GBTA BTI™ Outlook – Western Europe Prospects for Domestic & International Outbound Business Travel 2014-2015 2014H2 The European economy lost momentum in 2014H1, delaying progress in the recovery that began last year. Tight credit conditions, high unemployment, weak exports, and wary consumers and businesses took their toll. Business travel, likewise, slowed the pace of its ascent. Despite abundant risks, 2014 is still shaping up to be a true bounce‐back year for European business travel, however. Business travel spending will advance 4.9% in 2014, followed by an even stronger 6.6% advance in 2015.
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GBTA BTI™ Outlook – Western Europe · The GBTA Foundation, the education and research arm of the Global Business Travel Association (GBTA), commissioned Rockport Analytics, LLC
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GBTA BTI™ Outlook – Western Europe
Prospects for Domestic & International Outbound Business Travel 2014-2015
2014H2
The European economy lost momentum in 2014H1, delaying progress in
the recovery that began last year. Tight credit conditions, high
unemployment, weak exports, and wary consumers and businesses took
their toll. Business travel, likewise, slowed the pace of its ascent. Despite
abundant risks, 2014 is still shaping up to be a true bounce‐back year for
European business travel, however. Business travel spending will advance
4.9% in 2014, followed by an even stronger 6.6% advance in 2015.
The GBTA Foundation, the education and research arm of the Global Business Travel Association (GBTA), commissioned
Rockport Analytics, LLC to build the first‐ever semiannual business travel outlook for Western Europe, specifically
focusing on the economies of Germany, France, the UK, Spain and Italy. Sponsored by Visa, the purpose is to provide
corporate travel professionals and the broader business community insight into both short‐ and long‐term trends in
domestic and international outbound business travel activity.
The GBTA BTI™ Outlook – Western Europe – 2014H2 projects aggregate business travel trends over the next eight
quarters. The report tracks business travel spending in total and by domestic and outbound segments. It relates
unfolding economic events at home and abroad to their resulting impacts on Europe’s business travel markets. GBTA
BTI™ Outlook – Western Europe 2014H2 is our sixth report in the semi‐annual series. Releases are planned for March
and November for 2014.
Rockport Analytics developed an econometric model to better inform the forecast process. The model explicitly relates
measures of business travel spending, uniquely sourced from other GBTA Foundation research1, to key economic and
market drivers of European business travel including:
Gross Domestic Product (GDP) and its components
Employment & Unemployment
Measures of Business & Consumer Confidence
International Trade, Foreign Direct Investment, and Exchange Rates
Commodity Prices
Oil Prices
Inflation Measures
Productivity Rates for Business Travel
International Air Transport Association (IATA) Passenger and Revenue Performance2
Smith Travel Research (STR) Global Hotel Performance3
CONTACT:
Colleen Lerro Communications & Public relations GBTA 703‐684‐0836 ext. 133 [email protected]
Andy Gerlt Corporate Relations Visa Inc. 650‐432‐8375 [email protected]
1 GBTA BTI™ Outlook – Annual Global Report & Forecast, GBTA Foundation, July 2014. Please see Methodology Notes beginning on page 71 for specific sources and approach. International Air Transportation Association (IATA) quarterly data on premium class revenue performance was also integral to the process. 2 Please see www.iata.org/pa/intelligence_statistics for more information. 3 Please see http://www.str.com/Products/Trend_Reports.aspx for more information.
Evidence of a European economic recovery was building quickly late last year. Though never expected to be robust, improving debt imbalances and strengthening bank balance sheets were giving way to better economic growth. Then came 2014H1. With the exception of the U.K, many northern tier economies began to give back some of 2013’s hard‐fought momentum while key southern periphery markets stalled. GDP growth disappointed in the first half of 2014, particularly during the second quarter. Euro Area (18 country definition) GDP expanded at the anemic rate of only 0.8% (vs.2013Q4 annualized). The second quarter saw no gain vs. Q1 and only 0.7% growth relative to year‐earlier results.
Why the delay? European consumers remain hesitant to buy big ticket items such as cars and appliances, this despite favorable credit conditions. High unemployment persists and household income has not yet expanded at rates sufficient
to bolster confidence. Exports were also weaker than hoped with Chinese growth moderating, the U.S. still thawing out from winter, and some fallout from the Ukrainian situation. Businesses have also been reluctant to borrow, hire, and invest. Finally, the first half of 2014 saw inventories being drawn down at the expense of new production.
