Any lost hours or reduced payrolls in the travel and hospitality sector are likely to fall first on the lowest-paid workers. Throughout the current expansion, job growth in the hospitality sector has consistently outpaced that of the economy as a whole. The sector has welcomed re-entrants to the labor force, boosting the participation rate. This labor-intensive sector needs many cleaners, servers, cooks and drivers when the economy is thriving; when conditions cool, these front-line workers are the first to be culled.
Travel and entertainment are important sectors of the U.S. economy. Restaurants, hotels, transportation and recreation add up to about 15% of U.S. consumer spending. Further, over the past decade the U.S. had seen a steady rise in the number of leisure travelers from abroad, who spend a considerable sum of money while here. In 2018, nearly 80 million international visitors arrived, spending over $156 billion. China’s share of tourist arrivals also grew as its economy thrived, accounting for nearly three million arrivals in recent years. These trips are vital to the domestic economy, as the industry employs nearly 9 million people.
Reticence on the part of travelers was already a poor omen for hospitality workers. This week’s travel ban from the White House added further gloom to the industry outlook. The new prohibition on any foreign traveler entering the U.S. from continental Europe took the whole travel industry by surprise. The restriction affects 3,500 flights per week in a busy airspace, with only a day of notice. The pronouncement required further clarification that U.S. citizens and permanent residents may return to the country, and that goods imports are not restricted—but cargo also arrives in the hold of passenger flights that are now disrupted. Airline share prices plummeted, further shocking an industry already under pressure.
Targeted support to these affected industries may take shape with forthcoming fiscal interventions; if governments can keep companies afloat and stem layoffs, such intervention will be worthwhile. For now, airlines and hotels are offering discounts and more flexible terms to convince hesitant travelers to get back on the road. Indeed, airlines’ waiver of future rebooking fees convinced me to go ahead and reserve my family’s summer flights. For a range of reasons, I am hoping we’ll depart on schedule this July.
Bearing The Brent
The COVID-19 outbreak has led to financial market corrections and weaker demand across sectors. Under these conditions, a modest oil price decline would be no surprise. However, the dramatic price drop that followed last Friday’s collapse of discussions among crude producers sent shock waves through financial markets.
Tensions between Russia and Saudi Arabia pushed oil prices off a cliff. The 24% decline seen last Monday was the biggest single-day drop since the Gulf War in 1991. After Russia refused to lower output, Saudi Arabia slashed oil prices with plans to increase production. Shortly after, Russia indicated similar intent, bringing back memories of 2014 when Saudi Arabia, Russia and the U.S. competed for greater market share. As production escalated, prices plummeted.
Tumbling oil prices couldn’t have come at a worse time for highly oil-dependent economies. While advanced economies are attempting to dampen the economic shock from the virus outbreak in a coordinated way, the oil price war has exposed the absence of coordination between major oil producers. Dealing with the virus threat will be expensive, and lower oil prices will only add to the rising fiscal pressure on petro-economies, particularly in Venezuela (Russia’s ally) and Iran (Saudi Arabia’s main opponent), which has 9,000 confirmed COVID-19 cases.
The move by Saudi Arabia to lower prices and ramp up production to garner market share is seen by many observers as an attempt to bring Russia back to the negotiating table. The price war will hurt Russia, but every oil exporter will feel pain, including Saudi Arabia. Lower oil prices, if sustained, will likely create a big fiscal hole for oil-dependent nations.
According to International Monetary Fund estimates, the fiscal breakeven—the price of oil that balances the government’s budget—is well above current levels in several nations. It is close to $200 a barrel for Iran and over $80 for Saudi Arabia. Russia’s breakeven price of $40 and its floating currency give it a greater cushion against a price decline.