Eurozone tourism to enjoy a strong year despite high inflation

According to a new report by Oxford Economics, tourism continues to enjoy a strong year despite high inflation. Oxford Economics’ Tourism Tracker shows that overnight stays reached pre-pandemic levels in May for the first time in two years. Online search and booking data which lead real activity by about four weeks show that the positive trend is set to continue in the high season.

Despite grim predictions during the pandemic restrictions on international travel, the tourism sector keeps bouncing back. The Omicron wave limited tourism during the winter, but as infections fell in mid- February and governments lifted restrictions, tourism embarked on an uptrend. Overnight stays stood 24% below pre-pandemic levels in the EU in February, the latest datapoint. Overnights stays have since recovered, reaching pre-pandemic levels in May.

The positive trend is likely to carry on into the high season. Internet searches for tourism-related queries have roughly a four-week lead on actual tourism activity and point to strong demand in June. Despite the ongoing squeeze on real incomes from inflation, the pent-up demand for travel and recreation after years of pandemic restrictions is materializing and households are willing to spend on holidays.

While households might not forgo holidays altogether, they might opt for more budget- friendly alternatives. Persistently downbeat consumer sentiment might prompt households to hold off from tapping into excess savings as an offset to the high inflation. The tourism splurge might come at the expense of sharper shift away from goods consumption, resulting in little net boost to total consumption. And finally, the pent-up demand will fade at some point. Inflation might slow down towards the end of 2022.

According to Oxford Economics, although tourism staged a solid rebound in 2021, 2022 will be even stronger. Part of the reason behind that is a normalization in travel patterns. While tourism in European hotspots had to rely on domestic visits during the pandemic, foreign arrivals are now close to pre-pandemic averages in most tourism-oriented European economies. The lifting of restrictions and associated costs (such as compulsory testing) should favor more international demand.

Flights stand only 12% below pre- pandemic levels in the EU. The remaining gap is due to EU sanctions on Russian airlines and the retaliatory measure from the Russian side, along with travel disruptions to and from Ukraine and the re-routing of flights away from Russian airspace. Air travel is seeing the strongest recovery in Portugal, Italy, and Spain, all 5% below 2019 levels, while Croatia, Cyprus, and Malta (all usually seeing a larger proportion of Russian tourists).

All European tourism-oriented economies are seeing solid bounce-back. Oxford Economics’ Tracker highlights Spain and Portugal as outperformers, with overnight stays back to 2019 levels. Italy is in the middle, some 10% off pre-pandemic levels in May but on a positive uptrend. Greece stands at the other end of the pack, lagging slightly.