Standard Life Investments

Weekly Economic Briefing


Tourism obeys the law of demand


Like all goods and services, international tourism should be subject to the laws of economics. The volume of and expenditure by foreign tourists in the United States can be modelled as a function of its relative price – in this case the trade-weighted exchange rate – foreign incomes, as well as non-price and income factors that affect the country’s relative attractiveness as a destination, like special events, perceived safety and the availability of visas. The same set of factors should influence the volume of and expenditure by US tourists abroad, though the sign of the exchange rate effect should be the opposite and it will be US incomes that matter. For the purposes of our analysis, we rely on international trade data for both conceptual and practical reasons. From a conceptual standpoint, inbound tourism is recorded as exports and outbound tourism is recorded as imports in the balance of payments. From a practical standpoint, official international trade data are more up-to-date than the official tourist arrivals data and compiled on a consistent basis for both inbound and outbound tourists – though the former is subject to more revision and the monthly data is only available on a value basis.

Growing arrivals from the Far East Lagged dollar effects

So, what do we observe in the data? Our first takeaway is that the economic cycle is very important. Both tourist exports and imports tend to increase during economic expansions and decrease during contractions, though the former has grown more quickly on average since the beginning of the century and, as a result, America’s tourism trade surplus has been on an upward trend over time. The faster growth of inbound tourism than outbound tourism makes sense given the faster average growth of non-US incomes over the past 16 years, as well as the fact that tourism has become much more affordable and accessible to the growing middle classes in China and other successful emerging markets. Indeed, between June 2009 and September 2016 (the latest month for which data is available), tourist arrivals from China increased by 378%, compared with 47% for all other countries combined (see Chart 2).

Discerning exchange-rate effects on inbound and outbound tourism is made more complicated by the fact that movements in the dollar are themselves partly driven by the local and global economic cycles. Nevertheless, the relative growth rates of tourism exports and imports in the periods before and after the trade-weighted dollar began appreciating rapidly in July 2014 show that currency movements do matter. In the five years before July 2014, inbound arrivals increased at an average annualised rate of 9.8%, while outbound journeys were up 5.5%. Since July 2014, the average growth rate of inbound arrivals has shrunk to 3.3%, while the annualised growth rate of outbound journeys has picked up to 6.3% despite the economy having slowed (see Chart 3). More recently, there has been speculation about whether the US election result and the subsequent attempts to restrict entry from countries considered to potential national security threats may have reduced foreigners’ enthusiasm and ability to travel to the US. However, while the three-month annualised growth rate of travel services exports did slow to a 10-month low in April, it is too early to identify either the reason or whether the slowdown will persist.

Jeremy Lawson, Chief Economist