Macroeconomic assumptions and pandemic recovery: Widely available and robust vaccination and booster programs led most European and Middle East markets to substantially reduce or eliminate COVID-19 restrictions by Q2 2022, which has increased the pace of recovery and bolstered domestic and international travel. Warming weather and increased ease of international travel have led to strong surges in leisure-based domestic and short-haul international demand, with medium- and long-haul slowly resuming as well.

After a slower start to vaccination programs, Asia Pacific countries are largely vaccinated as well, leading many governments to slowly reduce or eliminate restrictions, albeit at a much slower pace than in Europe or the Middle East. The slowed end to these stricter policies means APAC markets continue to lag the rest of the world in travel recovery. China is the notable outlier to APAC recovery, as the government remains committed to a COVID-zero strategy. The contagiousness of the Omicron variant and lockdowns used to contain it suggest that a gradual border reopening strategy will not begin in China until the end of 2022, which will impact inbound international demand in both China and key source markets like Japan and Australia.

The war in Ukraine has caused uncertainty among travelers to Central and Eastern European destinations, leading markets like Budapest to completely eliminate COVID travel restrictions to counter the demand effects from the war. Refugee movement led to temporary demand growth in some markets, including Warsaw and Dublin, although impacts are expected to end by Q3 2022. Wider Europe, however, has not been significantly impacted. Continued conflict in Ukraine presents modest downside risk to the return of long-haul international travel.

Following Omicron, leisure demand rebounded rapidly and will remain a key demand driver in 2022, although business travel has started to resume and is expected to continue improving over the course of the year.

The long-term recovery outlook has stabilized, with domestic demand expected to bounce back in 2022. International demand is expected to reach pre-pandemic levels by 2023 in the Middle East, 2024 in Europe, and 2025 in Asia Pacific. The long-term outlook should see a moderation in both demand and ADR growth as the impacts of pent-up demand fade and the increased cost of living reduces the excess savings currently driving demand. Economic risks, including a mild recession or persistently high inflation, also present downside risk and could lead to moderation in long-term performance trends.

Short-term outlook: The short-term outlook for STR’s 48 forecast markets is much improved from recent quarters, with 2022 demand and average daily rate (ADR) upgraded for most European markets despite the ongoing war in Ukraine. Drastically reduced or eliminated COVID-era restrictions led to a surge in travel and the influx of pent-up demand, and the wider macroeconomic environment contributed to ADR growth. Demand remains on track for recovery by 2023 for the 32 European forecast markets, while continued ADR growth has pushed rate recovery from 2023 to 2022.

While the APAC demand forecast for 2022 has been slowed, downgrades are concentrated primarily in China and key source markets for Chinese travellers, with the assumption borders will remain closed through year-end. ADR, however, has been upgraded across most markets outside China due to a combination of increasing demand, inflationary pressures, and for Singapore, the gradual release of quarantine hotel rooms. Despite the downgrades to performance in 2022, demand recovery remains set for 2023, with China expected to reopen borders next year. Despite substantial upgrades in Singapore, Sydney, and Mumbai, ADR downgrades in Tokyo, Beijing, and Guangzhou have pushed APAC ADR recovery from 2023 to 2024.

A strong end to EXPO 2020 and expected impacts from other mega-events in the region allowed upgrades to both demand and ADR in the Middle East, with both metrics anticipated for double-digit growth over 2019 levels this year.

Supply methodology: Forecast uses Total Room Inventory (TRI), which assumes no temporary closures related to COVID-19 and accounts for all available hotel rooms in the marketplace regardless of operational status. For historical data, all rooms that we know to be closed have been added back into supply with “0” demand and “0” revenue. An exception has been made via a permanent closures analysis (see next point).

Permanent closures: No changes have been made to the methodology from the February 2021 forecast.
The methodology compares current performance for each market against the worst period of the Global Financial Crisis (GFC) to determine the extent to which hotels are more adversely impacted by the pandemic. This is then applied to the permanent closures observed during the GFC period to determine a new rate of permanent closures during the pandemic. Closures are assumed to take place over a three-year period that began with April 2020, compared with five years during the GFC. Half of these closures are assumed to occur in the first year while the remainder is spread across the following two years. All permanent closures that have occurred to date have been removed.

In Tokyo and Dubai, respective hosts of the Olympics and EXPO, the phasing of these closures was adjusted to expect a lower weighting of closures in year one than in the following two years.

Pipeline: The analysis on delay rates, first introduced with the November 2020 forecast, remains unchanged from the November 2021 update.Delay rates were calculated for all markets based on delays observed since the pandemic began. These rates determined the proportion of new rooms from the pipeline that are likely to be delayed in the near-term. The delay rates have been applied to pipeline rooms scheduled to open between Q4 2021 and Q1 2022 with opening dates pushed back to the following 12-month period (April 2022 to March 2023).

For those projects in earlier stages of development (i.e., planning and final planning), a higher probability of abandonment is applied, and therefore reduces the future supply expected to enter the market in the long-term.

