buoyant.

The overall impact of border closures has led to a spike in the travel services trade surplus because Australian residents spend a lot more holidaying overseas than international travellers spend on a vacation in Australia.

International border closures will hurt Australian businesses that rely on foreign tourists, but the overall macro-economic impact is far less damaging in 2020.

Overview:

Border closures have had a profound impact on services trade. Australian businesses that rely on overseas tourists have suffered. And parts of the education sector are concerned about what border closures may mean for international student enrolments in 2021. With the COVID-19 pandemic still very much a global phenomenon, it could be a long time before international borders are reopened. As such, the damage to businesses that rely on foreign residents visiting Australia in some capacity could be long lasting. But the overall harm to the economy is not as big as it looks on the surface, particularly in 2020.

Australia is a popular destination for foreign residents to visit. But Australians love to travel and spend offshore. Border closures mean less money is coming in, but equally less money is going out (chart 1). If borders were closed to foreign residents coming to Australia but local residents could still travel abroad the impact on the economy would be severe. But the fact that Australians cannot travel overseas means that a big chunk of money is no longer leaving the country. In this note we take a look at the travel services trade balance to assess the impact that border closures will have on the economy from a macro perspective in 2020.

Foreign residents visiting Australia:

There are generally three way that foreign residents can spend money in Australia. They can visit Australia for a holiday, they can study Down Under or they can visit for business purposes. These three categories make up what the ABS defines as travel services (chart 2). From an accounting perspective, travel services credits are basically an estimate of all of the spending by foreigners on goods and services while they are in Australia (e.g. retail, accommodation, recreation, transport). In 2019 travel services credits were $A65.7bn (3.3% of GDP) comprising:

– $A22.6bn spent by foreign residents having a holiday in Australia (1.1% of GDP).

– $A40.3bn spent by foreign students who were studying in Australia (2.0% of GDP).

–$A2.8bn spent by foreign workers visiting Australia for business purposes (0.1% of GDP).

The main driver of the lift in travel services exports over recent years has been the ongoing lift in education exports (note that education exports measure the total expenditure of overseas students who are studying in Australia and not simply tuition fees,which is important distinction).

Border closures to date have had a significant impact on the number of short term arrivals into Australia. They have effectively dropped to zero (chart 3). The tourism sector that is reliant on international travellers has been hit incredibly hard. It’s a different story, however, for the education sector.

According to the Department of Education, Skills and Employment the number of international students in Australia as at April 2020 (latest available) was up by 3% over the year. The number of students from China is down by 9%. But the number of students from India has risen by 20% over the year. This data indicates that education exports have held up well so far. And the monthly travel services trade balance supports this view.

Prior to the COVID-19 pandemic Australia’s monthly travel services trade balance was running at around $A0.9bn a month. But since the pandemic and resultant border closures it has averaged $A3.3bn per month. With tourism credit and debits dropping to virtually zero the $A3.3bn surplus can essentially all be attributed to education exports. If we annualise the recent monthly surpluses we get ~$A40bn which is what education exports were in 2019. So in our view the concern around a sharp drop off in foreign students and therefore education exports is a story for 2021 and not 2020. Policy decisions around the border and on health, quarantine and provider protocols will shape the outlook in 2021. We will get clarity on this in due course.

Australian residents travelling overseas

Australian’s spend a significant amount of money offshore every year. But almost all of it is spent holidaying (chart 5). Australians spend a negligible amount of money studying abroad. In 2019 the total amount spent by Australians overseas (i.e. travel services debits) was $A51.9bn (2.6% of GDP) comprising:

–$A46.7bn spent by Australian residents having a holiday overseas (2.3% of GDP).

–$A0.5bn spent by Australian students who were studying in overseas (0.0% of GDP).

–$A4.7bn spent by Australia workers travelling overseas for business purposes (0.2% of GDP).

Border closures mean that there is basically no leakage in spending now offshore. Australian residents are not travelling overseas and the amount of money spent by Australian students is too small to have any impact on the overall level of travel services debits.

The net result

If we assume that the border remains closed for the rest of 2020 then on our calculations it will result in a massive travel services trade surplus of $A32bn in 2020. Now while that sounds impressive, we need to remember that there has been a reduction in the amount of money coming in as well as going out. It is simply that the amount of money that is no longer going out is greater than the amount of money that will not come in.

We estimate that over 2020 the Australian economy will miss out on approximately$A20bn in foreign spending due to the international border closure (1.0% of GDP). But working the other way is $A38bn that we estimate would have been spent offshore that will no longer leave Australia (based on the 2019 outcome and Q1 20 expenditure of $A13bn by Australian residents offshore).

