The hospitality, leisure and travel industry has been at the eye of the storm over the past 24 months due to Covid-19, with UK based companies having already had a prior period of adversity during the uncertainty surrounding Brexit and the ongoing negotiations that followed.
However, the continuing economic growth from a consumer and business perspective driven by medical and logistical advancements to fight the battle against Covid-19 and ongoing macroprudential policies to support any economic uncertainty, means that the worst may now be behind us.
Key Takeaways for Hospitality Investors
- Expect economic developments to provide the necessary support for the hospitality, leisure and travel industry to rebound strongly in 2022.
- From an economic perspective, fiscal policy and monetary policy look likely to remain accommodative even if interest rates rise to combat and contain inflationary pressures, as interest rates will still remain low compared to historical levels.
- Governments will not rush to reduce the overall levels of debt raised during the pandemic, thus maintaining a relatively easy fiscal policy for the foreseeable future as well. Hence, positive economic growth alongside positive sentiment for consumers and businesses should be supportive for the industry.
- It looks like we are entering a world of elevated prices. And while the majority of emerging market central banks have pursued an orthodox monetary policy of tighter interest rates to combat domestic risks of inflation, the developed central banks have been slow to the uptake. Only recently has there been a shift towards a more hawkish outlook by the Federal Reserve and the first rate hike of the cycle by the Bank of England. Whereas, the ECB is still maintaining a dovish outlook expecting inflation to fall below their 2% target levels next year.
- Early and small rate hikes will not only ensure the clarity of message to the financial markets, consumers and companies, but will also start to rebuild the dry powder needed for the eventual recession in due course. Quick and small rate rises reduce the risk of inflation getting out of control as well as maintaining policy credibility.
- Putting economics to one side there are also geopolitical developments worth considering; from the latest Russia-Ukraine tensions to the upcoming US midterms and the National People’s Congress of the Chinese Communist Party in the autumn. Leading up to both of these events there will be some raised political rhetoric in Q2 and Q3 albeit mostly for domestic consumption and not expected to be disruptive for financial markets and the global economy.
- As for the developments in the Ukraine and Russia, diplomacy continues to prevail but should tensions escalate they are unlikely to impact the global economy beyond the localised region. With the EU split internally and the transatlantic relationship hit by earlier years of Trump followed by Afghanistan and AUKUS more recently, the West is not fully aligned.
- There are also national elections in South Korea, Australia, Hungary and France in the first half of the year with Brazil in October. The French elections in April will be critical and will be analysed in more depth with a separate note closer to the time.
Section 1 - 2021 at a Glance
As 2020 will be remembered for Covid-19, the lockdown of economies and the structural shifts in our working patterns, 2021 will be remembered for the surprise in inflation. Not a surprise for us, however, as we had been calling for higher prices to remain resilient and unlike the Federal Reserve and other major central banks, not transitory. Our previous White Paper on inflation turned out to be quite prescient and we continue to believe that geopolitical tensions, socio-political shifts and macroprudential policies will continue to support higher prices, even with some tightening in monetary policy which we expect in 2022.
Putting 2021 into perspective, Fig 1 depicts headline inflation for the major economies going back to the 1960s whilst Fig 2 isolates the historical data for the US from a century ago. It is important to state, however, that although prices may remain elevated it seems unlikely there will be a return to the inflationary crisis of the 1970s as central bankers have knowledge of the tools required to combat higher prices and the central bank credibility to instil discipline to markets.
There are however more idiosyncratic factors at play for the hospitality, leisure and travel industry where Covid-19 restrictions on travel and hospitality have been compounded by shortage of labour, raised wages in leisure and hospitality (see Figure 3), higher commodity and fuel costs, and elevated geopolitical uncertainty impacting broader investor sentiment. Where are we heading in 2022 and what impact are we likely to see for this industry?
Covid-19
Apart from inflation, 2021 will also be remembered for Delta and Omicron.
It would be unreasonable not to mention the Omicron variant as it has already made an impact on the economy and financial markets since its emergence in November, as well as policy changes in various countries ranging from elevated caution to recent full lockdown.
The volatility in equity markets and broad risk assets since November was primarily due to the elevated levels of valuation, with Omicron more of a catalyst for a correction. The central case scenario is for some near-term economic slowdown driven by partial closures, reduced travel and relatively elevated levels of uncertainty; however, unlike inflation, these are transitory factors and Omicron is unlikely to destabilise the global economic recovery with the threat of taking us back to the summer of 2020.
