In the first quarter of 2009, tourism spending in real terms in Canada dropped by 5.1% quarter over quarter at annual rates (q/q AR). The decrease was driven by declining discretionary incomes plus a severe erosion of consumer and investor confidence.

This was the largest quarterly decline since the outbreak of Severe Acute Respiratory Syndrome (SARS) caused tourism spending to plunge by 13.5% (q/q AR) in the second quarter of 2003.

Reflecting the relative fiscal health of Canadians versus their U.S. neighbours, spending on tourism by Canadians fell by a relatively modest 0.5% (q/q AR) in Q1/09, whereas spending by international visitors, 80 per cent of whom come from the U.S., dropped by 20.7% at annual rates in the quarter.

Given that the Canadian dollar had dropped by 19% year over year versus the U.S. dollar, it appears that the stimulative impact of the weaker Canadian dollar was totally offset by the weak economic fundamentals south of the border — rising unemployment and falling consumer confidence.

With respect to the near term outlook for tourism spending by non-Canadians, a number of signs suggest that it may be turning the corner. These include a 1.1% increase in the number of international travelers to Canada in April, plus the effects of lower gasoline prices (-90% y/y). There has also been a steady increase in U.S. consumer confidence since February 2009.

Turning to the prospects for tourism spending by Canadians, the outlook is also better than it was at the start of the year. As in the U.S., consumer confidence has strengthened, while prices at the gas pump are 25% lower than they were a year ago.

Furthermore, given the relative drop in value of the Canadian dollar, the incentive to travel closer to home is significantly greater than it was just six months ago.

Finally, reflecting weaker demand for accommodation across the country, average daily room rates are down by 3.5% year over year to their lowest level since July 2003, according to PKF Consulting.

Spending on Tourism: Total, Resident and Non-resident

Data source: Statistics Canada/Chart: Reed Construction Data — CanaData.