The question is then around what proportion of that $A38bn gets spent domestically. The short answer is that we do not know. Some of the money will be saved and some of it will be spent (both on domestic tourism and also other goods and services). A back of the envelope calculation means that if about half of that money is spent on domestic goods and services then the overall impact on GDP from border closures is minimal in 2020.

There will certainly be businesses that are negatively impacted and we do not wish to gloss over that fact. But from a pure level of expenditure in the economy, if Australians can spend half of what they would have spent overseas in 2019 domestically then the gap is plugged.

The message therefore from policymakers becomes an easy one –if you were going to have an overseas holiday this year then please take one domestically and support Australian businesses! We suspect that regional Australia could do well from an expected lift in domestic tourism. It is likely to be the bigger cities that have been reliant on overseas tourists that will be more negatively impacted.

This is an excellent report that adds some much needed perspective. MB has made similar arguments, most recently last week:

These international departures generally outnumber international arrivals (primarily foreign tourists holidaying in Australia). Therefore, while the international tourism market has dried up almost completely, this should be mostly offset by a big lift in domestic tourism.

In 2018-19, 5.6 million Aussies holidayed overseas, spending $43 billion. Thus, that’s $43 billion that could potentially be tapped by domestic tourism operators, which could largely offset lost tourism export earnings.

Leith van Onselen
Latest posts by Leith van Onselen (see all)

Comments

  1. Goldstandard1MEMBER

    I don’t know about you, but I spend far more overseas than I do on a local holiday. The same with overseas ppl.
    Broadly the thinking seems right, however I think he underestimates how “open” our domestic tourism will be the next two years.
    I couldn’t even spend money in Phillip island last week because most places are shut and everyone is looking at each other sideways. We went to the beach, bought coffees, groceries and takeaway but not much else. That ain’t “taking my overseas holiday money and spending it domestically”.
    Even took my son to the skate board park and some yokel yelled out to everyone there “go home Melbourne” because another 4 year old scooted in front of him. Tensions are flairing everywhere, even the chilled out skegs.

    • DominicMEMBER

      I could be imagining things but there’s definitely a lot more tension on the roads these days. These last couple of weeks have been bad for tail-gating, very aggressive driving and people behaving selfishly rather than assisting when cars have to merge or exit from side streets.

      And that’s in merry ole QLD – not VIC, where things should be worse.

      • Was surprised by a couple of instances of off the charts stupidly insane aggressive driving during the 2 weeks I was back at work on the edge of Melb. About to venture into the town next door to go shopping at Aldi for the first time since Feb. That’ll be interesting

      • Well, driving around our area( Elsternwick) is always challenging- terrible drivers.
        At the start of the first lockdown the driving was dire ( and I’ve been teaching two offspring to drive).
        But, it’s almost empty now- they’ve all gone away – the 200 car space car park had perhaps 12 vehicles in it today, usually its busiest day.
        Safer to drive here Poppy.

      • That was me doing all the tail gating on the Bruce highway on the weekend. Left hand lane was doing 80 and right hand lane was doing 90 in a 110 zone for no reason apart from people chose to drive at those speeds!!!!

        I can imagine the stories all those drivers told about the angry gap toothed bogan lol, fck em though, I’m driving to work and you’re just being a tourist – it’d be ok if they spent money as tourists but an overpriced coffee and maybe a cheap lunch is the best you usually get out of these day trippers to the sunny coast.

    • kannigetMEMBER

      But just think how many times someone on jobseeker/jobkeeper can visit phillip island due to their now extensive leisure time, and when they do they will buy a coffee and some takeaway each time….. tourism has to boom with that prospect

  2. DingwallMEMBER

    According to the Department of Education, Skills and Employment the number of international students in Australia as at April 2020 (latest available) was up by 3% over the year.

    I is confused. If the numbers coming in for the last 3-4 months have been severely restricted and the Uni’s are squealing like stuck pigs about wanting all their students to flood the place, how can numbers be up overall?

    • Explains the many multiples of wide body jets that are still arriving in Australia every day. That said the next set of data could be interesting.

    • It was interesting hearing the weekly numbers last week when the PM announced the reduction due to quarantine failures. They were running at an amazing 8,000 people per week, now down to 4,000 per week. 8k / week is still 400k per year. No idea how this balances out with departures, but it certainly leaves open the possibility for population growth.

      • Shades of MessinaMEMBER

        Returning citizens and PR’s ?. Plenty of those dotted around the world

  3. Mate is on a roadtrip up north. Caravans, campers, utes, jetskis, boats everywhere. WAs usual holiday destination, Bali, is closed so all those good dollars are contained domestically within the State (State border closures in force – exceptionally popular in Secession State).

  4. karlflowersMEMBER

    Unfortunately, MB and Leith is rarely as far in error as they are with the claim: “while the international tourism market has dried up almost completely, this should be mostly offset by a big lift in domestic tourism”. Both MB and Gareth Aird are rare tourists to tourism industry analysis and it shows. Please do a little deeper thinking about whether the key components of previously outbound travel spending will really flow to domestic travel spending in the very unusual world we now inhabit?

