Standard Life Investments

Weekly Economic Briefing


Vacation or staycation


Tourism is booming as more overseas visitors than ever holiday in the UK. A key driver is the relative affordability following the collapse in sterling. For those choosing to visit the UK, the depreciation of sterling following the referendum to leave the EU last June has led to an increase in their purchasing power. While there was little evidence of a boost to inbound tourism in 2016, so far 2017 has seen a more noticeable impact. The increase in purchasing power for these visitors has boosted earnings in the UK from overseas visitors by approximately 11% in CPI-adjusted terms on the year in the first quarter. With regards to the number of people visiting the UK, visitors from the US and the European Union increased 13% and 14% year-on year (y/y) respectively in April. As a result, the overall share of tourism earnings in GDP has increased to 1.3% in nominal terms.

Spending boosts Feeling the squeeze?

It is unclear how trends in travel to the UK will develop throughout the Brexit negotiations, as sterling seems to be the main transmission mechanism for the market to express it views on the risks in the UK economy. As the market continues to price Brexit through the currency, there could be further relative gains for those choosing to visit the UK. Additionally, the recent tragic terror attacks in London and Manchester could also impact the number of overseas visitors to the UK as these were the most visited cities in England in 2016. The extent to which tourist numbers are negatively impacted by such events is often hard to quantify and may only become clear in the data as time passes. Using France as an example, the recent terror attacks could be impactful. Tourist exports in France were down 5.5% y/y in 2015 and nearly 7% y/y in 2016 as security concerns drove tourists elsewhere. Indeed, China will be an interesting bellwether – following Brexit, Chinese travellers to the UK were up nearly 50%. Part of this surge was a substitution effect as visits to France plunged nearly 25%. As both places deal with security concerns, it is unclear how foreign tourists will react.

By contrast, travel to Europe and the US for British visitors has become relatively more expensive. The number of UK residents travelling abroad has declined consecutively for three months; contracting 6% on a 6-month annualised basis in April (see Chart 5). In addition to the increase in the cost of travel, UK consumers have seen their real incomes squeezed, as the inflationary pressures caused by currency weakness have not been offset by wage increases. With the view that overseas travel may be seen as a luxury good, which declines in volume consumed as incomes decline, UK consumers may have to reduce spending on holidays or fund these through further drawdowns on savings. This could, when combined with unseasonably warm weather, lead to an increase in relatively more affordable domestic tourism, which in 2015 accounted for around a quarter of UK tourism revenues. The trends in tourism in the UK going forward are likely to continue to be dictated by the pass-through of uncertainty into the value of sterling throughout the Brexit negotiations. Security risks can negatively impact the tourism industry but the overall trend in the recent tourism data seems fairly positive for the future outlook of the industry.

Abigail Watt, Statistical Analyst