Will the Rugby World Cup Help NZ Sustain its Growth Momentum?
Tourism is integral to New Zealand’s economy in the production of goods and services and the creation of employment opportunities. With a yearly average of 2.4 million visitor arrivals, the tourism industry is the country’s biggest export earner. In the year ended March 2010, international tourist expenditures comprised NZ$9.5 billion (18.2% of total export earnings) and supported 92,900 full-time equivalent jobs (4.9% of the total workforce). For the same period, tourism directly contributed NZ$6.5 billion (3.8%) and indirectly contributed NZ$8.06 billion (5%), an aggregate of NZ$14.56 billion (8.8%), to New Zealand’s GDP.
In 2011, the tourism sector is set to take a dip due to the February 22 Christchurch earthquake damaging accommodation availability and Rugby World Cup (RWC) venues, the appreciation of the NZD deterring would be visitors, rising fuel prices and airfares, reconstruction in Japan, and financial turmoil enveloping the Eurozone and U.S. Indeed, recent data points to underlying weakness in visitor arrivals from key markets, namely Australia, the U.S., the U.K., and Japan. Including July 2011, visitor arrivals have declined in four of the last five months, compared with the same months in 2010. Ash from the Chilean Puyehue-Cordon Caulle volcano led to widespread flight cancellations in June, while searches for holidays, a gauge of visitor arrivals, have been steadily declining in recent months. This slump in holiday searches indicates a slowdown in tourist arrivals outside of the RWC. In the meantime, the RWC, which will take place from September 9 to October 23, will afford Kiwis employment in services and provide a tailwind for domestic consumption and the tourist sector.
Figure 1: March and June Earthquakes Cause Dip in Overseas Visitor Arrivals; 95,000 Expected for RWC
Source: Statistics New Zealand
Tourist Slump from Developed Markets (DMs) Likely Trend for Years to Come
Concerns over high government and household debt levels, whether in the Eurozone or in the U.S., will weigh heavily on growth in New Zealand’s tourism sector. After Australia, the U.K. and the U.S. are the second and third largest sources of international visitors, respectively. Facing rising tax burdens, massive cuts in public services, and cuts in income, consumers in DMs are “not going to be happy markets for some time,” Finance Minister Bill English warned. In the year ended July 2011, visitors from the U.K. were down 11.2% y/y, while visitors from the U.S. were down 2.9% y/y. Visitors from the U.K. have declined in most months since April 2007 following the start of the global economic downturn, while visitors from the U.S. reached its lowest levels since the year ended July 1993. However, visitors from Asia, particularly China and Malaysia have risen substantially since 2009.
Ongoing aftershocks in New Zealand, the high NZD, balance sheet repair in DMs, and elevated global oil prices will perpetuate the slump in tourist numbers until the RWC attracts an expected 95,000 visitors in September (RBNZ estimate). However, we think the number is too high, given the financial woes in the U.S. along with rugby markets in Europe, the recession and reconstruction in Japan, and concerns of overheating in emerging markets (EMs).
Figure 2: Financial Turmoil in DMs Allows for Asia’s Growing Share of Short-Term Overseas Visitors
Source: Statistics New Zealand
High New Zealand Dollar (NZD) May Deter Visitors form DMs and EMs
Concerns over the strong NZD coupled with high levels of private sector debt across DMs will deter visitors from key tourist markets. The NZD has strengthened against the majority of those from key tourists markets, namely the USD, EUR, GBP, and ZAR. However, the competitive exchange rate against the AUD has kept New Zealand as an attractive destination for Aussies to visit. According to RBNZ analysis, “the New Zealand dollar Trade Weighted Index is about 20% above its long-term average, and is particularly high relative to the South African rand, the British pound and the US dollar, having appreciated significantly against these currencies since 2003.”
Figure 3: High Government Debt in EU Ushers in Austerity Measures; NZ Tourism to Take a Blow
Source: European Commission
Rugby World Cup (RWC) Economic Benefits
Dr. Sam Richardson of Massey University said the Reserve Bank’s estimate of NZ$700 million (1.4% of quarterly GDP) in projected economic benefits from the RWC is “lofty and unrealistic.” After researching public spending on 11 major New Zealand sporting events for his PhD, Dr. Richardson found that only three events had any real positive effects on the country’s GDP during the event itself. In addition, tax payers are expected to pick up a considerable portion of the projected loss of around NZ$39 million from the RWC, which is conditionally based on the RWC selling a further 200,000 tickets worth NZ$30.5 million by the end of the tournament. RWC Minister Murray McCully noted the extra 200,000 tickets would be snapped up mainly by Australians and Kiwis, who usually made late decisions to purchase tickets. However, these late purchases would hinge on how well their respective teams fare during the tournament. Meanwhile, the government is set to earn NZ$268.5 million worth of revenue from the tournament, while the NZ$39 million projected loss would be mitigated by increased tax receipts and levels of business for New Zealand firms.
