Economic factors such as income growth (usually measured by a proxy such as GDP) and exchange rates are key drivers of airport passenger demand in the short to medium term.
In its January 2015 update to the World Economic Outlook, the International Monetary Fund (IMF) marked down its global growth projection for 2015 and 2016 to 3.5% and 3.7% respectively, down by 0.3 of a percentage point relative to the October 2014 outlook. While global growth is expected to receive a boost from lower oil prices, this boost is projected to be more than offset by negative factors.
The IMF revisions reflect a reassessment of prospects in China, Russia, the Euro area, and Japan as well as weaker activity in some major oil exporters because of the sharp drop in oil prices. The United States is the only major economy for which growth projections have been raised.
Growth in the advanced economies is expected to increase from 1.8% in 2014 to 2.4% over the following two years. The US economy is posting the strongest growth with domestic demand supported by lower oil prices and favourable monetary policy. However with weaker investment prospects, recovery in the Euro area is projected to be slower than previously forecast, with annual growth projected at just 1.2% in 2015 and 1.4% in 2016.
Growth in the emerging market and developing economies, which had reached a pre-GFC peak of 8.6%, is expected to be stable during 2015 at 4.3%, before increasing to 4.7% in 2016 (although down on previous forecasts). The downward revision is partly due to slower forecast growth in China and a weaker outlook for Russia; investment growth in China has declined while Russia has been impacted by lower oil prices and increased geopolitical tensions.
The chart below shows annual economic growth rates for selected countries/regions from 1992 through to 2014, together with IMF estimates/projections to 2019.
GDP Growth to 2014 and IMF Outlook to 2019
Source: IMF World Economic Outlook October 2014, with January 2015 Update.
The impact of the 1997/98 Asian Financial Crisis on the economies of the ASEAN-5 and China, and to a lesser extent the 2008/09 Global Financial Crisis (GFC), is evident in the above figure. The advanced economies slipped into recession during the GFC, with the Euro area “double-dipping” again in 2012 and 2013. The forecasts show the sluggish recovery expected for the Euro area.
The IMF points to downside risks stemming from uncertainty about the oil price path, and from shifts in sentiment and volatility in global financial markets, especially in emerging market economies. Stagnation and low inflation are still concerns in the euro area and in Japan. Geopolitical risks are expected to remain high.
Exchange rates and differential inflation rates impact upon the price of a country as a destination relative to competing destinations. They have a significant impact on the mix of residents and overseas visitors amongst international passengers at major airports:
- An appreciating currency, combined with a strengthening economy would be expected to result in an increasing proportion of residents in the international market mix.
- A depreciating currency would be expected to hold back resident overseas travel, while stimulating international visitor arrivals from markets with strong economies.