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Special Topic: International Tourism Developments and Travel Services Exports

Tourism, comprising both domestic and international elements, is an important industry in the New Zealand economy.  Travel services exports, of which international tourism is the main contributor, accounted for 16% of New Zealand’s total exports in the March 2015 year.  This special topic concludes that recent rapid growth in travel services exports has come from a combination of increased visitor arrivals, an increase in the average length of stay, and an increase in the average spend per visit.  The outlook for travel services exports is positive and could help offset some of the slowing momentum elsewhere in the economy.

Visitor numbers rise rapidly…

After remaining steady around the 2.4-2.5 million mark between 2005 and 2011, the number of short term visitor arrivals to New Zealand has trended steadily upwards.  The latest data puts visitor arrivals in the year to May 2015 at 2.98 million, a 6.9% increase on the previous year and a new record level.

China (including Hong Kong) is New Zealand’s largest source of visitor arrivals growth, accounting for more than 40% of the increase in visitor arrivals since 2011 (Figure 1.1).  Since 2012 China has been the second largest source of visitor arrivals.  While Australia is by far the largest source of visitor arrivals, it accounted for only a third of the increase, much less than its market share of 43-45%.  The next four largest sources, the US, UK, Japan and Germany, contributed a further 8% to the increase, with the US contributing the lion’s share of this and visitor numbers from the UK actually declining over the five year period. 

Figure 1.1: Annual visitor arrivals
Figure 1.1: Annual visitor arrivals   .
Source:  Statistics NZ

As a result, the recent upward trend in total visitor arrivals reflects steady growth in some of New Zealand’s traditional sources of visitors such as Australia, Germany and the US, and the rapid expansion of visitor arrivals from China.  The changing composition of New Zealand’s visitor arrivals, with proportionally more visitors from China, the US and Germany, has positive implications for the average length of stay.

…contributing to a surge in visitor expenditure…

International visitor expenditure has grown rapidly in the last year with around a third of that growth due to the solid growth in international visitor arrivals.  Expenditure growth has also been supported by a longer average length of stay and increased average daily spend which have both also accounted for around a third of the increase each.  International travel services exports rose $1.3 billion (13.7%) to $10.7 billion in the year ended March 2015.  This is the fastest pace of growth since 2003 and consistent with the high levels of activity being reported by the hospitality sector in Treasury’s business talks, [1]and is reflected in solid growth in other indicators such as hospitality spending in the Electronic Card Transactions data and accommodation and food and beverage sales in the Retail Trade Survey.

Figure 1.2: Change in visitor stay days
(March 2015 year)
Figure 1.2: Change in visitor stay days  (March 2015 year)   .
Source:  Statistics NZ, MBIE

Travel services exports are the second largest export category by value after dairy exports and rising tourism expenditure has offset some of the lower national disposable income from depressed dairy prices.  On current trends, travel services export values may temporarily become the largest export category later this year.

The Ministry of Business, Innovation and Employment’s (MBIE) International Visitor Survey (IVS) - which excludes education, travel expenditure - shows that visitor spending rose $1.4 billion in the year ended March 2015.[2]  This has been driven by an increase in both the number of visitor stay days (visitor arrivals multiplied by length of stay) and average spending per day.  Around half of the increase in visitor stay days is attributable to an increased length of stay, reflecting a general lift across most countries (excluding China) and the changing mix of visitor arrivals (Figure 1.2). 

These positive impacts have been marginally offset by lower average spending per day from Europe, Japan and Australia, likely as a consequence of the fall in the euro and yen as a result of quantitative easing and a slowdown in economic growth in Australia.

…led by Chinese visitor expenditure…

The largest positive contribution in the March 2015 year came from a $470 million rise in Chinese visitor expenditure – with annual expenditure rising 61.2% to exceed $1.2 billion.  This rise has been driven almost exclusively by increased average spending per day (Figure 1.3). A shorter length of stay completely offset the increased number of Chinese visitor arrivals in the last year.

