The Worry Of A Fall In Tourist Spend

Mario Draghi, the president of the European Central Bank, is not someone you would necessarily expect to crop up in a tourism article, but what he said earlier this week merits that he does. Draghi suggested earlier this week that recovery in the Eurozone was losing impetus, pointing to a stalling of growth during the second quarter and to indicators through the summer which have been weaker than expected. This economic performance cannot of course solely be attributed to activity in the tourism sector, but tourism does play a key role in measuring this performance.

Questions are often asked about the tourism spend statistics which get trotted out with monotonous regularity and which, for many, appear to bear little relationship with evidence on the streets and terraces of Mallorca's resorts. These statistics are far from perfect, but it needs to be remembered that their principal function is one determined by the Bank of Spain and, by association, the Central Bank and European institutions. They feed into economic performance measures, and so when, as was the case in July this year, Spain shows a slight fall in tourism spend (1.3%), there is cause for a few eyebrows to be raised and for foreheads to be furrowed.

This fall in expenditure seems odd because the number of tourists has been at record levels, as they have been in Mallorca. So, how does one explain the decrease? The simple answer is that tourists are spending less, but this isn't only because tourists are being more careful with their money while on holiday. They are also staying for shorter periods. Overnight stays for July and August combined rose by only 0.2% (a figure for Spain as a whole). When tourist arrivals increase by almost 9% (as they did in August) but overnight stays barely increase at all, you get what is in fact the situation. There is simultaneously a mini-boom in the number of tourists and a contraction in tourist expenditure. And it is this contraction that concerns Draghi and should also concern the national government in Spain and the regional government in the Balearics.

The announcement by Spanish finance minister Cristóbal Montoro of some relaxations in the pipeline on tax has been very welcome, and in the context of tourism, these may well filter through to the domestic market, which has already shown good signs of recovery this summer and which has been helping to fill the void left by a significant fall in Mallorca's Russian market. But Spain can't affect the expenditure of tourists from other countries. Draghi is calling for "unconventional measures" to counteract a lack of credit, and it would certainly appear to be the case that unless there is more credit (and more employment) in the Eurozone (and the UK) the contraction in tourist expenditure will continue, thus producing an unwelcome cycle which might ruin some of the good work the Rajoy administration has been doing. In addition, there is the Russian question. This market, hampered by obvious events, by sanctions and by the exchange rate, is enduring a genuine crisis, reflected by the numerous bankruptcies of Russian tour operators, many of which were not on a firm financial footing anyway. The bankruptcies will only help to further deter Russian tourism to the island and to Spain, and with everything else occurring in Russia and Ukraine, next summer is looking distinctly uncertain.

So, there is a double whammy of what had been a rapidly growing market being in crisis and of expenditure contraction in stable, long-established markets. Record numbers of tourists might sound all well and good, but records or not, there are some serious questions to be asked about next summer.

Mariano's Best Mates

To describe Angela Merkel and Mario Draghi as friends would probably be an exaggeration, but Mariano Rajoy can, right now, do with having any friend he can call on. And Rajoy's new best friends are saying things are much better. Like a drunk slowly sliding to the floor of the bar, he's grabbing hold of Merkel and Draghi and drawling "you're my best mates, I really love you", before finally collapsing in a comatose heap.

You couldn't really blame Mariano were he to drink himself into oblivion. Just when he thought that people might be forgetting about the Bárcenas papers, up pop other minor revelations - that Bárcenas was still on the Partido Popular's payroll until a couple of months ago and that graphologists have confirmed that the infamous ledgers were indeed written by Bárcenas (which of course Bárcenas has been denying) and not at one go, as has been suggested by PP prominenti. Ledgergate has required that friends rally round, and so Merkel and Draghi are propping him up by the bar.

Both Merkel and Draghi would have been alarmed by the fact that Spain's borrowing costs started to edge up again because of the nervousness induced by Ledgergate. It was the time for every good man, female Chancellor and president of the European Central Bank to come to the aid of the Partido Popular party, especially Draghi. It was he, after all, who promised unlimited bond buying.

Small wonder then that Draghi should have come before the Spanish Congress and offered some encouragement that there were signs of improvement and that Mariano and his merry men were doing the right things to get Spain out of its slight pickle. He probably hadn't intended for it to slip out, but it did, that he also told Congress that he was aware that adjustments were "still not producing visible improvements in the everyday lives of people". Had he not been aware, Draghi could have dragged himself off to Cas Catala in Calvia and spoken to a pensioner couple who were facing eviction for getting behind on their payments. It would have been too late, though, as the couple would have already committed suicide by the time he got there.

The ECB's intervention has certainly helped the situation, if you can call paying 5% plus on your bonds a healthy state of affairs. It is healthier than it was, but is it just a case of buying time? Economy minister Luis de Guindos can now say with a degree of confidence, all things being relative, that a bailout won't be needed and, moreover, say it without everyone rolling around in fits of laughter, which they were when he was insisting there wasn't a need for a bailout some months ago.

So yes, there are certain signs of improvement where the financial economy is concerned; hence the reason for de Guindos ruling out a bailout.  But there aren't signs in the real economy. De Guindos's belief that there will be some positive growth at the end of the year is not one that is widely shared, and even if there were to be, how would it be sustained? Could it be sustained? It is most unlikely. The government is pinning its hopes on export-led growth, enabled by internal devaluation through a lowering of labour costs. There are analysts, and Morgan Stanley bank has one, Joachim Fels, who do think that exports could permit sustained return to growth. An opposing view is that too little has been done to increase Spain's export competitiveness, while it is difficult to see how the domestic market can avoid being anything other than depressed for some considerable time. There just isn't any credit or liquidity to stimulate the real economy. In fact, the capitalisation pressures on the banks could become greater if the private sector remains inert. It's the chicken and the egg; banks can't lend and they don't receive capital either, except from the European Union.

The consequence is one of continuing stasis. The government has hinted that incentives will be offered to banks to lend to smaller businesses, but it has not explained what these might be, while there is no guarantee that they would have any real effect, a conclusion drawn from the recent Spain Summit held by "The Economist".

Despite the better news on the financial economy, the situation remains desperately bleak, and it may be that the government, and everyone else, has to wise up to the fact that it will remain bleak. For years. There is a belief that, as though by some act of God, economies always recover. Well, maybe they don't. And they certainly don't if nothing is done to make them recover.


Any comments to andrew@thealcudiaguide.com please.