Australia's tourism boom is shifting gear, and that's a huge deal for the nation's economy

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Australia’s tourism industry is investing again, and that could prove significant to the nation’s economic growth outlook.

Economists at UBS say capital expenditure plans from the hospitality industry – part of the broader services component of the economy that has cushioned the blow from the falls in mining activity – is now three times the size it was in the previous decade.

This is significant when you consider that Treasurer Scott Morrison has said a priority for the national economy must be to “coax capital from its cave” — in other words, ensure that conditions are right for businesses to feel confident in investing heavily in Australian projects that will deliver a return.

In the tourism sector there is now a huge amount of refurbishment and new construction coming online, as the hospitality industry has become comfortable with the reality that, with a continuing rise in tourist arrivals – including a phenomenal surge in Chinese visitors – there will be steady growth in the sector in the years ahead.

This chart, in a note from UBS today, illustrates the scale of that shift in investment intentions. It shows the levels of accommodation investment – upgrades and refurbishments to hotels and the like – going back to 2001.

Source: UBS.

The UBS economics team – Scott Haslem, George Tharenou, and Jim Xu – explain:

… the better trend in tourism activity is also spilling-over to private investment, reflected in a noticeable increase in the stock of work to be done in the construction of hotel and related accommodation, which has tripled over recent quarters relative to its prior decade trend (Figure 7). At $2.8bn in Q3, this equates to 12% of quarterly non-dwelling capex (up from just 4% in the decade to 2013).

What’s important is that, much like governments building roads and rail to improve the lives of people going about daily life in Australia, this investment in tourism infrastructure is designed to improve the experience of people who come here to visit.

Those investments will create current jobs in their construction phase and then different jobs when the hotels re-open or resume full service. And ultimately, the goal for the investors is they’ll take some profit out of it: it doesn’t just add to GDP in the quarter that it lands, but if there’s demand for what the investment produces, the impact will be felt in an ongoing contribution to overall economic output.

All of this is why economists get so worked up about how weak Australia’s capital expenditure data has been in recent years.

And just look how tourism has been contributing to Australia’s economic activity in recent years:

Source: UBS

Investment cycles for companies are often encumbered by process and the natural tendency for wanting time to get comfortable with an adjustment of the scale that we’ve seen in the 25% devaluation in the Australian dollar since the peak of the mining boom. But the “new normal” has set in, and it looks like the vitally important tourism sector is ready to spend again.

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