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Special Topic: The outlook for services exports
COVID-19 and the closure of the border resulted in an abrupt shock to arrivals and New Zealand’s travel service exports. This special topic concludes that the outlook for the recovery in travel service exports has improved compared to the Half Year Fiscal and Economic Update (HYEFU) 2022 as arrivals have picked up faster than expected. The return of international tourism, pent-up global demand, and China’s reopening means that demand for travel to New Zealand will increase despite a slowing global economy. Meanwhile, New Zealand’s ability to service travel demand will improve as constraints on international travel ease.
New Zealand arrivals are recovering quickly…
Travel-dependent service exports such as international tourism and education exports made up 62% of service exports in 2019. Border closures due to the pandemic saw international visitor arrivals and international tourism expenditure fall by over 90% between 2019 and 2021 and the number of international students studying in New Zealand fall by 75%. However, arrivals numbers recovered quickly throughout 2022 as border restrictions eased, rising from 1% of 2019 levels in January to 57% by October and underpinning a recovery in travel service exports.
In the HYEFU the Treasury projected the pace of the recovery in visitor arrivals to slow in 2023, due to the high cost of international travel, the expected continuation of China’s zero-COVID policy, and a softening global economy. However, visitor arrivals have recovered strongly since HYEFU, reaching around two-thirds of 2019 levels, underpinned by pent-up demand and easing supply constraints in the airline industry (Figure 1).
Figure 1: Visitor arrivals vs HYEFU forecast
Source: Stats NZ, Treasury
Regionally, arrivals from the Americas have recovered the fastest, reaching 92% of 2019 levels in January on the back of strong arrivals numbers from the US. Australian and European arrivals continue to recover steadily, reaching 80% and 64% of 2019 levels in January respectively. However, arrivals numbers from Asia remained low, sitting around 30% of 2019 levels in the same period. This was primarily due to a near-absence of visitors from China which accounted for 11% of total arrivals in January 2019.
…as demand to visit friends and relatives…
Traditionally, 80% of New Zealand arrivals are made up of visitors seeing friends and relatives and those travelling for holidays, with the remainder consisting of visitors travelling for business, conferences, and educational purposes. Friend and relative arrivals have recovered the fastest out of all the travel purposes, increasing from 1.7% of 2019 levels in January 2022 to 77% in January 2023 (Figure 2). Friend and relative arrivals as a proportion of annual arrivals have increased as a result, going from 28% in January 2019 to 42% in January 2023. The continued recovery in friend and relative arrival patterns will be supported throughout 2023. This is due to China, New Zealand’s second largest source of friend and relative arrivals in 2019, finally returning to global travel.
Figure 2: New Zealand arrivals by purpose
Source: Stats NZ
…offsets a slower recovery in holiday arrivals.
Holiday arrivals recovered strongly in the first half of 2022 but have since lagged friend and relative arrivals. Holiday arrivals jumped from 1% of 2019 levels in January 2022 to 43.8% in July 2022 as New Zealand’s border reopened. However, the recovery then began to slow with holiday arrivals reaching 60% of 2019 levels in January, and holiday arrivals as a proportion of annual arrivals falling from 52% to 37%. This low proportion of holiday arrivals is reflected in visitor spending. Friend and relative arrivals tend to spend less than holiday arrivals and this is reflected in real average visitor spending falling from $3,404 in 2019 to around $3,200 in 2022. The slow return in holiday arrivals is partially due to the relatively late return of tourist-heavy markets such as China, and the longer lead times for holiday travel relative to visiting friends and relatives
Recent monthly arrivals data suggests that friend and relative arrival patterns are normalising. This means that a continued recovery will depend upon holiday arrivals. We expect holiday arrivals will increase throughout 2023 now that all key tourist markets have reopened. The return of high-spending holiday visitors from countries such as the China and the US will also support a recovery in average visitor spending, as will falls in airfares due to increasing flight capacity. While it is uncertain whether seasonal patterns have fully returned, we expect to see a lift in tourist arrivals in 2023Q1 as summer is traditionally New Zealand’s busiest tourist period. The Auckland floods and Cyclone Gabrielle provided temporary disruptions during this period but are not expected to materially influence arrivals trends.
China’s return will support the recovery…
The return of China to international travel this year will boost New Zealand’s travel service exports. China eliminated quarantine requirements for incoming travellers in January 2023 which has made it easier for travellers to re-enter the country. Additionally, China announced that New Zealand was be one of the first 20 destinations that tour groups could visit post-COVID. This will mean a sooner-than-expected return of high-spending Chinese tourists who in 2019 accounted for 15% of total visitor spending. International students from China also appear to be returning quickly, providing a lift to education exports. In January 2023, the Chinese government announced that Chinese students must return to the country their university is based in immediately. Chinese student visa numbers have increased in response, jumping from 20% of 2019 levels in January 2023 to 50% in February 2023 and supporting a near-doubling in total student visa numbers in the same period.
…as will strong global demand…
In economies that removed border restrictions earlier than New Zealand, demand for international travel is near pre-COVID levels. In North America, international travel demand reached 94% of pre-COVID levels in January, while demand in Europe has hit around 85% of pre-COVID levels. Air-seat capacity measures indicate that supply has so far responded to demand, with the gap between supply and demand relative to 2019 normalising in recent months (Figure 3).
Figure 3: Global supply and demand for air travel
Despite a weakening global economy, with consumers facing high inflation and rising interest rates, this has yet to translate into softening demand for travel. While deteriorating global economic conditions usually curb international travel, services have been experiencing high growth due to pent-up demand and a reorientation towards consumption of services. JPMorgan’s Global PMI showed that consumer global demand for services grew at its fastest rate in the nine months to February 2023, with transportation and tourism being two of the best-performing sectors. This is supported by the continued improvement in key measures of international travel demand (see Figure 3).
…and despite higher prices…
During the early stages of the recovery in tourism in 2022, airlines who laid off workers and reduced operations during the pandemic faced pressure in restoring capacity. While supply has responded, airfare prices have risen following the oil price shock from the war in Ukraine, high global inflation, and labour market tightness which have all increased costs for airlines. While airfare prices remain high, strong pent-up demand will likely underpin a continued recovery in international travel in the near term. Meanwhile, as cost pressures ease and airfare prices begin to normalise, demand is expected to increase further and support a continued recovery.
…international connectivity is steadily returning
Increasing flight connectivity throughout 2023 should support an increase in competition and lower airfares. Increased flight numbers and the announcement of many new or rebooted international routes will build on the improvements made to New Zealand’s flight capacity in 2022. MBIE is currently forecasting that international seat capacity will be 89.5% of pre-COVID levels by September 2023. Auckland Airport, which processes 75% of all international arrivals, forecasts a full recovery in international aircraft movements and passenger numbers by December 2024.
A faster recovery is expected than at HYEFU 2022
The outlook for New Zealand’s travel exports has improved since HYEFU, and the steady recovery in visitor arrivals looks set to continue throughout 2023. Pent-up global demand for travel alongside improvements in international flight capacity is likely to offset a slowing global economy and the currently high cost of international travel. Meanwhile, the sooner than expected return of China to international travel will support travel exports by providing a boost to tourist arrivals and international student numbers.