Credit crunch and the travel industry – is the UK heading towards a recession in 2008?

TravelMole guest coment by Euromonitor International

Throughout the last quarter of 2007, the credit crunch in the UK combined with the US sub-prime mortgage crisis raised concerns about a possible 2008 recession in the UK.

This is particularly worrisome for the UK travel industry.

A recession would likely result in travel and tourism expenditure facing
substantial cuts in both its leisure and business segments in stark contrast to strong performances over the past five years, especially in outbound travel.

UK departures by purpose of visit – ‘000 people

Source: Euromonit International

Weaker growth appears more likely

Euromonitor International believes a 2008 UK recession is unlikely.

The UK economy is still healthy, British GDP grew by 0.7% in the third quarter of the year. This represents 3.2% growth over the third quarter of 2006, a good performance though Q3 2007 growth was lower than the expected at 0.8%.

The world economy is also doing well, driven by strong increases in the economies of BRIC and Middle Eastern countries, another factor expected to favour a continued growth of the UK economy in 2008.

The credit crunch in the UK appears more likely to result in weaker GDP and consumer expenditure growth than in a recession in 2008.

We forecast a 2.25% growth in UK consumer expenditure in 2008 compared to the 2.5% growth estimated for 2007.

As a result, a moderate decline in consumer expenditure growth combined with the main trends affecting the UK travel and tourism industry will have an effect on tourism expenditure patterns in 2008, but likely less daunting than initially expected.

Credit crunch to favour internet deals over high street sales

The main factors behind growth in UK tourism (especially outbound) in the 2002-2007 period were the success of low cost carriers and internet reservations, as well as the growth of niche types of tourism, such as spa holidays, cultural tourism, activity and adventure travel, and cruises.

These factors will continue to drive the industry performance, with travel and tourism expenditure expected to grow by 2% in 2008.

A weaker growth in consumer expenditure due to the credit crunch can result in some changes in consumer patterns and preferences within a growing industry.

In particular, the trends which are already the most successful today are expected to be further favoured in this situation. Low cost carriers’ cheap fares will become even more attractive, while the search for internet deals will intensify.

Also the trend to prefer cheaper short breaks to longer holidays is expected to be favoured.

Internet transactions sales through intermediaries – £ million

Source: Euromonitor International