Section 2 – Looking forward to 2022
This multifaceted industry is impacted by numerous domestic and international factors; let’s take each in turn in order to assess the outlook for hospitality, leisure and travel for 2022.
Starting off with Covid-19 we assess our expectations on the impact of the latest Omicron variant, the expected consumer and business sentiment in 2022 which is an indispensable guide to hospitality, leisure and travel, as well as the broader economic forecasts on growth and inflation followed by geopolitical events and risks for the current year.
Omicron
There are three key reasons why Omicron is not a major concern:
(1) Existing vaccination programs will be expedited for the existing known variants;
(2) We should see uber-accelerated R&D push for an Omicron vaccine;
(3) Policy makers are all at hand to do whatever it takes.
Looking through any near-term economic impact, we expect 2022 to remain buoyant with a positive trajectory on economic growth. In fact, the latest data on Omicron highlights in the case of the UK (Fig 4) and world (Fig 5) that the resurgence in Covid-19 cases has not been reciprocated by a proportionate rise in deaths. Hence, Omicron is having a far less severe impact than initially expected on both number of deaths and the broader economy.
Economic Outlook
Looking ahead at the economic outlook for 2022 and its impact on hospitality, travel and leisure, there are four key factors to focus on: consumer sentiment, business sentiment and expectant GDP growth and inflation.
Consumer confidence and sentiment has remained on a broadly upward trajectory since we came out of the initial wave of the Covid-19 crisis in the summer of 2020. Figure 6 depicts consumer confidence for the US which has stabilised well above the neutral level of 100 as unemployment continues to trend lower and fiscal stimulus from the Biden administration remains accommodative.
More anecdotal evidence, conducted from a Thomson Reuters / Ipsos sentiment survey also highlight regions with positive consumer sentiment (those above 50 in Figure 7) namely China, Saudi Arabia and India as well as USA, Germany and UK. However, more indicative is the change in consumer sentiment over the last 12 months, depicted in Figure 8, highlighting Italy as the country with the largest jump in consumer confidence followed by Spain, India and USA. The laggards on the other hand have been China and Turkey, the latter mostly due to the unorthodox macroprudential policies pursued by President Erdogan and the central bank.
These results are also aligned with the shifts in the quarterly Hospitality Insights Investor Sentiment Assessment where Italy, Spain, UK, US and Germany populate the top 3 countries for most attractive investments for the ensuing 12-month period.
Shifting away from consumer sentiment to business sentiment, there has been a significant positive reversal in levels of trade internationally, with OECD data in Figure 9 highlighting a reversal of the Covid-19 impact seen only a year before. The significant change in export growth for goods and services was emblematic of the macroprudential policies pursued by central banks and politicians. Support is likely to continue albeit with some shift from monetary to fiscal. The improvement in global trade and ample liquidity has manifested itself in an improved business sentiment as depicted in the Global Purchasing Managers Indices (PMIs).
Outlook for Growth and Inflation
As the worst is now behind us, we should see continuing economic growth from a consumer and business perspective driven by medical and logistical advancements to fight the battle against Covid-19 and ongoing macroprudential policies to support the economies amidst the ongoing uncertainty. Therefore, it seems sensible to assume hospitality, travel and leisure will rebound in 2022 after the latest Omicron scare has been contained and shown to be less severe than initially feared. Areas of concern, however, remain in China where Xi Jinping’s zero tolerance policy ahead of the National People’s Congress may require extended lockdowns.
More specifically, the chart below has been put together to show the average GDP growth forecasts by the leading economic institutions and central banks for the period 2022-2024. The average growth rate for 2022 is forecast at 4.5% for the world, 4.9% for emerging market countries, 4.3% for Euro Area and USA and 4.4% for the UK. China is expected to grow faster at 5.4% but not as fast as Spain at 5.8%!
Growth is expected to taper into 2023 as tighter monetary conditions impact economic expectations, reducing global growth to 3.5% from 4.5% with a commensurate slowdown globally with the exception of China which is expected to remain buoyant at 5.3% in 2023 versus 5.4% in 2022. Within the Euro Area, Spain will remain the highest growth major country at 3.6% followed by Italy at 2.2% and the Euro Area average of 2.4%.
The relative downward shift in economic growth forecasts from 2022 to 2023 seems sensible. Policy makers will be on standby to take any necessary action to avoid Covid-19 variants from having an adverse economic impact, which would have a disproportionate impact on the hospitality, leisure and travel industry.
