There is no doubt that the global economic downturn is having a detrimental effect on the tourism sector. Annual visitor arrivals peaked in March 2008 at 2,497,000 p.a., just 3,000 visitors shy of the 2.5 million per annum milestone that some industry observers expected to be achieved last year.

The last three quarters of 2008 saw falls in visitor numbers of 3.6 percent (June quarter), 2.1 percent (September quarter), and 1.5 percent (December quarter) compared to the same quarter the previous year. However, it should be remembered that the global financial crises did not fully enter the lexicon until September 2008. The initial decline in visitor numbers was actually caused by the high exchange rates of 2007. Now depressed global consumption demand is offsetting any gains we would have seen from the recent lower exchange rates. Things were improving after a poor performance in 2006, until ever higher exchange rates choked off tourism demand after 2007. The financial crisis has only been an aggravating factor. Considering the characteristics of our tourism market, and expecting the impact of the crisis to only be moderate (due to an appropriate government response), the rate of decline of visitor numbers should only reach about 2 percent per annum in mid-2009 and positive growth will return by mid- to late-2010.

The most important characteristic of our tourism market is its dependence on Australia as a source country, from where roughly 40 percent of our visitors come from. About the same number of these visitors are classed VFR (Visiting Friends and Relatives) as are purely holidaymakers. Hence the health of the sector is closely tied to our ability to sustain growth in these market segments.

Fortunately, despite current conditions, growth in the number of Australian visitor arrivals is still positive although a little subdued. Similarly New Zealand is still receiving more holiday and VFR tourists from China, Germany, and Canada. So the sector has been somewhat sheltered from the worst effects of the downturn.

The relative buoyancy of the Australian market segment is probably due to recent price competition and added capacity on the Tasman routes. The large drop-off in visitors from Japan and Korea is a concern, but this is just the continuation of a trend for these countries that began even before the high exchange rates of 2007. The global situation has only worsened what was already an emerging problem. The negative annual growth figure for China is caused by a 42 percent reduction in the number of Chinese business arrivals in the year to January 2009. This amounts to 8000 less business arrivals, and now Chinese VFR arrivals outnumber business arrivals (15,600 per annum and 10,900 per annum respectively).

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The demand for commercial accommodation has been falling in line with the fall in tourist arrivals, with some regions and provider types more affected than others.

The volume of guest nights purchased in the last three quarters of 2008 was lower than the same quarter of 2007 by 1.6 percent in the June quarter); by 3.7 percent in the September quarter; and by 1.3 percent in the December quarter. The December 2008 quarter saw domestic guest nights up 4.1 percent compared to the same quarter of 2007. However, this was entirely due to growth in October of 15 percent over October 2007. The following two months saw declines in domestic guest nights of 0.7 percent and 1.0 percent respectively. Over the same quarter, international guest nights fell 7.6 percent compared to the year earlier level.

As we might expect, the destinations that depend most on international visitors are being hit the worst. Overall guest nights fell 7 percent in the December 2008 quarter for Rotorua and Queenstown and 3 percent for Christchurch, while Auckland saw no growth. Over the same quarter, Wellington appeared to perform well with 5 percent growth. However, all these main centres including Wellington saw worse monthly results in November and December than in October. This is because domestic guest night growth has been slowing and turning negative as noted above. This is a particular problem for Queenstown but Auckland has sufficient domestic guest nights growth to offset the decline in international visitors.

With domestic tourists only partially replacing the missing international visitors, accommodation providers are seeing their occupancy rates fall. The annual average occupancy rate for 2008 was 37.4 percent compared to 38.0 percent in 2007. However, motels, hosted accommodation and backpackers have been hit disproportionately harder with percent-point falls in occupancy rates of 5.2, 5.6, and 3.1, respectively. Caravan parks only saw their occupancy rates fall 0.6 percent-points and hotels had a 0.8 percent-point increase. Hosted accommodation, which is less utilized by domestic tourists than the other accommodation types, is feeling the loss of international tourists more acutely, especially in Rotorua and Queenstown, where their 2008 occupancy rates have fallen 16 percent-points and 6 percent-points, respectively, relative to the previous year.

While it is clear the tourism sector is experiencing difficulty at present, and will have a moderately slow 2009, it should be remembered that New Zealand now receives almost one million more visitors per annum than it did just ten years ago. The challenge for the industry is to ensure that the current global crisis does not significantly affect the fundamentals underlying that long-term growth trend. In short, NEW ZEALAND must remain open for business.

 - reprinted from BERL Forecasts, March 2009