There is also a great deal of variation in the performance of member countries. Euro Area GDP growth has been lifted by welcome performances from the likes of the United Kingdom, Sweden, and, even, Spain (see adjacent chart). With growth of 3.6% (qtr/qtr annualized) in 2014Q2, the UK has been leading the charge. Meanwhile, Spain quietly moved into positive growth territory late last year and has been building momentum since. Once a southern periphery growth laggard, Spain is expanding on the strength of improving domestic consumption, investment, and exports. Sweden and other Nordic countries have also been lifting overall EU results, albeit with slightly more volatility.
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Euro Area GDP Growth Disappoints During 2014H1
2014Q2 @ 0.7%
Source: Eurostat
2014Q2 @ 0%
Qtr/Qtr % @ Annualized Rates
Yr/Yr %
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2011 2012 2013 2014Qtr/Q
tr % at Annualized Rates
Spain, UK, Sweden Lifting EU GDP Growth…
Sweden: '14Q2 @ 2.8%
Source: Statistics Sweden, UK Office for National Statistics. National Statistics Institute (Spain
United Kingdom
Spain
Sweden Spain: '14Q2 @ 2.4%
UK: '14Q2 @ 3.6%
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Qtr/Q
tr % at Annualized Rates
...while Italy, France, and Denmark Stalled
Denmark: '14Q2 @ 0.8%
Source: Statistics Sweden, UK Office for National Statistics. National Statistics Institute (Spain
Among those Euro Area economies that stalled during 2014H1 were Italy, France, and Denmark. France has thus far shown no growth in 2014, and Italy retrenched by ‐0.4% and ‐0.8% in the first two quarters of the year, respectively. Meanwhile, Denmark’s growth was positive‐but‐lackluster during 2014H1. Even Germany, the biggest economy in the EU and fourth largest in the world, gave back some momentum in the second quarter, falling by 0.8% vs. Q1 (annualized rate).
The growth distinction between northern tier and southern periphery countries is beginning to fade away, replaced by differences in the pace of implemented reforms following the worst of the sovereign debt crisis. For example, Germany and Spain were among those to quickly implement sharp cuts in unit labor costs and drastic labor market reforms. This has already boosted exports. On the other hand, France, Italy, and Greece have resisted more drastic reforms leaving behind more rigid labor markets and still deteriorating global competitive positions. Profit margins are
also suffering in these countries, a condition less conducive for investment growth.
And the rest of the world desperately needs Europe to recover and grow. Europe is a major trading partner of many of the world’s largest economies including China (12 percent of total imports), the United States, Russia, and Japan. Moreover, the financial linkages between Europe and the developing world provide much of the capital necessary for growth. A rising tide in Europe will help to lift all economic boats. This is arguably even
truer for business travel activity. The chart above identifies the share of total business travel spending (2013) below each global region. At 24%, Western Europe’s continuing progress is necessary for the sustained recovery of global travel activity.
Unemployment has finally stopped rising in Europe ,yet remains stubbornly high at 11.5% (Aug 2014). Job growth has also been sluggish and, along with it, household income gains. Moreover, consumers continue to deleverage. This has made European consumers reluctant to purchase big ticket items such as car, homes, and appliances. After five years of declining durables purchases, however, there is ample pent‐up demand. By way of example, the chart at left tracks Euro Area auto registrations. After averaging over 950,000 per year from 2000‐2008, registrations have been languishing in the 700‐750k range since late 2012. Big ticket
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New Auto Registrations (x 1000)
Europeans Have Been Reluctant to Buy Big Ticket Items
purchases are often cited as catalysts for broader economic growth.
Staying with the theme of European consumers, there is good news in rising total retail sales figures. Total Euro Area retail sales advanced 1.1% in August versus year‐earlier levels, this after averaging +0.6% growth for the first 7 months of 2014. Like other economic indicators, there is significant disparity among the member countries. The chart at left contrasts the UK and Italy with overall Euro Area results. Three‐month moving averages have been calculated to reduce monthly volatility and help amplify underlying trends.
