Overview
We are in a period of geopolitical and economic uncertainty: geopolitical uncertainty in relation to the outcome of the Russia/Ukraine war and the impact this will have on European Union’s relations with Russia going forward, the rising power of China and the potential of Donald Trump winning a second term in office.
On the economic side we have uncertainty surrounding inflation (see our special report last summer), uncertainty surrounding rising interest rates and the impact on economic growth and unemployment. Furthermore, the severe lockdowns in China and food and energy shortage from the fallout of Russia’s invasion of Ukraine.
Hence, why Emmanuel Macron’s win in the recent French Presidential election provides a sense of continuity amidst this period of change and uncertainty. A continuity in economic policy within France, but also a continuity within the EU’s policy in a post-Angela Merkel world. Furthermore, Macron’s 58.5% to Marine Le Pen’s 41.5% secured him not only a second term in office but the first French president to secure re-election in 20 years and specifically since Jacques Chirac in 2002.
This report will address the following:
- The importance of tourism within the auspices of ESG
- Macroeconomic policy in a post-Covid-19 world
- Geopolitical and political scenarios worth considering
Hospitality Investment Implications
As one of the largest, fastest, and most consistent growth sectors in the world economy over the last six decades, according to OECD, tourism’s significant contribution to job creation, export revenue, and domestic value added, is well recognised.
More specifically, tourism plays a major role in the French economy with traditional sectors such as accommodation and food services, accounting for approximately 6% of GDP, but tourism also acts as an engine of growth for many other sectors. Total internal tourism consumption, which combines tourism-related spending by both French residents and non-residents, represents over 7% of GDP, with two-thirds of the total impact of tourism is accounted for by French residents.
Direct tourism employment accounts for 1.4 million jobs, and over 2 million when considering indirect jobs. Tourism contributes positively to the balance of payments, with the tourism balance typically contributing between €14 - €17 billion annually. Travel exports accounted for 22% of total service exports in 2018.
EU countries account for 69% of all international arrivals in France, with the top three countries (United Kingdom, Germany and the Benelux countries) accounting for over 46%. A further 10% of visitors come from the Americas and 7% come from Asia.
Figure 1 - Total contribution of travel and tourism to GDP in France from 2012 to 2020 (in Eur bn)
Furthermore, France remains the third most visited destination in Europe after Spain and Italy as depicted in the figure below.
Figure 2 – Tourism destinations – share of nights spent by international guests, 2019
Our own Hospitality Investor Sentiment Assessment depicts Paris as the 2nd most attractive city for Hotel investments in 8 of the 9 quarterly reports, with a third place in one of them. Throughout the period in question, London has maintained the top place, predominantly due to the adverse impact of Brexit having impacted valuations significantly, as well as the cheaper currency.
Figure 3 – HISA Most attractive Cities for Hotel Investments
According to a recent OECD paper on “Managing tourism development for sustainable and inclusive recovery” tourism growth in recent years was economically, socially and environmentally unbalanced, often the result of rapid and unplanned growth in visitor numbers, which can negatively affect not only the tourist experience but also the environment and host communities upon which tourism depends.
The impact of Covid-19 on global tourism was both overwhelming and immediate, with asymmetrical and highly localised impacts. Within and across countries, some destinations are more exposed than others, reflecting differences in the nature of the tourism offer, the impact of travel restrictions on visitor flows, the speed of economic recovery in source markets, the level of exposure to international tourism, and the relative importance of tourism in the economy.
Despite the sector’s resilience to previous crises, according to the OECD, the sheer depth and breadth of the pandemic’s impacts on tourism and the wider economy mean that a quick recovery is unlikely. However, while it remains unclear what long-standing or permanent changes the current crisis will inflict on the global tourism sector, growth is expected to return in the medium-term.
Furthermore, the pandemic has dramatically changed the policy context for tourism. Looking beyond the immediate challenge to minimise the negative impacts of the crisis, foster safe travel and support a sustainable recovery, many countries are now exploring the opportunity to fast track the move to greener, more sustainable tourism development.
