• Interesting times ahead

The UK is set for a 16.1% slide in revpar this year, according to TRI Hospitality Consulting. And the outlook for much of the rest of Europe is no better and in some cases, notably Spain, it is significantly worse.

Compounding the gloom are the latest economic forecasts, most notably from the IMF. This foresees a recession that will be deep and a recovery that will be slow.

The TRI projections were updated this week from numbers put out in February. Back then the downside scenario was for an 18% drop in London revpar and the central case was for 10%. This week the outlook was for the 18% drop in London.

The provinces are barely better, with again February's downside scenario of a 14% drop (the central case was an 8% fall) becoming the official forecast.

Particularly scary was the small print in TRI's forecasts which states that it was premised on UK GDP contracting by 2.6% in 2009. Given that the forecast of a 3.5% contraction made in this week's UK budget was widely viewed as being overly optimistic, risks are clearly on the downside.

Today, official figures showed the first quarter GDP drop was 1.9%. To even achieve the 3.5% drop predicted by the UK Treasury will require a significant turnaround in the final half of this year.

More positively, TRI pointed out that UK hotels will maintain a profit conversion at a higher level than they did in the early 1990s. "UK hotels are better prepared for recessionary times than they were in 1991 due to a combination of structural reforms to cost bases during the intervening years and far greater access to markets through today's enabling technologies," said TRI in its HotStats UK 2009 document.

Another positive comment was that TRI expects the recovery from recession for hotel to be quicker given that the time lag before hotels reacted to the recession this time has been much shorter. "Any reaction to more positive economic news will be more rapid than during the 1991 recession," said TRI in its document.

Both rate and occupancy are expected to suffer, with occupancy in London falling from 79.8% to 71.8%, year-on-year. Rate falls from £103.10 to £84.88. The provinces are set to suffer a drop in occupancy from 68.3% to 62.4% and rate from £45.55 to £39.08.

This brings us to the economic outlook. The IMF expects the UK to suffer a GDP contraction of 4.1%, this is 1.3 percentage points worse than it forecast three months ago. And to make things even gloomier, the IMF also expects a contraction of 0.4% in 2010.

In Europe's biggest economy, Germany, the outlook is particularly severe, with a drop of 5.6% in 2009 and of 1.0% in 2010. And the Euro area as a whole is expected to be just as bad as the UK, falling by 4.2% in 2009 and by 0.4% in 2010.

Perhaps surprisingly, Spain, which is set to have the worst hotel market, according to most industry estimates, is to suffer comparatively slightly, down 3.0% in 2009 and down 0.7% in 2010. This ought to give pause for thought to those making a straight forward linkage between GDP and revpar performance.

The IMF said that the rate of contraction should moderate from the second quarter of this year onwards but it warned that GDP will still fall by 1.3% in the year with countries representing three-quarters of the global economy in decline.

Growth is expected to re emerge in 2010 but at 1.9% it would be sluggish relative to past recoveries. A key problem envisaged by the IMF is that stabilising financial markets will take longer.

This is mainly caused by the ever increasing total of losses from securitised assets and distressed loans. The IMF now reckons this will hit $4.1 trillion globally.

Back in October, the estimate of likely losses was put at $1.4 trillion. This only included the US but even so, the figure for the US is now $2.7 trillion, almost double. Plus there is $1.2 trillion in Europe and $150bn in Japan to make the unhappy total $4,100bn.

The IMF pessimism is based on its research that shows recessions associated with both financial crises and global downturns are unusually severe and long-lasting.

The problem for the IMF researchers was in working out how economies responded to fiscal and monetary expansion in the face of recessions. Most of the evidence showed some positive response but it was often not statistically significant.

It is beyond the scope of this journal to get into a long-winded discussion about this but it is worth noting the unprecedented nature of both the scale of the current problems and the massive policy responses. There is little in economic history to give clear guidance on what lies ahead.

The IMF view is gloomy for three key reasons: negative feedback from asset price, credit and investment declines; reduced consumer wealth; and the synchronisation of recessions around the world. Deleveraging is necessary, believes the IMF, before we will see a major turnaround.

The one piece of good news for hotel investors and the wider property industry is that the bounce back for industries with high "asset tangibility" is less dependent on a full credit recovery. (MBA types can take a look at p121 to p123 of the latest World Economic Outlook report available on the IMF website http://www.imf.org/ and play with the equations).

I remain unconvinced that households will attempt to rebuild their wealth by saving substantially more given that their wealth was primarily connected to the value of their homes. It seems to me much more likely that households will simply wait for the value of their houses to increase and carry on spending as before provided they have not been impacted via job losses or salary cuts.

There will be an impact where households have used equity in their homes to fund spending but I doubt this is as widespread as popularly perceived.

In fact, some households have seen net income rise substantially thanks to lower mortgage rates (about a third of the UK mortgage market is on tracker rates).

The IMF also looked at how successful previous attempts at introducing financial stability after a crisis have been. The upshot of this is Sweden good, Japan bad.

With Sweden and its 1990s banking crisis, more than 90% of the government outlay for the rescue was recovered within five years.

For Japan, whose crisis started in 1990, just 10% was recovered within five years and it took until 2008 before 90% was back.

The Swedes succeeded by moving quickly to establish independent asset management companies which removed bad assets from troubled banks.

If governments do move quickly to establish similarly effective programmes – the US and UK governments both look nearly there – then the present fears about public debt will prove overhyped as the bulk of the bailout cash will be returned to taxpayers.

What will remain is paying back the usual debt associated with recessions, albeit that this one is a big one and will leave a big hole.

Nobody knows how the recession is going to play out. There are huge risks. But taking calculated, measured risks is what business is all about and this is surely one of the most interesting times to be in business.

This reminds me that the oft-quoted Chinese proverb – may you live in interesting times – has two follow-ups of increasing severity: may you come to the attention of those in authority; and may you find what you are looking for.

The recession has already brought us to the attention of the authorities. Will we soon find what we are looking for? If the current IMF forecasts do prove accurate this time, we probably already have.

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