BDC Monthly Economic Letter:
‘It will take years for the industry to regain its footing’
The pandemic crisis has caused the sharpest economic contraction in the post-war period and the recovery, which began in May, is likely to be most painful for the hardest hit sectors.
In particular, the tourism industry will show the scars for years to come. Its full recovery will depend on a number of developments, including the permanent reopening of interprovincial and international borders, the emergence of a coronavirus treatment or vaccine, a return of consumer confidence and the survival of the industry’s businesses in the interim.
The importance of tourism to the Canadian economy
Canada is the 18th most visited country in the world, according to the World Bank. The country welcomed a record number of more than 21 million international tourists in 2018. The World Bank estimates these visitors injected $22 billion into the economy. (Destination Canada has since reported a new record of 22.1 million visitors was set in 2019).
However, tourism is not limited to international travellers. Visitors from other parts of Canada account for a large proportion of tourism spending. They are particularly important for cultural and entertainment events and restaurants.
Taken together, interprovincial and international tourism generated 1.9% of national GDP ($35 billion) and 3.6% of employment (643,000), according to Statistics Canada data for 2014, the latest year available.
The importance of tourism varies from province to province. While 2.8% of jobs in Manitoba depend on out-of-province (including international) visitors, this figure rises to 6.7% in Prince Edward Island and 5.1% in British Columbia.
Measuring the extent of the damage in 2020
Real-time data provides us with a snapshot of how various tourism-related activities are recovering. For example, Google mobility data on July 5 in Canada, showed that traffic to businesses and recreational venues was down 13% from January’s baseline. According to OpenTable data, restaurant reservations were down 57% nationally compared to July 2019.
In the U.S., hotel reservations remained down 30% in early July compared to a year earlier, according to data from Capital Economics. U.S. airport traffic was down 75%. (Similar data is not yet available for Canada.)
Meanwhile, Statistics Canada reports a 98% decline in non-resident inflows into Canada between April 2019 and April 2020, a drop from 1.4-million visitors to less than 25,000 during this period. This represents by far the lowest non-resident inflow in the last 50 years.
In contrast to the reopening of travel between Canada and the European Union on July 1, the closure of the Canada-U.S. border to non-essential travel has been extended. This is a serious blow to the tourism industry, which is expected to see a halving of its activities in 2020, according to the Oxford Economics analysis firm.
4 years to recover from 9/11 in the U.S.
Beyond 2020, the recovery of tourism activity remains difficult to predict. Increased caution about travelling could lead to lean years for the industry. For example, it took four years for the United States to return to pre-September 11, 2001 flight levels.
The Canadian tourism industry will likely depend on short-haul domestic travel this year and in 2021. In particular, hotels outside major cities and national parks may be surprisingly busy, while the postponement or cancellation of conventions and other international events may disproportionately affect metropolitan areas.
Short- and medium-term horizon: Untapped potential
The global tourism industry is expected to return to normal by 2023, Oxford Economics estimates. However, Canada’s tourism sector could face more difficulties in the short term than other countries. The Canadian hotel industry is more dependent on foreign visitors than those of several other countries, including the United States, Australia and Germany.
But while 2020 will be a year to forget, some believe that Canada has untapped domestic tourism potential. In fact, Oxford Economics believes Canada has the second largest potential for domestic growth after the United Kingdom. Indeed, the firm notes, Canadians are among those who travel the most and also have a greater propensity to spend their vacations outside their country’s borders. Retaining more of those dollars in Canada could give the industry a much-needed boost.
Indeed, Canada has run a tourism trade deficit in the past—Canadians spend more abroad than tourists visiting Canada. This net deficit amounted to more than US$10 billion in 2018, according to the World Bank. That year, Canadians spent almost US$34 billion on foreign tourism compared to US$22 billion in receipts from international tourists visiting Canada.
Encouraging Canadians to vacation at home rather than in the United States, France or elsewhere in the world will help domestic operators survive the crisis.
And that’s just what Canadians are planning to do. Almost nine out of 10 Canadians were planning to stay in Canada this summer, including a strong majority who are staying in their province, according to a BDC survey. Of those planning to travel, less than a quarter were looking to go outside the country. Between 2017 and 2019, that figure was more than 40%, according to the Conference Board of Canada.
What does it mean for entrepreneurs?
- Tourism businesses will have to be patient. Those that want to continue to operate will have to keep a close eye on their cash flow.
- Canadian tourists will remain the best source of business for the next two years. Work with your municipality and industry association to ensure your business is part of regional offerings.
For Canadian entrepreneurs less affected by the current crisis, encourage local businesses by planning to vacation closer to home.