Summer tourism brightens eurozone economy but cost of living crisis casts shadow

Perched on a cliff on the Amalfi Coast, overlooking the azure waters of the Mediterranean, the Hotel San Pietro Positano is having its best year as pandemic-weary travellers, especially Americans, flock to Italy.

The hotel, charging an average rate of €1,800 per night for a room this summer, noticed a pick-up in April and is fully booked until mid-October. “For two years, nobody was able to come,” co-owner Vito Cinque said. “Now everybody does.” 

The eurozone’s tourism boom, aided by the single currency’s fall against the dollar, is one bright spot in a region that economists are increasingly concerned will fall into recession over the second half of this year.

Figures out on Friday showed the currency area’s economy grew by 0.7 per cent between the first and second quarters, a stronger result than the 0.1 per cent economists had forecast and a sharp contrast with US gross domestic product figures for the same period, which showed the world’s largest economy shrank for the second quarter in a row.

France, Italy and Spain all posted better than expected numbers as visitors flocking to Mediterranean destinations and enjoying city breaks helped offset the impact of surging energy bills and higher food prices on domestic demand.

Mohamed Ichem, who sells macarons at Ladurée near Paris’s Tuileries gardens, said most of his customers are English-speaking. “Tourists spend without counting,” said Ichem. “My biggest order was eight boxes of 54, for over €1,000.”

Adama Touré, who manages Le Castiglione — a brasserie minutes away from the Ritz hotel in the French capital’s chic Place Vendôme, said: “Americans are enjoying themselves in every way . . . I just served a plate of caviar to a group of them.”

Ignacio de la Torre, chief economist at asset manager Arcano, calculated that about a third of Spain’s second-quarter growth — which came in at 1.1 per cent, against just 0.2 per cent in the first three months of the year — was driven by tourism.

María Frontera, president of the hoteliers’ association on the Spanish holiday island of Mallorca, said the occupancy rate reached 93 per cent this month, five percentage points higher than in July 2019, the summer before the pandemic began. “We expect similar levels in August and demand for the autumn is continuing to rise,” she said.

But by the time the weather cools European businesses and consumers will face more economic pressure. The war in Ukraine has left the region’s factories, barely recovered from the pandemic, facing fresh supply chain woes. Germany’s more manufacturing-dependent economy stagnated in the second quarter, missing analysts’ expectations of a slight expansion and highlighting how grave the situation is for northern economies that can rely less on hospitality.

Russia’s invasion and doubts over Moscow’s willingness to keep gas flowing to Europe has triggered a surge in households’ energy costs, which are up by 40 per cent over the past 12 months, while food costs are up by 10 per cent over the same period, leading to the worst cost of living crisis in decades.

Marina Lalli, president of Italy’s National Federation of Travel and Tourism Industries, said resorts catering to more ordinary Italian families were under pressure. “People have to struggle to pay utilities, fuel for their cars and food prices have also increased. [Italians] are deciding either to not go on holiday at all — or, instead of staying 10 days, they are staying a week, or just three days.”

Confidence figures out last week from Eurostat, the European Commission’s statistics bureau, show that consumers are more reluctant to make big purchases than at any time since the early months of the pandemic.

That pessimism is unlikely to stop the European Central Bank from raising rates further in the autumn, after making their first increase in decades when they increased the benchmark deposit rate by 50 basis points to zero in late July.

“We expect the ECB to raise [the rate] by a further 100 basis points by the end of the year to help prevent any rise in inflation expectations as inflation rises even further over coming months,” said Holger Schmieding, economist at Berenberg Bank.

Overall, eurozone inflation rose to a fresh record high of 8.9 per cent in the year to July, according to figures on Friday from Eurostat, the European Commission’s statistics bureau. Even the core measure, which strips out the surge in food and energy costs, was up 4 per cent — more than twice the ECB’s 2 per cent goal.

As interest rates rise and tourists return home, economists expect the growth figures to worsen — especially if tensions with Moscow intensify. Russian energy firm Gazprom has cut flows through its Nord Stream 1 pipeline, which runs under the Baltic Sea to Europe’s largest economy, to just 20 per cent of capacity — levels that if sustained would trigger a sharp recession in Europe.

“This quarter brings good news, but does not tell us much about the underlying health of the economy,” said Gilles Moëc, chief economist at French insurer Axa. “What happens after the summer ends?”