Anyone attending Abta’s Travel Convention in Palma in the hope of escaping the harsh financial realities of the industry back home will have been cruelly disappointed, but surely not surprised.
What did appear to surprise some of those attending was the pessimistic view of the economy outlined by two of the headline speakers: Daily Telegraph economics commentator Jeremy Warner and leading economist Douglas McWilliams.
Warner spoke of “the dawning reality that the world has fundamentally changed”. “Many advanced economies, including the UK, have been living in a fool’s paradise,” he said. “It is as plain as a pikestaff that the UK and US are slipping back into recession.”
Warner acknowledged the convention organisers had requested he “be more upbeat”, then spoke directly to the argument that we are talking ourselves into recession.
He said: “We cannot ignore reality. . . There is the biggest and most-prolonged squeeze on living standards since the 1920s. . . Europe is paralysed. The UK and US are drowning in debt. The UK is particularly vulnerable to financial contagion. The UK economy will not return to the way it was.”
International Airlines Group chief executive Willie Walsh did not agree. His ringing denunciation of Air Passenger Duty went down a storm and he placed himself firmly in the ‘don’t let’s talk ourselves into recession’ camp, arguing: “It is doom and gloom all over. The gloom is holding people back from doing the things they normally do.”
However, Walsh’s plea for optimism was dealt a blow by McWilliams, who is chief executive of the Centre for Economics and Business Research. It should be said that neither he nor Warner are wild-eyed critics of capitalism. They are not even terribly critical of the current government.
Here is a taste of what McWilliams had to say: “We will have to pay a lot more for primary commodities. Wages will be squeezed – people are going to be paid less for doing what their predecessors did, and will have to get used to it. The rising cost of energy is changing consumption patterns. Transport is becoming more expensive.
“We are in a sustained period of weak growth. There will have to be a huge bail-out of European banks. People will have their income squeezed for some time. Your [tourism] product will become more expensive . . . You will be winning if in 10 years time you have 90% of the business you had in 2006 and 2007.”
McWilliams predicted “the euro won’t survive in its current format” and a two-tier euro zone was the most likely outcome – with one ‘hard’ currency, one ‘soft’. He said: “The only silver lining is that some destinations may become less expensive. Southern Europe will become cheap again – [in Greece] probably by 30%-40%.”
Sadly, confirmation of Warner and McWilliams’ outlook came immediately. The UK Office for National Statistics (ONS) reported the recession of 2008-09 had been more severe than thought. The economy contracted by 7.1% rather than 6.4%.
The ONS also revised down the GDP figures for the first half of this year, which were lousy anyway, declaring the UK economy has stagnated for the past year. So the economy is about 5% down on its size pre-recession.
At the same time, the International Monetary Fund reported €200 billion might be required to protect Europe’s banks from collapse. Analysts suggested the banks might need more. The European Financial Stability Fund (EFSF) now being finalised to bail them out will contain €250 billion – which leaves not too much margin for error, especially considering that in July the European Banking Authority’s ‘stress test’ of Europe’s banks identified a mere €2.5 billion shortfall in funds. By this calculation, the situation is 100 times worse than three months ago.
But back to McWilliams: consider what his forecast of a two-tier euro and 30%-40% cut in wages means as a way to make some destinations more attractive for the UK industry. The government and employers in Greece, Portugal and possibly Spain and Italy will attempt to drive down living standards on a scale that is obviously very bad news for millions of people.
If successful, the UK industry would benefit from the reduced wage bills in hotels, transport and tourism services. However, where would this leave the social objectives of Abta’s Travelife system, which include the material well-being of staff in destinations? Where would it leave the similar objectives of industry charity The Travel Foundation, which Abta and its leading members support?
Crucially, where would it leave the argument that travel and tourism raise living standards? Far from doing so, such wage cuts would destroy many of the benefits tourism has brought to countries such as Greece and Portugal which were once among the poorest in Europe.
If the industry were to benefit from a 40%-reduction in wages it would shatter an argument that forms the bedrock of travel and tourism lobbying: that tourism brings economic development and raises living standards.
This week, at the Abta Travel Convention, we learned that tourism may not necessarily do that at all. On the contrary, tourism would benefit from a savage reduction of wages in destinations.