The current fear is that this upward trend in sales will falter. Europe needs consumers to reawaken to help overcome austerity‐driven declines in government spending and convince businesses that ramping up capital spending is necessary. At the moment, indicators such as consumer confidence are not encouraging, however. After bottoming out in October of 2013, two key measures of consumer sentiment began to trend higher (see chart at right). Unfortunately, both turned over in late spring and have since been declining, indicating eroding confidence.
The key to sustainability of consumer spending is most often found in the employment statistics. Even though it is generally considered a lagging economic indicator, job growth is also indicative of improving management confidence and rising incomes. The good news is that Euro Area employment is no longer declining, having added about 115,000 jobs (vs. year‐earlier levels) in the first quarter. The cyclical trend is also clearly up. Even if the second quarter numbers prove to be weaker, we believe the momentum is still positive.
Businesses may be starting to hire again across Europe, but they are not yet convinced of sustained forward momentum. Measures of business confidence, such as the European Commission’s Business Confidence Index (see green line in chart at right) and Markit’s Purchasing Managers Indexes for Manufacturing & Services (no pictured), are all signaling a weak start for the second half of 2014. Investors are likewise bearish about near‐term European economic prospects. Sentix’s Investor Sentiment Index (blue line) crossed into negative territory in September (@‐9.8) and fell even farther in October.
European credit markets are still extremely sluggish. Banks are starting to reawaken to new loan opportunities after four years of balance sheet repair, but risk tolerance remains quite low. Meanwhile, consumers and businesses are still deleveraging, causing tepid new loan demand. The chart at left tracks growth in consumer and business loans across Europe. Still falling relative to year‐earlier levels, August registered a decline of ‐1.9%. Perhaps the silver lining is that year‐over‐year comparisons continue to improve. Europe needs credit to flow more freely and loan demand to begin to grow in order to build economic momentum. Indeed,
the European Central Bank (ECB) continues to take significant steps to make that happen.
Both the ECB and the Bank of England (BoE) continue to keep policy rates near zero (see chart at right). Moreover, the ECB recently announced its intention to purchase asset‐backed securities in an effort to provide direct injections of liquidity into the ailing economy. This is akin to the Quantitative Easing (QE) programs of both the BoE and US Federal Reserve. ECB President Draghi has vowed even more measures if economic conditions do not sufficiently improve.
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Euro Area Consumer & Business Loans
Aug 2014 @ ‐1.9%
Still negative, but slowly improving
Source: European Central Bank
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Index: Ze
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Businesses and Investors Suggesting a Weak Start to H2
Investors Sentiment Index (left) EC Business Confidence (right)
With the exception of Germany and Spain, Europe is still waiting on exports to spark growth. Some of the current lethargy is caused by competitiveness losses from the slow pace of labor market reforms mentioned earlier in this report. Yet another cause is slower growth among key trading partners such as China, Russia, Latin America, and intra‐European partners. This continues to weigh on international outbound business travel spending (IOB) as well. The flow of both imports and exports drive IOB. As noted in the chart at left, growth has been difficult to come by in 2014.
Risks at Home and Abroad Also Weigh on Progress
Geopolitical threats abound, the risk of European deflation remains ominous, and fiscal and financial imbalances are far from resolved. While difficult to measure at this juncture, the Ukrainian situation is undoubtedly slowing Europe’s advance. Economic sanctions on Russia have both a real and emotional impact. Moreover, Russia’s economy, a key trading partner, was already faltering even before the annexation of Crimea. Sanctions on individuals, companies, and sectors have slowed the flow of trade in some areas and arguably damaged confidence across many others. And the threat of a possible Russian energy embargo looms like a huge storm cloud over continued European (perhaps even global) economic progress. Indeed, even a short‐lived restriction would likely vault Europe back into recession.
