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Travel revival is fueling economic recovery and reshaping supply chains in Asia

By understanding the resilience of people flows across the region, companies can better understand shifts in the business landscape.
By understanding the resilience of people flows across the region, companies can better understand shifts in the business landscape.
26 November 2023 •

Travel is bouncing back worldwide as we enter the endemic stage. As the latest DHL Global Connectedness Index (GCI) reveals, cross-border people flows –the number of people traveling to foreign countries – doubled in 2022 as a steady stream of border re-openings kept travel momentum high.

The decisive recovery has continued in 2023, fulfilling the GCI’s forecasts that the sector would revive this year to levels just 5–20 percent lower than before the pandemic. Research shows that globally, international arrivals reached 80 percent of pre-pandemic levels in the first quarter of 2023 alone. In Asia Pacific, airlines recorded a 129.7 percent surge in traffic during August 2023, compared to the same period a year ago – bringing demand up to 76.5 percent of pre-pandemic levels.

“This is clearly good news for Asia Pacific companies offering services in areas such as tourism, work-related travel and international education. From a logistics and trade perspective, more flights can lead to a greater capacity to transport goods across countries,” said Ken Lee, CEO, DHL Express Asia Pacific.

But as travel rebounds, and air passenger demand increases, what has the effect been on sectors such as international logistics and trade? At the same time, what impact is travel’s return having on economic recovery in Asia Pacific more broadly – and where does all this leave the supply chain?

Understanding the impact of travel’s return

Travel and tourism have long played a vital role in Asia Pacific’s economic growth. In 2019, prior to the pandemic, tourism contributed more than US$3 trillion, or 9.9 percent, to the region’s overall gross domestic product (GDP). In 2020, this figure shifted down to 4.6 percent as the pandemic hit.

But today, as consumers embark on a wave of ‘revenge travel’ to satisfy pent-up demand, there are signs that the sector is closing in on its 2019 peak. A recent Visa survey found that travel is currently one of the most important outlay categories on payment cards, with 44 percent of Asia Pacific consumers citing travel as their preferred spending category.

As highlighted by research from the Asia Development Bank, travel’s return looks set to boost economic recovery across the region – helping offset the impacts of elevated food and energy prices caused by recent geopolitical tensions and supply chain disruptions.

This is especially pertinent for hard-hit economies such as Cambodia and Thailand, where tourism accounts for more than 10 percent of GDP. It also bears noting that mainland Chinese tourists spent US$254.6 billion internationally in 2019, forming the world’s largest travel and tourism economy before the pandemic. Within Asia Pacific, these travelers also accounted for 30 percent of cross-border payment volumes – a proportion that will likely only increase as the region’s consumers grow in affluence and, in turn, seek new travel experiences.

A shift in consumer expenditure

Strong retail and hospitality demand in economies including Japan was also bolstered by consumers spending savings accumulated during the pandemic on dining out and other treats.
Strong retail and hospitality demand in economies including Japan was also bolstered by consumers spending savings accumulated during the pandemic on dining out and other treats.

Travel’s resurgence is also contributing to a growth in consumer expenditure more broadly across Asia Pacific. In the first half of 2023, private consumption was the primary driver of economic growth, buoyed by improved labor market conditions. However, the potential for an economic slowdown and recession has also made some Asia Pacific consumers more cautious of total spending. As studies show, people are delaying big-ticket purchases and shopping for cheaper options on everyday items, while still looking for opportunities to indulge themselves.

Forecasts nevertheless suggest that the overall redirection in spending from goods to services will continue, fueled by rapidly rising household incomes across the region’s large emerging markets – especially mainland China and India. As a result, analysts are predicting a service-driven recovery in 2024 for Asia Pacific, and a further boost to GDP growth.

Mitigating headwinds

The rebound of Asia Pacific’s travel and broader services sector is also mitigating challenges experienced in certain categories of merchandise exports. In Indonesia, Malaysia and the Philippines, growth in exports of electronics and other manufactured goods has softened as inflationary pressures elevated commodity prices and monetary tightening in major advanced economies slowed global demand. Singapore was also affected, given its heavy dependence on high-level manufacturing exports, which represented 187 percent of GDP in 2022.

This slowdown in exports is reflected in subdued Asia Pacific air cargo markets. Data from the Association of Asia Pacific Airlines indicates that demand – measured in freight ton kilometers – saw a slight 1.8 percent year-on-year fall in August 2023, compared with volumes recorded in the same month in 2022.

Asia Pacific airlines also recorded a 7.6 percent decline in international air cargo demand during the first eight months of the year, reflecting more subdued growth in global trade flows amid challenging macroeconomic conditions.

Despite this, economic activity in the region remains firmly on track to contribute to about two-thirds of global growth in 2023, according to the International Monetary Fund (IMF). The organization said it maintains its positive 2023 growth forecast for Asia Pacific at 4.6 percent – an increase from the 3.9 percent it registered last year.

Charting a new course for supply chains

Any analysis of travel trends and people flows must also consider the state of the supply chain. Global supply chains play a vital role in the movement of people across borders as they connect people and organizations worldwide.
Any analysis of travel trends and people flows must also consider the state of the supply chain. Global supply chains play a vital role in the movement of people across borders as they connect people and organizations worldwide.

Today, Asia Pacific remains central to global manufacturing supply chains. As geopolitical tensions, inflationary pressures and regulatory changes continue to test supply chain resilience after the pandemic, manufacturers everywhere have continued to rethink their strategies. These ranged from sourcing raw materials elsewhere to relocating production units – with countries across Asia Pacific emerging as attractive alternatives.

Research from KPMG indicates that nearly 71 percent of globally relocated distribution has taken place in the region, with 55 percent of transfers unfolding in Southeast Asia alone.

This is opening up significant opportunities for many Asia Pacific economies. India, for instance, is emerging as a leading sourcing partner across multiple sectors, from electronics to automotive. For example, Apple has doubled its sourcing capacity from 3 percent in 2019 to 6 percent in 2022.

Boosting connectivity through trade partnerships

Attracting foreign investment is also key in developing the high-quality infrastructure needed to deliver effective and efficient cross-regional supply chain flows. Across Asia Pacific, greenfield investments have remained resilient, growing by 6 percent in 2022 – albeit unevenly.

“As the DHL GCI points out, countries within the region tend to have unusually high trade depth. Southeast Asian countries, in particular, benefit from linkages with wider Asian supply chain networks,” said Lee.

Ongoing market integration between these countries via robust trade policies is also helping to encourage economic and trade cooperation and build resilience. Free trade agreements such as the Regional Comprehensive Economic Partnership and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership that facilitate multilateral trade are a significant factor.

All this is leading some commentators to offer a cautiously optimistic outlook for Asia Pacific supply chains in the medium term. IDC predicts that by the end of 2024, 40 percent of Asian-based supply chain organizations will have rebalanced resiliency efforts to reflect the realities of inflation and will, therefore, be in a strong position to recover up to two percentage points of margin.

A solid foundation for meeting future challenges

Analyzing travel trends – especially in the broader arena of people flows and connectivity in general – can help businesses identify new opportunities to expand their footprint.

In the case of Asia Pacific, the picture of economic recovery that emerges through such an analysis is largely a positive one.

“The resilience of people flows across the region and with the wider world provides a strong incentive for countries and companies to stay engaged – even in the face of geopolitical tensions and successive global shocks,” noted Lee.