Inherently, hosting global events is a loss making business in the short term, but will have long term benefits in global brand exposure and the marketing of New Zealand’s businesses and economy. Even if the “All Blacks”, the favorites to win, are unexpectedly eliminated from the tournament early on, the RWC will act as a catalyst for infrastructure development. Already, more than NZ$250 million has been poured into infrastructure upgrades and stadium refurbishments.
RWC Expected to Boost Household Consumption and Retail Spending Growth
In Q1 2011, household consumption grew 0.4% q/q as the volume of durable goods purchased by households’ expanded by 2.9% q/q. The increase in durable goods was driven by higher sales of retail furniture and major appliances, and retail recreational goods. Meanwhile, the volume of services purchased by households’ increased 0.2% q/q in Q1 2011 due to higher expenditure on tourist accommodation. For the year ended March 2011, the volume of household consumption expenditure rose 1.8%, compared with a 0.3% increase in the year ended March 2010. Consumption of services, major appliances, and recreational goods will see gains once the tournament commences. The RBNZ noted that in the last couple of years, the tournament has spurred substantial spending on recreational infrastructure and public facilities.
Figure 4: Q2 2011 Retail Sales Points to Sustained Recovery in Underlying Activity in the NZ Economy
Source: Statistics New Zealand
In July 2011, the seasonally adjusted value of electronic card (ETC) spending in retail industries rose 0.5% m/m. All core retail industries saw increases in July, in particular the value of transactions in the hospitality industry (+1.5% m/m). Meanwhile, retail sales volumes continued to build upon its 1.1% q/q expansion in Q1 2011, having grown by 0.9% q/q in Q2. Statistics New Zealand data points to continued improvement in discretionary spending, reflecting higher consumer confidence as household sector situations recover. Promisingly, discretionary spending continues to expand, as reflected in higher sales volumes of electronic goods, apparel and in department stores. ASB Bank noted “anecdotes of households buying new large-screen televisions ahead of the Rugby World Cup, and this may have underpinned the whopping 10% increase in sales volumes of electronic goods in Q2.” ETC and retail spending will expand on the back of domestic and international tourist accommodation and hospitality services.
Figure 5: Hospitality Sector Drives July Electronic Card Transactions; RWC to Boost Sector Spending
Source: Statistics New Zealand
Figure 6: RWC Tourist Spending to Provide Tailwind for Growth in Service Sectors
Source: Statistics New Zealand
Rising Consumer Confidence Spurs Domestic Consumption
According to the August 2011 ANZ-Roy Morgan Consumer Confidence Index (113.3), views on whether it is a good or bad time to purchase a major household item jumped from +14 to +33, suggesting “the high NZD may be a factor but it may also indicate more willingness by consumers to loosen the purse strings.” Likewise, according to the Q2 Westpac McDermott Miller Consumer Confidence Index (112), household spending is beginning to look up as a net 26% think it is a good time to purchase a major household item. Positive consumer confidence as well as Q2 2011 retail sales results points to a continued recovery in underlying activity in the New Zealand economy. The RWC will further improve on the recovery and growth in household consumption and retail spending.
Outlook
Hosting the RWC is an opportunity for New Zealand’s tourism and businesses to gain global exposure even as the global economy grapples with financial turmoil in DMs, fears of overheating in EMs, elevated commodity prices, and recession in Japan. While the tournament is projected to create a loss of NZ$39 million, the RWC will afford New Zealand an opportunity to showcase itself to the world as a tourist destination. The tournament will also provide much needed growth to economic activity through infrastructure upgrades, tourist accommodation, and hospitality services. Meanwhile, robust consumer confidence and increased retail spending continues to provide an optimistic outlook to New Zealand’s underlying economy. Increased domestic and international spending will filter through to higher incomes; this will increase domestic spending even further into the next year.
In H1 2011, deleveraging in DMs, earthquakes in Japan and New Zealand, volcanic ash from Chile, the appreciation of the NZD, as well as high oil prices combined to derail short-term overseas visitors to New Zealand. This slump in tourist arrivals looks to be reversed by the RWC and the hopeful arrival of 95,000 visitors estimated to spend an optimistic NZ$700 million (1.4% of quarterly GDP). We are doubtful of both estimates, given the global outlook. However, the RBNZ noted “the tournament-related spending of New Zealanders may substitute for other international travel (e.g., some may have chosen rugby over a winter holiday this year), particularly given the cost relative to household disposable income.” Spending by Kiwis and international visitors will boost exports of services, which will improve the current account. While the net effect of the RWC on short-term economic aggregates and longer-term activity remains to be seen, the games will provide a much needed distraction from earthquake related distress and the dismal global outlook.
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