Weaker Global Growth Forecast Leaves Mixed Clues for Travel Industry

A global economic forecast released Tuesday by the International Monetary Fund (IMF) may give pause to some travel executives. Short-term drivers for growth are modestly less robust than expected at the start of 2019.

The IMF predicted that global growth would slow to 3.2 percent this year — the weakest pace in a decade.

The baffling aspect of the IMF’s updated forecast is that travel industry profits are still pretty robust.

In the U.S., Delta Air Lines reported double-digit percentage profit growth on a revenue gain of 8 percent in the second quarter — a company record for second-quarter revenue performance.

The IMF update also reflected only a modest change to its global growth forecast, down 0.3 percentage points from its January prediction. In comparison, the world growth rate last year was 3.7 percent.

“Travel is an important part of the world’s economy, accounting for a little over 10 percent of global gross domestic product [a measure of economic output],” said Seth Borko, senior analyst at Skift Research. “That’s why the IMF figures have important implications for the sector.”

A Slowdown in Emerging Markets

The majority of the cuts in global growth happened in emerging markets, the IMF said.

Some areas seeing a reduced pace of growth include China’s economy, which has been growing at its most sluggish rate in nearly three decades, the IMF estimated.

“One of the great questions about today’s airline industry is whether the giant Chinese market will slow,” said Skift Airline Weekly in its mid-year review.

However, in most advanced economies the travel sector has been a bright spot.

“Demand has been strong in the first half of 2019 and is likely to stay strong for the rest of the year,” Borko said.

Travel’s Economic Link

During the Great Recession consumer travel spending in the U.S. fell 10 percent. That was 3.7 times as fast a drop as overall spending budgets, which were cut by 2.7 percent in 2009.

“We suspect a similar pattern will repeat itself globally come the next recession,” Borko said. “Travel is, after all, a discretionary item and can be cut much easier than, say, a mortgage.”

U.S. tariff talks and uncertainty over how Britain may trim its ties to the European Union this year may sap confidence. Economic uncertainty in India, Venezuela, Iran, and much of Latin America also raised questions for the IMF, as did the potential threat of geopolitical turmoil in the Gulf and other hotspots.

But other economic headlines have been positive. Argentina and Turkey seem on the upswing. Elsewhere several central banks are taking steps to respond to fears of softening demand by shifting toward policies that may keep the growth going.

Many economies continue to expand. So travel businesses should continue to do well.

“Travel is likely to grow even faster than most sectors as the global middle class expands and prefers to spend discretionary income on experiences over things,” Borko said.

Skift Research forecasts that global hotel inventory will reach 17.5 million rooms, representing just under 2 percent growth, which is mainly in line with previous years. It expected global hotel revenues would reach around $550 billion, representing 4 percent growth over 2018. Cruise lines on average should continue to see strong 2019 bookings, thanks to occupancy and rate strength.

The mixed bag of early signals was perhaps best summed up by Jim Foote, CEO of U.S. cargo rail company CSX, during a call this month to discuss second-quarter results.

“The present economic backdrop is one of the most puzzling I have experienced in my career,” Foote said.