Many countries in the European Union and especially Eastern Europe are highly dependent on Russia to meet their energy needs. The charts below illustrate the deep dependence of Europe on Russian energy. The bottom left graph shows the degree to which key European economies depend upon Russian crude oil. The grey bars depict Russian crude as a percent of all oil imports, while the blue bars depict its share of total oil demand in that country. [Note the lower share of demand in the UK and US where each has its own domestic sources.] The bottom right chart illustrates Russia’s influence on natural gas imports and demand. Although not without pain, Europe could, given time, switch to alternative crude supplies from the North Sea, OPEC, or other exporters. Gas is largely distributed by pipeline, however,
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2008 2009 2010 2011 2012 2013 2014
Yr/Yr % Growth in
Trade Volume
Euro Area Trade Growth Still BouncingAround Zero...
something that cannot be altered quickly [witness the many delays in constructing new pipelines that circumvent the Ukraine on their way into Eastern Europe]. In fact, the graph at right shows the almost total dependence of Emerging Europe on Russian oil. Meanwhile, natural gas supplies to Eastern Europe (not depicted) are virtually 100% Russian.
Playing the energy card would also impose tremendous economic costs on the Russian economy as well. As much as 25% of Russian GDP is directly related to energy exports. Even a short‐lived embargo would further curtail an already weak domestic economy and almost certainly plunge Russia into recession. Despite the severity of such a decision, if Russian authorities felt the geopolitical gains outweighed these economic costs, they could yet choose to utilize this leverage.
Whilst the Ukrainian situation, Middle East conflicts, and various independence movements dominate the headlines, we must also remain vigilant to the threat of European deflation.
Falling prices (deflation) may sound beneficial to individual consumers and businesses but from a macroeconomic perspective, it can be debilitating. Expectations of lower prices in the future freeze current spending. Europe’s fledgling recovery can ill‐afford such conditions. The chart at left tracks current rates of consumer inflation. From a cyclical high of 3% reached in November of 2011, inflation has been ratcheting downward culminating in the latest reading of 0.3% (September 2014). Prices are still rising (versus year‐earlier levels) but are dangerously close to crossing into decline.
2013-2014 Economic Outlook
The Euro Area stagnated in 2014Q2 but the recovery has not been derailed. Financial markets continue on edge but credit conditions are still slowly improving. The fallout from the financial crisis, namely high unemployment and debt levels, weak demand, and continuing fiscal imbalances, is far from eradicated. This has kept the recovery slow and tepid, and poses a continuing threat to sustainability. The pace of recovery is also very uneven across Europe –Germany, UK, Sweden, Ireland, and Spain are stronger, while France, Italy, and the Netherlands (among others) are weaker.
Our new growth projections incorporate the first‐half delay while still calling for modest recovery with low inflation. This is predicated on more favorable credit conditions, slowly improving domestic demand, and healthier external circumstances. Euro Area Real GDP will advance by 0.9% in 2014, a downgrade from our 2014H1 forecast (1.2%). The following year is essentially the same as our H1 projection, with 2015 GDP growth reaching 1.7%. Meanwhile, inflation
will remain well below ECB targets, due to persistent slack in the economy and despite continued ECB efforts to inject liquidity. Inflation, based upon consumer prices, will reach only 0.5% this year and advance by 0.9% in 2015.
Risks to the forecast remain to the downside. First, fallout from the sovereign debt crisis, though much improved since the dark days of 2009‐2010, remains a challenge. High debt, a still‐weak banking sector, and fiscal imbalances also continue to test the European recovery. Second, the UK, Sweden, and Switzerland, among Europe’s current growth leaders, face potential financial challenges stemming from possibly overheating housing markets. Third, slower‐than‐expected growth among Europe’s key trading partners is also a potential headwind, particularly for those countries with greater dependence on trade (e.g. Germany, Spain, Switzerland). Fourth, the potential for falling inflation to morph into deflation could cause consumers and businesses to abruptly slow spending. Finally, we have already mentioned the potential for geopolitical events to negatively impact Europe’s fledgling recovery, particularly the Ukrainian situation.
The GBTA BTI™ in Germany eclipsed its former peak of 136 (achieved in the third quarter of 2008) in the third quarter of 2013 when it reached 137. The Great Recession shaved 26 points from the index, which fell into a slow growth pattern from 2010 to 2012. Through 2013 and early 2014, momentum has been slowly building in German business travel performance.
The GBTA BTI™ in Germany came in at 147 in 2014 Q2, representing an eleven point annual gain. This represents the largest annual gain in the GBTA BTI™ in Germany since 2007.