We have seen this direct response already from our quarterly Hospitality Assessment on the questions for ESG. ESG continues to take centre stage in investor thinking as they consider more actively the broad interests and influences of stakeholders. Over 80% of investors now take ESG into consideration through their HMA or embedded via other mechanisms, with less than a fifth either not considering it yet or considering how to incorporate it into their operating models.
Figure 4 – HISA question on ESG
Economics
The paradigm of economic management has changed since the eurozone crisis which followed the global financial crisis. The tight Maastricht criteria are no longer observed amongst the EU countries following the pandemic and as a result French state spending has risen to 60% of GDP (with approximately a third of that on welfare programs), a government deficit at 7% and public debt at 112%. These levels are amongst the highest across major economies, but Macron’s reforms during his first term did help to ease labour market constraints and improve the competitiveness with an aim of being more in line with Germany.
As per IMF’s latest report, a surprising upside of France’s economic recovery was its limited adverse impact on investment and jobs. By the end of last year output was almost at par with pre-crisis levels while investment and employment had fully recovered. Labour force participation actually exceeded its pre-crisis level by about 0.5 percent, and given the recovery in employment, led to stable unemployment. In contrast, the recovery in other countries was less balanced, with employment levels yet to fully rebound or investment depressed.
In terms of the economic growth projections for Europe, France has indeed held significantly better than the average EU country and Germany in particular.
Furthermore, investment remained resilient throughout the crisis, supported by government measures and the need to adapt to new work conditions. Compared to the global financial crisis, when investment fell more strongly than output, in 2020 it fell by the same amount (about 8 percent). For non-financial corporates the investment loss was concentrated in a few sectors, such as real estate, and the corporate investment rate was largely unchanged.
The government’s emergency measures prevented a more severe impact on investment, which could have fallen by over 30 percent in the absence of support. Furthermore, the French labour market has responded to the crisis better than expected, reflecting strong public support. Large scale employment losses were prevented by the extensive expansion of the schemes which preserved employment relationships and limited the drop in labour force participation. Labour market conditions are tightening, however, with wage pressures on the rise fuelling higher inflation than expected for the medium term. Furthermore, this labour market mismatch, according to the IMF, could slow the recovery by impacting production if shortages are not resolved, as well as by lowering potential output through productivity losses.
France 2030
Emmanuel Macron, unveiled the “France 2030” investment plan last autumn focusing on sectors of France’s industrial future by the year 2030. Faced with the challenge of the ecological transition, the plan, drawn up with Europe, aims to support the transformation of sectors of excellence in the French economy in the automotive, aerospace, digital, green industry, biotechnology, culture and healthcare.
This is a massive €100 billion investment plan representing the equivalent of one third of the annual state budget, with €40 billion provided by the European Union in order to support businesses, rethink production models, transform infrastructure and invest in training. France was the leading European country in terms of foreign direct investment attractiveness in 2019 and this plan will further bolster its competitiveness and help support its openness to foreign investors.
These structural initiatives touching upon ecology, productivity and workforce may not be directly aimed at the hospitality industry, but the ancillary benefits will be clear and significant. For example, France has an ambitious objective to become Europe’s first major decarbonized economy by achieving carbon neutrality by 2050. To reduce the impact of France’s economic activity on the environment, the recovery plan will significantly speed up the ecological transition. Furthermore, France has chosen to upgrade its production facilities, invest heavily in future technologies (including green technologies), reduce production taxes and increase support for research, training and development of skills and existing national expertise. Last but not least, France will focus on improving its workforce: strengthening skills and transforming vocational training for young people in strategic, high-growth sectors.
Geopolitics
Geopolitical uncertainty was the top challenge of Hospitality investors over the next 12 months according to our latest Hospitality Investor Sentiment Assessment quarterly report. This superseded even inflationary pressures and labour shortages/wages.
