The Impact of the Business Cycle on Service Providers

Abstract

For service providers, it is essential to understand how their business is affected by the macroeconomy. This is especially pressing for the tourism sector, the world’s largest export service, because the number of incoming visitors is likely to be strongly determined by the business cycles in the countries of origin. Utilizing state-of-the-art business-cycle metrics, we derive novel insights on the relationship between international tourism and the business cycle. We find an excess sensitivity of the sector to economic cycles based on a multidecade data set of international visitors to New Zealand coming from multiple counties and with various visitor purposes. However, we find no asymmetries in the speed of adjustment across contractions and expansions, suggesting a quicker recovery than many other (nonservice) sectors. Moreover, a higher cyclical volatility results in higher growth in the long run. A robustness check for two more destination countries (Australia and Japan) yields comparable insights. The results underscore the need to closely monitor the cyclical sensitivity and long-term growth prospects of the various visitor streams into the country, in order to (i) better tailor the accommodations and services to these streams and (ii) exploit diversification opportunities to reduce the overall cyclical volatility.