Belfast Telegraph

How your dream holiday country copes with economic apocalypse

Angela McGowan, chief economist at Danske Bank, takes a look at how the economies of your breakaway destinations will affect your vacation

So how is your holiday destination faring? It's holiday time again and the temptation to get on to the internet and book a few days of guaranteed sunshine is increasing.

For Northern Ireland holiday-makers prepared to travel by plane, Europe is by far the most popular destination. The availability of direct flights combined with relatively short travel distance means that we can find ourselves somewhere warm and balmy in as little as two-and-a-half hours from local airports.

Although many households across Northern Ireland will spend endless hours on the internet researching potential European resorts, hotels, campsites, local cuisine and even predicted temperatures – tourists rarely bother to find out anything about a location's economy.

Yet the prevailing economic climate in holiday destinations can easily impact upon the visitor experience. For example, tourists do not want to be caught up in anti-austerity demonstrations which have been a prominent feature across some European cities in the last couple of years.

The economic climate as well as government economic policy can also result in industrial action or strikes, which can be a huge headache for tourists, particularly when public transport is affected. On the upside, however, weak European economies can mean better value for money for tourists when the local prices are falling in holiday resorts and the tourist industry in these countries is much more appreciative of its customers. So this year, before you head off to the sunshine, let's find out exactly how your chosen destination has been faring.

The Spanish housing market boomed prior to the financial crisis and credit expanded rapidly. In less than a decade Spanish household debt tripled. Spaniards now refer to this period as 'cuando pensábamos que éramos ricos' – 'when we thought we were rich'. But since the housing market bubble burst so dramatically, house prices have fallen by 27% and are still falling. Although Spain was granted up to €100bn (£85bn) from the European Central Bank (ECB) in financial assistance for the country's banking sector, credit still remains a big problem for this economy.

Corporate bankruptcies remain highly elevated compared to pre-crisis levels. A huge challenge for Spain is the unemployment rate at 27% and youth unemployment, which is now sitting at 55%. But good progress has been made with the Spanish budget deficit which is currently 7% of GDP – although still high, this is well down from the 2009 level of 11%.

Spanish bond yields have fallen back to pre-crisis levels thanks to ECB policy and, so far, financial markets have not lost confidence in Spain. Without doubt recent labour market reforms are making Spain more competitive and in May the country recorded its first monthly trade surplus for 40 years.

While exports in wine, olive oil and traditional products continue, there has also been healthy growth in sophisticated exports like pharmaceuticals, software and mechanical components.

Portugal has a long history of weak growth and is one of the poorest countries in the euro area with GDP per head sitting at 55% of the euro area average. Large and permanent government budget deficits are also a key feature of the Portuguese economy and in May 2011 the EU and International Monetory Fund (IMF) had to approve an €80bn (£69bn) rescue package. In the past decade, spending and wages have been growing out of line with productivity. This has given rise to escalating foreign debt, which is currently above 100% of GDP.

The economy has now shrunk for 10 quarters in a row. But, due to the weak economic conditions, Portugal has been given extra time to reduce the government deficit and repay rescue loans.

In the latest IMF, EU and ECB review it was noted that "program implementation remains broadly on track, against the background of difficult economic conditions. The end-2012 fiscal deficit target was met, financial sector stability has been safeguarded, and a wide range of structural reforms is progressing". The Portuguese economy specialises in industries such as wine, textiles, footwear, furniture and fish. ButPortugal has a relatively unskilled labour force and only 32% of the working age population have an upper secondary education compared with a euro area average of 74%.

THE French economy is the fifth largest in the world measured by nominal GDP and accounts for about a fifth of euro area GDP. France weathered the global crisis better than most advanced economies due to its large public sector and substantial fiscal stimulus. But the recovery after the crisis has been extremely weak and GDP has been almost unchanged since 2011.

All three of the major rating agencies currently have this country on negative outlook.

The government debt-to-GDP ratio is very close to the euro average but the deficit is high.

The economic outlook for France remains very weak with several indicators pointing to a deepening recession, which will put additional pressure on its budget.

The retirement age in France is 60 and the average number of hours worked per week is relatively low so the need for labour market reform is high.

But reform in France does not come without significant protest.

For any tourists tempted to buy a holiday house – prices are high and affordability looks stressed. Price declines of 10%-20% in coming years should not come as a surprise.

After a decade of almost no growth, Italy is currently trapped in a severe recession, with negative growth since Q3 of 2011.

We now expect the recession to continue throughout 2013 but growth of around 1% is expected in 2014. Italy has made several labour market reforms but is still struggling with very low productivity growth.

The business climate is hampered by significant bureaucracy. The World Bank's Doing Business report ranks Italy as number 73, just after Romania. Corruption is deep-rooted, which distorts incentives and hampers productivity growth.

Traditional economic sectors include furniture, luxury leather goods and textiles. The country's specialisation in the labour-intensive production of luxury goods limits its scope for productivity gains.

Greece has been in recession since 2008 and real GDP has now declined almost 25%. When financial markets lost confidence in Greece during 2010, it was forced into an EU/IMF programme. Since then it has received more than €340bn (£290bn) in rescue packages and has had to implement severe austerity measures.

The country has undertaken substantial reforms and improved its business climate significantly from a poor starting point. This is reflected in a large jump to rank 78 in 2013 (from number 109 in 2011) in the World Bank's Ease of Doing Business ranking. The Greek government beat its budget targets in 2012 for the first time since the crisis erupted. The deficit excluding support to Greek banks amounted to 6% of GDP, which was better than the forecast of 6.6%. Unfortunately, strikes and protests are common in Greece and have drawn much media attention.

In Q2 this year prices fell into deflationary territory for the first time in 45 years. Although the sterling/euro exchange rate is not as favorable as last year; tourists can console themselves with the fact that prices of olives, feta cheese and wine should be falling.

Belfast Telegraph

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