Alongside the continuing economic recovery, elevated prices look likely to be a significant feature of 2022. Although the majority of emerging market central banks have pursued an orthodox monetary policy of tighter interest rates to combat domestic risks of inflation, the developed central banks had been slow to the uptake. Only very recently have we seen a shift across the board with a more hawkish Federal Reserve and the first tightening by the Bank of England. However, the ECB remains elusive and complacent to the risks ahead. In fact, central bank complacency is the single largest risk for 2022 potentially leading to a policy mistake and over-tightening of policy, triggering an economic slowdown or recession
Similar to the GDP Growth forecasts in the chart above above, the one below shows the average Inflation forecasts by the leading economic institutions and central banks for the period 2022-2024. Inflation is expected to peak in 2022 and gradually come down in the following two years. In the US the Federal Reserve upgraded its inflationary outlook in the recent December meeting, expecting inflation to drop from current levels but stabilise above the 2% historical target to 2.4% by 2024. In contrast to the Fed, the ECB expects inflation in the Euro Area to drop below its 2% target to 1.6% and 1.7% in 2023 and 2024 respectively.
Our view is slightly more hawkish with inflation expected to be higher than the current estimates for the major economies across the 2022-2024 period. This would impact the hospitality, leisure and travel industry adversely, detracting from the relevant margins as well as elevating operational costs and funding costs accordingly through higher interest rates.
Hence, in order to contain the risks of higher inflation, early and small rate hikes will not only ensure the clarity of message to the financial markets, consumers and companies, but will also start to rebuild the dry powder needed for the eventual recession we will be facing as we move from a mid-cycle economic period to the latter part of the cycle in a few years’ time.
One point worth noting is that although our concern is elevated in relation to the developed central bank policy making, the majority of emerging market central banks have been prudent and tightening interest rates so as to contain inflationary pressures, and more importantly consumer expectations of rising prices. Hence, these economies are expected to benefit from the continuing positive trajectory of global demand and investment and raise potential investment opportunities for the hospitality, travel and leisure industry or even provide some demand and positive sentiment for travel as Omicron subsides.
Geopolitical Developments
We cannot discuss the 2022 outlook without discussing politics and geopolitics, which have become instrumental drivers of government socio-economic policy and investment agendas.
The political agenda for 2022 was already evident in the summer of 2021 as Chinese President Xi adjusted policies towards the new “common prosperity” impacting a number of industries and introducing a new Xi Jinping Thought. These were actions directly aimed at the forthcoming 20th National People’s Congress of the Chinese Communist Party (CCP) in spring 2022, where leadership changes including the President take place. It was during my Keynote presentation in Tarragona for MR&H in October 2017 when I announced our expectation that President Xi would break with tradition and extend his term beyond the two-term policy held by all Presidents since Mao; unheard of at the time and only confirmed a few months later in February 2018. Hence, we expect President Xi to remain in power and continue with his agenda of economic growth and social cohesion.
Apart from China, we have National elections in France (10th and 24th April), Hungary (April) Brazil (October) as well as S Korea and Australia. We also have the mid-terms in the US on November 8th which will impact the agenda for the remaining 2yr term and bias the outcome of the next general election in 2024. With a split Senate this election will be critical for Biden.
On the geopolitical arena, the disengagement of the US initially from the Middle East and more recently from central Asia, as evidenced by Afghanistan in the summer, has further accelerated the broader geopolitical shift from a US hegemonic environment to one of receding globalisation leading into a Multi-Polar World. The latest tensions between Russia and Ukraine are a direct consequence of that with the EU split internally and the Transatlantic relationship hit by earlier years of Trump followed by Afghanistan and AUKUS.
What does this mean for Hospitality? Sino-US tensions will remain elevated and potentially worsen / tighten as we head towards the autumn. We also foresee a period of uncertainty and inaction on EU foreign and domestic policy as the German government is trying to find its feet domestically before extending beyond the German borders, and France enters a pre-electioneering period for the first 4 months of this year. With the likelihood of either Macron winning a second term or the rising possibility of the first female president (centre right Pécresse rather than far right Le Pen) the risks to France and the EU remain contained.
As for the UK, it remains broadly isolated with elevated tensions with EU and France, arms-length relationships with Russia and China and relying solely on the old ‘special relationship’ with the US which is unlikely to provide a free trade agreement. Any economic resurgence post Omicron will benefit Johnson’s latest strategy on vaccinations but his Teflon / populist / ‘funny hair-do’ persona will start to look a bit dated and the various scandals surrounding lockdown breeches could even see a new prime minister installed.
In conclusion, we expect economic developments to provide the necessary support for the hospitality, leisure and travel industry to rebound in 2022, whilst geopolitical tensions remain elevated.