COVID-19 is not just a health crisis!
iStock photo of a colourful Jamaica palm tree beach and sunset.
With Raymond Campbell
The COVID-19 pandemic has unleashed unprecedented uncertainty across global markets as the world still grapples with containing the virus and the economic implications that arise from the mitigation measures employed.
March 2020 saw both the US and Jamaica governments implementing restrictions on travel, with the result that airline and cruise travel all but stopped. The absence of guests has meant that several major hotel chains across the country have halted operations. At the time of writing it is not known how soon the tourism sector is likely to resume normal business operations. This brief newsletter provides an initial examination of the economic impact of the COVID-19 crisis for the Jamaican tourism sector and the overall economy.
In order to make an informed estimate of the impact on tourism earnings once the crisis is contained and the industry reopens, we have tried to identify the relationship between US GDP and tourism earnings. We performed regression analysis on US GDP (real) (“the independent variable”) and Jamaican tourism earnings (“the dependent variable”) over a 35-year period (1984 to 2019).
Our analysis indicates an elasticity of 2.09 between US GDP (real) and Jamaican tourism earnings. This means that each one per cent change in US GDP (real) results in a 2.09 per cent change in Jamaican tourism earnings.
Tourism earnings sensitivity to US GDP
Figure 1 plots the annual tourism earnings and US real GDP from 1984 to 2019 and shows that the tourism earnings tend to move in a similar direction to US economic activity.
1* Jamaica Tourist Board Annual Statistics Reports /US Bureau of Economic Analysis
Forecasting Possible Post-COVID-19 Tourism Impact
We looked at recent studies on the forecasts for changes in US real GDP in 2020. As a caveat, the forecasts for changes in US GDP (real) are highly volatile, given the continuous updates in the mitigation efforts across the US.
To demonstrate this volatility in forecasts, KPMG Economics in January 2020 forecast an increase of 1.6 per cent. On March 19, 2020 KPMG Economics revised the forecast to a decline of 4.3 per cent. Other estimates produced in the week ending March 27, 2020 forecast declines in US GDP ranging from eight per cent to 12 per cent.
Our analysis took three scenarios in account and attempted to estimate the decline in tourism earnings once the industry resumes activity. Stated differently, the declines we estimate do not include the COVID-19 crisis management period when travel restrictions are in effect and earnings are significantly compromised.
Players in the tourism industry will need to react to the disruption in the market and focus on business restructuring, capital planning and financing strategy activities. KPMG Advisory Services is well equipped to help our clients navigate these complex matters by leveraging our global network of expertise.
Raymond Campbell is a partner and head of advisory at KPMG in Jamaica.