• Worst recession since the war ‚Äì so was the last one

The global economy is headed for the slowest growth since the Second World War, according to the International Monetary Fund.

This 0.5% of expansion could lead to tourism stagnating or falling by as much as 2% during the year, estimates the World Tourism Organisation.

How bad will it be? Well, as ever, it depends on who you listen to. Two economists who will feature at the International Hotel Investment Forum in Berlin in March this week had similarly gloomy outlooks.

Holger Schmieding, chief economist at Bank of America, predicted a period of sharp but short pain for the Eurozone with a deep recession that will end by mid-2009.

"We project by far the worst cumulative loss in output for the last four recessions," he said. The slump in growth this year in the Eurozone is, at 2.6%, not as bad as for the UK which is forecast to drop by 3.2%.

Schmieding's outlook for the current year is worse even than Roger Bootle's of Capital Economics. Bootle, sometimes known as Doctor Death, reckons GDP in the Eurozone will contract by 2.0% and the UK by 2.5% (which is still the worst year since 1947).

But Bootle lives up to his billing by being gloomiest on the outlook in 2010. Whereas Schmieding sees the Eurozone growing at 1.6% in 2010 and even the UK sputtering back to life with 0.8% growth, Bootle believes there is little prospect of a strong recovery in 2010 in the Eurozone and the UK will continue to slump with a 1.0% fall.

The economists also differ on what we need to worry about. For Bootle, the fear is deflation. Businesses and households are set to suffer from long-term falling prices with both impacted by rising real debts and falling asset prices.

Schmieding, however, argues that core inflation is close to 2% in the Eurozone and it would take probably a three-year depression to push core inflation into the danger zone below -1%.


HA Perspective: It does seem as though the economy is not only falling but also that the speed of drop is increasing. And nobody knows exactly when it will stop dropping or how far it will drop.

The constant revisions, downwards, to estimates are only exacerbating the sense of doom. The IMF, for example, just two months ago said that the UK would see its economy contract by 1.3%. Now it forecasts a 2.8% drop.

And the UK, although now at the bottom of the list in terms of the performance of major economies, has not had the deepest revisions in the past two months. France, for example, saw its outlook pegged back by 1.7% on the outlook given in November.

Most worrying though, from a global perspective, is the retreat in evidence for the newly industrialised Asian economies. Their revision was a whopping 6.0% down to a negative growth rate of 3.9%, worse than for any of the major economies.

It was not long ago that the East was going to rescue the West. Jim Rogers, the high profile investor who was a former sidekick of George Soros, has even gone so far as to say the UK is finished and we should be focused on Asia. That looks less convincing now.

The IMF said: "The uncertainty surrounding the outlook is unusually large." Indeed. The IMF's own attempts at forecasting make this clear.

The main uncertainty focuses on the impact of Government action. There has been a huge monetary boost to economies around the globe thanks to the slashing of interest rates and this takes nine to 12 months to feed through to GDP, according to Schmieding among others.

Also underway are a series of fiscal stimuli, ranging from the VAT cut in the UK all the way through to the massive $819bn package being pushed through by the new Obama administration in the US and only slightly smaller effort (at around $585bn) already in the works for China.

Regardless of what happens towards the end of this year, the near term looks bleak as consumers and companies react in a precautionary fashion and limit spending.

The World Tourism Organisation painted a contrasting picture of the two halves of the year. The first half to June saw global tourism grow by 5% but the second half saw a contraction of 1%, leading to growth for the year as a whole of 2%.

But it also points out that the four years to 2007 saw growth averaging 7%, markedly above the long term trend of 4%.The medium term picture is thus surely one of resuming trend growth.

And the medium-term should be where hotel investors fix their focus, (providing they can survive the short-term).

In the interim, it is a game of chance as to which forecast is right. The one certainty is that most will be wrong. The problem for the forecasters is that their models are based on past performance.

Figures are input from what has happened and trends are then discerned. Just as they have failed to spot the turn on the way up, they will surely fail to spot it on the way down.

Historically, when we are in the depths of a downturn, forecasters and media pundits are typically far gloomier than how things eventually turn out. Let's just hope this is now the depths.

By the way, Hotel Analyst is a media sponsor in Berlin and you can catch me interviewing both Bootle and Schmieding on the first day. See www.berlinconference.com for the programme.

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