Figure 1.3: Change in visitor expenditure (March 2015 year)
Figure 1.3: Change in visitor expenditure (March 2015  year)   .
Source:  Statistics New Zealand, MBIE

Rising average spends could in part reflect a change to Chinese travel laws which took effect in October 2013 and restricted low-cost tour providers. Consequently, Chinese visitors are now spending more on average for package holidays and to travel in tour groups. Average daily spend has also increased for independent travellers.

…and a recovery in traditional markets…

Total expenditure has also been supported by rising visitor stay days by traditional markets and, in the case of the UK, a higher average daily spend.  Expenditure from the UK rose $258 million to $919 million (Figure 1.4) in the year ended March 2015, while expenditure by visitors from the US, Germany and the rest of the world (mainly the rest of Asia and Europe) rose $112 million, $116 million and $440 million respectively.

Figure 1.4: Total visitor expenditure
Figure 1.4: Total visitor expenditure   .
Source:  Statistics New Zealand, MBIE

…but Australian visitor spending flat

The main drag on growth came from the Australian market (up just $30 million to $2.2 billion), with an increase in visitor numbers partially offset by a lower average daily spend. This likely reflects the slowdown in the Australian economy and consequent rise in unemployment in recent years, coupled with the effects of a stronger New Zealand dollar which reached post-float highs against the AUD in early 2015.  Despite these headwinds, New Zealand’s proximity relative to other destinations means that it is seen as a relatively low-cost destination buffering the impacts on visitor numbers.  Personal ties also play an important role in sustaining visitor numbers, with around 40% of Australian visitors coming to visit friends and relatives (compared to 12% of Chinese and 20% of Americans).

Outlook for international travel services exports growth supported by China…

Treasury does not forecast travel services exports separately, instead producing a forecast of total services exports.  That said, MBIE tourism forecasts released in September 2014 for the 2015-2021 period are similar to those implied by assuming the historical ratio of travel services exports to total services exports and the ratio of IVS expenditure to total travel services exports.

MBIE forecasts show visitor arrivals growing around 4% a year, rising by 900,000 to reach 3.8 million by 2021.  Total IVS visitor expenditure is projected to rise 48% to $11.1 billion in 2021 driven by rising disposable incomes and airline route availability and capacity.

Around a third of the increase in visitor arrivals is driven by China. Arrivals are forecast to rise 11.6% per year and reach over 500,000 by 2021.  Chinese visitor expenditure is expected to rise at a faster pace of around 14% per year as the market matures with a move towards longer stays. Consequently total Chinese visitor spend is projected to surpass Australia’s in 2020, and rise to $2.7 billion in 2021 (Figure 1.5).

Solid growth in visitor arrivals is also expected from Germany (6.0%), the United States (4.9%) and other developing markets such as India (11.8%) and Indonesia (12.4%) – although the latter two are from a much lower base.  Australian visitor arrivals are expected to continue to expand at a 3.0% pace, contributing around a third to the increased arrivals across the projection period, although a lower average daily spend is expected to temper the impact on total Australian visitor expenditure.

Figure 1.5: Projected annual expenditure
Figure 1.5: Projected annual expenditure   .
Source:  MBIE, NZIER

Conclusion

With the rapid growth in Chinese arrivals expected to continue and Australia and other traditional markets providing a solid foundation, the trend in visitor arrivals is likely to remain positive for some time to come.  When the upward trends in visitor expenditure are added in, travel services exports growth is expected to remain strong in the medium term. 
This is reflected in the Budget Update forecasts, where the services balance is expected to remain in surplus throughout the forecast period despite solid growth in services imports.  Furthermore, if the exchange rate continues to remain weaker than previously forecast, or oil prices remain lower for longer (impacting on airfare costs), New Zealand’s attractiveness as a destination could increase further.  Positive surprises to travel services exports could help mitigate some of the downside risks seen elsewhere in the current account.

Notes

  • [1] See March 2015 MEI special topic http://www.treasury.govt.nz/economy/mei/mar15
  • [2] IVS and Balance of Payments measures differ slightly given MBIE international visitor expenditure data incorporates updated outlier methodology which Statistics New Zealand will incorporate in the June quarter GDP and Balance of Payments releases.
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