    • Around a 13 per cent share of outbound tourist spending accrues to Australian travel suppliers such as travel agents and airlines and this will be lost while borders stay closed.

    • Will wealthier and normally older and more virus exposed Australians who might take 4 to 6 week trips to Europe or North America substitute a similar length holiday domestically?

    • Some outbound travel like gap years won’t translate to domestic travel, even were domestic economic situations more favourable. Around 27 per cent of total outbound visitor nights are by Australians from 15-29 years old.

    • Three times the number of Australians per year normally visit South East Asia than visit North West Europe including the UK. I am fairly sceptical about how commonly the fly and flop outbound traveller will become a domestic traveller, as once the Bali crowd see the normally higher prices per visitor night in Australia they are likely to be hesitant to book for longer stays domestically. When we add in a deep domestic recession, this reluctance toward long haul domestic holiday travel is likely to be the norm.

    • Any lift in domestic airfares due to reduced competitive pressure on Qantas group pricing is also expected to reduce the translation of outbound holiday travel to domestic holiday travel.

    . How keen after home schooling will many Australian parents be for their regular long summer family holiday?

    • Around one third of outbound visitor nights are by the over 55 year olds and this group provide around 40% of domestic visitor nights in a normal year. I am expecting that this age group will be more reluctant to travel than other age groups for fear of the virus and because self-funded retiree incomes are down heavily this year (lower dividends, interest rates and rent).

    The implications of this more detailed analysis was supported by the Australian official tourism industry forecasts as reported in the press in late June, which noted domestic visitor spending is set to fall heavily by around 22 per cent in 2020/21, driven by larger falls in holiday (26 per cent) and particularly business (35 per cent), partly rescued by a smaller fall in the large category of visiting friends and relatives overnight visitor spending (13 per cent).

    Unfortunately, big falls in domestic visitor spending along with the increasing disappearance of inbound visitor spending (particularly as second semester university enrollments disappear), will leave the visitor economy as the most devastated sector of the Australian economy. Regional areas like Philip Island, Great Ocean Road and Mornington Peninsula as well as the central areas of capital cities which rely heavily on the visitor economy are set to face depression conditions. Pretending otherwise is a disservice to your readers and your strong analytic record.

    More positively, Gareth is correct in thinking that much of the lost outbound (and domestic!) travel spending will flow to domestic savings and spending on other goods. Unfortunately, the visitor economy is highly labour intensive and the impacts on employment particularly of young people are set to be savage.

    • How keen after home schooling will many Australian parents be for their regular long summer family holiday?

      Business opportunity for Summer Camp operators. Parents prepared to pay a premium.

    • Segregate Victoria

      Some of it will be spent on domestic travel, other people will spend it upgrading their car, retail, maybe deposit for their house.

      Either way it’s good for the domestic economy.

      • ‘deposit for their house.’

        And so yet again we see that there is no misfortune that can’t lead to the possibility of an increase in house prices.

  5. This seems to be based on data derived from a year wide snapshot to the end of April. I’d reserve judgement until the moving window has reached the end of the current month before talking about things like student numbers, especially given that the semester begins in March, and many would find it desirable to be here a week or two before semester begins to get stuff sorted. We’ll get a better picture when we are looking at semester that kicks off with the borders having been closed for four to six weeks.

  6. thefatgeneralMEMBER

    Anecdata I know, but I was up in freycinet for two nights two weeks ago (quick getaway for myself/partner)-Sunday & Monday night. Fully booked out-and not a hire car in sight-normally it would be majority mainlanders/int tourists. Again I was up in Launceston for work last Thursday night – silos hotel (one of the bigger ones) pretty much full. It’s been the same with local restaurants/bars here in Hobart. No tourists but it’s much busier than it normally is for mid winter (when it’s dead). No fear anymore about the virus being in Tassie and lots of people with disposable income.

    • DingwallMEMBER

      Normally they would be OS or in Queensland for a winter break……. itchy feet. I have itchy feet too but want to be in Tassie……. Qld/Tassie bubble would have been nice but Victorians will spread it around the countryside now

  7. Well I just did my part – family of 5 for a week’s skiing in NSW (Charlotte Pass). Stayed in Cooma on the way, visited the Big Trout at Adaminaby and had a weekend in Canberra on the way back. Trappers Bakery in Goulburn got lunch down and on the drive back – that place does a roaring highway trade!

    We are even looking into a north coast road trip next school holidays. I agree it isn’t what we would drop on an overseas holiday but the difference is mainly airfares. I am enjoying travelling in my home state.

  8. A big increase in city type Bogans around sunny coast….larging it up on the tinnies!