Quarantine rooms methodology: STR’s methodology does not include rooms sold within hotels that are entirely rented or leased out to a health organization or government agency for quarantine purposes. Singapore and New Zealand are exceptions to this guideline, and these regions include historic and forecast quarantine demand in market-level performance.

In both markets, the government contracted with multiple hotels, resulting in high occupancy rates albeit at a lower ADR. While a limited number of hotels remain dedicated quarantine facilities, most hotel rooms in Singapore and Auckland have been released from contract and are again available for normal bookings.

Within STR’s methodology, if a hotel is partially open for quarantine, its rooms are included within market supply as in Abu Dhabi, where hotels can accept quarantine and normal demand.

Events: As in previous updates, we have accounted for canceled and postponed events in each of the markets and assumed lower event attendance than in normal times. At this stage, few to no events have been canceled or postponed in Europe and the Middle East, and calendars in these regions have rapidly filled with rescheduled events. While some events are going ahead in APAC, attendance remains drastically reduced and postponements are more commonplace than in Europe or the Middle East.

Global travel and tourism trends: Global recovery from the pandemic will be further deferred due to effects from the Russian invasion of Ukraine and we now expect global international arrivals to regain 2019 levels by 2025 instead of by 2024 on average. The largest change is evident in the European travel outlook, with impacts strongly weighted towards Eastern Europe.

The conflict will limit travel activity due to three main effects: reduced travel from Russia and Ukraine, including the effects of no-fly zones and airspace closures as well as lingering sanctions; wider economic impacts of sanctions on inflation and disposable income; and sentiment effects due to safety concerns.

Higher commodity prices will add to existing inflationary pressures, including for transportation costs. Many air carriers have had to borrow heavily, including some which also received government support, and those debt repayments will be made more challenging by declining credit ratings and higher financing costs. The slower recovery of business travel and now, the sharp rises in fuel prices, are likely to make higher fares inevitable over time.

Globally, domestic travel will continue to lead the recovery in 2022, particularly domestic leisure travel, while international business travel spending will remain way below pre-pandemic highs throughout the near-term.

Our latest forecast for Europe is still for improvement in international travel in 2022 but includes a downgrade on the prior outlook, and most notably in Emerging/Eastern European destinations. Russia and Ukraine accounted for around 1.5% of Western European arrivals in 2019 but 13.4% in Eastern Europe. More modest growth in 2022 is therefore expected in Emerging European destinations and a deferred overall recovery. Western European international arrivals are still expected to surpass 2019 levels by 2024, albeit more modestly than in prior forecasts (+4%). Travel to Emerging Europe on average is now anticipated to still be 10% below 2019 levels by 2024.

Recovery in the Middle East is expected to be faster than average – in part thanks to major events being held in 2022 in Qatar and the UAE. But Saudi Arabia is also readying itself for a return of religious pilgrimage tourism while also continuing to invest in mass tourism development opportunities.

International travel to Asia-Pacific is set to continue to lag recovery elsewhere in 2022 and 2023 due to lingering travel restrictions. Some notable opening of borders has occurred in Australia and New Zealand, while other countries such as Japan are allowing increasing visitor volumes. However, significant growth is unlikely while China maintains a strict 'covid-zero' policy.

Global macroeconomic trends (source: Oxford Economics): Ongoing lockdowns and restrictions in China have prompted us to lower our Chinese GDP growth forecast for this year and become more pessimistic about the easing of global supply chain bottlenecks. We have therefore lowered our global GDP growth forecasts by 0.4ppts to 3% in 2022 and by 0.1ppt to 3.1% in 2023.

A range of timely activity indicators confirm that China's zero tolerance approach to Covid is taking a heavy toll on the economy. We now expect the Chinese economy to grow by just 4% this year, a downward revision of 0.8ppts from our forecast last month, but the true scale of the economic damage may be bigger than the official figures will eventually show.

Although economic weakness in China could help to reduce commodity prices, the downward influence on global inflationary pressures might be offset by greater price pressures arising from supply chain disruptions. We have nudged up our inflation forecasts for early 2023.

Despite the deteriorating global economic outlook, many central banks in both advanced economies and emerging markets have either tightened policy by more than previously expected or signaled a more aggressive future path for rates. While we have kept our Fed policy rate forecast unchanged, we now expect the ECB to raise interest rates three times this year and see two further 25bps increases by the Bank of England in 2022. We have also revised up our policy rate forecasts for several emerging markets.

It is understandable that central banks have felt the need to raise rates due to inflation dramatically outpacing their own expectations. However, we continue to expect headline inflation rates to fall back sharply in late 2022 and for inflation to undershoot consensus and central bank targets in many economies by late 2023. Against this backdrop, we still think that markets are overstating the likely extent of policy tightening.

While the global economic outlook has continued to deteriorate amid considerably high uncertainty, we would characterize 2022 as a year of weak growth even by post-GFC standards, rather than a lurch towards recession. Indeed, with both the real income squeeze and restrictions in China set to ease in H2, we expect the global economy to regain some momentum in the second half of this year.

Market Forecasts, produced by STR and Tourism Economics, provide you with the insights needed to anticipate future performance. Based on the industry and economic assumptions below, the latest forecasts are available for purchase here.

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