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The current economic situation and how it will affect the hotel industry

The UK’s economy is a huge focus at the moment, having been thrown into uncertainty in recent weeks following the Government’s new ‘mini-budget‘ and appointment of Rishi Sunak as prime minister, after Liz Truss’ resignation. 

It’s believed that the economic situation is the worst that it has been for many years, but is there a silver lining for the hotel industry? In this blog, we will take an in-depth look at the current economic climate and its potential benefits for the UK’s hotel industry.

Are we heading for a recession?

After weeks of financial turmoil, the UK is expected to slide into a deeper recession than previously forecast according to Goldman Sachs.

The appointment of the new Prime Minister, Rishi Sunak, has eased tensions in the bond market, stabilising the US-GBP currency pair, however, the country still faces “profound economic challenges”. A four-quarter cumulative decline in GDP of 1.6% is now expected, which will possibly create a recession next year, with the labour market still tight.

What about costs?

A low-valued Pound brings many economic challenges, one of which being how it affects importing and exporting. Due to currency exchange rates, UK exports become more competitive with a plummeting Pound – good news for those exporting goods. However, a low valued Pound has the reverse effect on importing, something that many UK hotels use for their goods.

Often, UK hotels import things such as gas, fuel, food, and technology, and these imported goods play crucial roles in their daily operations. For these hotels, their Pounds will not stretch as far when buying these crucial resources due to the currency exchange rates, meaning they will effectively be spending more money on the same goods. It is neither simple nor quick to find alternative sources for these goods, and so the situation will undoubtedly be concerning for many hotels within the UK.

"However, with hotel rooms now appearing cheap to overseas travellers (read below), it may be that an increase in occupancy rates, especially off-season, can compensate for these extra expenses. "

The scrapping of the freeze on alcohol duty rates is a measure that will also hugely affect the hospitality industry, where it’s likely that prices will have to be hiked in the coming months. The scrapping of VAT-free spending for international customers may affect the hospitality industry too, potentially driving tourist spending into the EU.

A silver lining

Despite the weakness of the Pound and current economic uncertainty, there still seem to be some silver linings for the hotel industry. The implications of a weaker Pound are that visiting the UK from overseas becomes cheaper due to the currency conversion rates. Those from overseas will have their money stretching further when converting their currency into Sterling, which will encourage tourism within the UK from overseas. This is something that will inevitably benefit the hotel industry as a result.

The weaker Pound has the reverse effect on those in the UK. Travelling abroad becomes more expensive as the Pound will not stretch as far given its current value, something that will drive domestic tourism within the UK. As a result, this will pump fresh money into the hotel industry within the UK as the British public will likely be turning to city breaks rather than overseas holidays – good news!

According to Reuters, hotel prices will keep increasing in 2023 in most of the key cities for business events worldwide, as the demand for in-person meetings grows after pandemic disruptions

Corporate travel managers and buyers have been dealing with difficulties in securing accommodation at good prices, while hotels struggle with inflation and talent shortages amid a rebound in tourism and business events. The consulting firm said:

“While hotels can continue to benefit in 2023 from pent-up demand for in-person meetings and events, the global economic outlook is unlikely to allow them to achieve rate rises on the same scale as seen in 2022”, the report added.

Rates in London are forecast to rise by up to 6.2% next year, as hotels face inflationary cost increases for labour and energy, the study said. 

The company suggested that forecasting hotel prices after two years of pandemic-related travel disruptions and uncertainty over the global economy was challenging, with their data team having to combine historical transaction data with macroeconomic factors to generate the prices forecast for 2023.

Opportunities for hotel developers

Across the UK, the public policy of “levelling up” — restoring economic imbalances and creating job opportunities — is quite popular. As cities and local governments are under pressure to provide jobs, taxes and balanced books, land is being released for real estate development, including hotels.

There is an opportunity for hotel brands to partner with their local council to develop more hotels, as the local Government has a big part to play in the regeneration of their area to create more jobs and demands.

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