Figure 5 – Challenges the Hotel industry may face over the next 12 months
Indeed, as well as the domestic politics within France and within the EU, there are broader geopolitical issues to consider: relations with Britain, with US, with China and with Russia. How do we expect Macron to navigate these relationships in his new term?
Ties are expected to remain frosty with Britain, albeit broadly constructive in relation to Russia and Ukraine. We say ‘broadly’ because Macron had criticised UK for being belligerent when he was reaching out to Vladimir Putin to try and find a diplomatic solution to the impasse. Otherwise, tensions following Brexit will continue as the Northern Ireland Protocol has become even more difficult given Sinn Fein’s success in the latest elections.
Relations with the US have been deteriorating until the latest Russia / Ukraine war, first with Trump and then with Joe Biden following the debacle with Afghanistan last summer and the announcement of AUKUS – the axis between Australia, UK and US with the cancelled French submarine order. The unity on Putin, however, has brought the Western allies together once again, albeit we expect further tensions rising with and increasing probability of a second potential Trump presidency in 2025.
Domestic Politics
Presidential Elections
Macron’s 58.5% to Le Pen’s 41.5% secured Macron not only a second term in office but the first French president to secure re-election in 20 years and specifically since Chirac in 2002.
The latest French presidential election was Macron’s third victory. The first was the Presidential electoral victory in 2017 (a clear coup from within the French establishment) whilst the second was during the 2019 European Parliament elections where he took control of the EU from Germany’s Merkel (who had decided to start handing over the reigns of the CDU in late 2018 and not stand for a further term) with his key appointments of Christine Lagarde as ECB president, Charles Michel as European Council president and Ursula von der Leyen as European Commission president.
Still, the latest developments in France are not uncontroversial. Macron may have won Le Pen decisively in the second round, but the level of nationalist and Eurosceptic sentiment is at its highest point since the second world war, with the highest level of abstention of 28% since 1969. French society is split very much like the UK was during Brexit and US since Trump took the presidency.
The traditional political parties right of centre and left of centre have dwindled whilst the debate permeates more about nationalist versus globalist issues as seen during the gilet jaune uprisings.
The success of Macron to win a second term, the first French president to do so in 20 years, is a positive sign of continuity with the EU project but also a potential hallmark of stability amidst the risk of Biden losing the midterms and opening the road for a second potential Trump presidency in 2024.
As for Le Pen, she has managed to reduce the second-round difference for the third consecutive time and has detoxified the party from her father’s anti-semitic narrative; however, her personal links with Putin and her until recently desire to leave the European Union were held against her. The future of the right-wing movement is most likely to fall to her niece Marion Marechal who decided to join Éric Zemmour’s party, being more true to the spirit pursued by her grandfather Jean-Marie Le Pen.
Legislative Elections
The Presidential elections may now be behinds us, but we still have the parliamentary (legislative) elections in two rounds on 12th and 19th June in order to elect the 577 members of the National Assembly as well as the next Prime Minister. Will Macron be able to maintain his outright parliamentary majority, be forced to govern with a minority or even a ‘cohabitation’ with a prime minister from another party?
The latest developments with Jean-Luc Melenchon having agreed in principle with the Socialist Party to form an electoral coalition may increase the probability of the latter two outcomes – potentially placing Melenchon as the next Prime Minister to replace Castex.
In principle, the agreement according to Politico — which includes the Greens and Communists — means the parties will campaign under a common program and run one joint candidate in the election for the National Assembly on June 9 and 12. The agreement would reportedly allow a Socialist candidate to run unopposed in 70 constituencies. If confirmed, this would mark the first formal coalition for the French left since the Socialist-Green pact two decades ago. If the deal goes ahead, the parties will campaign on policies including raising the minimum wage, capping prices on essential products and lowering the retirement age to 60.
We could foresee tensions with Brussels should Melenchon become prime minister, a Eurosceptic at heart and likely to rattle the cage at a delicate time of necessary EU unity amidst tensions from the East and Viktor Orban’s internal success recently.