We expect the GBTA BTI™ in Germany will advance another five points in 2014, reaching 152 by the end of the year. In 2015, growth in the index will continue to pick up momentum, surging to 170 by the end of the year.
One of the objectives of the GBTA BTI™ Outlook – Western Europe is to construct a headline measure of the current and
projected level of business travel spending –an index of business travel activity. The GBTA BTI in the UK has been
derived from total business travel spending, the most holistic measure in our database since it reflects the volume of
travel, spending‐per‐trip, and travel prices. An index base year of 2005 was chosen for consistency with the GBTA BTI
in other countries. Specifically, the GBTA BTI in the UK is set equal to 100 in 2005 Q2.
The Great Recession took a significant toll on business travel in the UK. The GBTA BTI™ in the UK shed 31 points between the end of 2007 and the third quarter of 2009. The recovery in business travel spending has not been robust in the UK either. The index has gained only one point per year since 2011.
The UK GBTA BTI™ is finally beginning to pick up and the index has advanced four points over last year. The weak economic environment on the European mainland has been a tremendous drag on the index but it appears that business travel in the UK is moving back to a healthier trajectory.
We estimate that growth of the GBTA BTI™ in the UK will continue to pick up pace through the forecast horizon. The index is projected to gain two points per quarter through 2015, when it will reach 129.
One of the objectives of the GBTA BTI™ Outlook – Western Europe is to construct a headline measure of the current and
projected level of business travel spending –an index of business travel activity. The GBTA BTI in France has been
derived from total business travel spending, the most holistic measure in our database since it reflects the volume of
travel, spending‐per‐trip, and travel prices. An index base year of 2005 was chosen for consistency with the GBTA BTI
in other countries. Specifically, the GBTA BTI in France is set equal to 100 in 2005 Q2.
The GBTA BTI™ in France fell 21 points through the Great Recession. There was a strong rebound in 2009 Q4 and 2010 Q1 as the index picked up 16 points. Over 2010 and 2011, the GBTA BTI™ in France remained relatively flat and then fell in 2012 as the French economy enter a recession.
The GBTA BTI™ in France slowly began to recover in late 2012 and early 2013 but dropped again to 128 in the third quarter of 2013. Growth in business travel activity over the last three quarters has been tepid and the GBTA BTI™ in France has gained only a point per quarter.
While we believe the GBTA BTI™ in France has bottomed, we expect a weak French economy will continue to
shackle robust growth in the index over the next six quarters. The index is projected to amass 10 more points through next year on its way to a value of 141.
One of the objectives of the GBTA BTI™ Outlook – Western Europe is to construct a headline measure of the current and
projected level of business travel spending –an index of business travel activity. The GBTA BTI in Spain has been
derived from total business travel spending, the most holistic measure in our database since it reflects the volume of
travel, spending‐per‐trip, and travel prices. An index base year of 2005 was chosen for consistency with the GBTA BTI
in other countries. Specifically, the GBTA BTI in Spain is set equal to 100 in 2005 Q2.
The GBTA BTI™ in Spain shed 24 points during the Great Recession, from a high of 148 in 2008 Q3 down to 124 in 2009 Q3, but saw a significant recovery in the late 2009 and early 2010, bouncing back to 144.
Business travel in Spain has been extremely challenged over the last few years and the GBTA BTI™ in Spain has been on a downhill ride. The index finally saw positive growth in the last quarter of 2013 and has picked up some positive momentum over the first two quarters of 2014.
We expect growth in the index to continue to gain momentum over the next six quarters as the Spanish economy improves. The GBTA BTI™ in Spain will gain another 10 points by the end of next year on its way to 135.
The GBTA BTI™ in Italy took a huge one‐quarter hit in 2009 Q1 as the index dropped 130 to 97. It recovered just as sharply over the next two quarters but fell again in early 2010.
The GBTA BTI™ in Italy slid hard in 2011 and early 2012. Over the last two years the index has moved essentially sideways – gaining only one point over the period.
We expect the GBTA BTI™ in Italy will continue to grow at an extremely slow pace over the next six quarters. We expect the index will only pick up two more points in 2014 and four more points in 2015, ending the year at 111 – only 11% higher than its base year of 2005.