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HAF "The hospitality sector is very representative of this kind of divergence between the macro-economy and the micro-economy"

Nicolas Baverez, Economist and Historian, began the first conference of the Hospitality Asset Forum 2022 by reminding us of the dangers and challenges posed by the current situation with the numerous crises we are experiencing, whether economic, geopolitical, energy, food or health-related.

The idea today is to try to give a vision of this world which is indeed chaotic and complicated lately. History is not linear, it stagnates and then accelerates. At the moment, it is accelerating extremely brutally.

There is no doubt that what has happened this year with the war in Ukraine is a change of era. It is a change of strategic era with the return of war to Europe. An open war in Ukraine, but also a hybrid war involving energy, food, cyber, manipulation of migrants, intervention in our election systems as well as the support of extremist parties.

We are living today in a very particular situation because the world has experienced many shocks but this is the first time we have this combination of crises (energy, food, economic, health and geopolitical). This geopolitical crisis is very important, including for the hospitality sector, because we are moving from an open society in the 21st century to a system that is reconfiguring itself into blocks with more and more closed countries. China is closed for reasons of 0 covid, but behind this are political reasons specific to Chinese totalitarianism. Russia is obviously closed for strategic reasons. These shocks have a strong impact on us as Europeans because Europe is on the front line.

I would like to start by looking at this very singular situation, which I would call "a strange crisis". Indeed, the macro-economic environment is deteriorating very quickly, but on the other hand, from a micro-economic point of view, things are apparently going rather well, particularly in the hospitality sector. Secondly, I would like to remind you why this period is a moment of truth that forces nations and companies to try to make their choices and to chart their course in a complicated world.

The first element is this "strange crisis" because there is this spiral of recession that is underway from a macroeconomic point of view. For the moment, companies are holding up rather well, in fact, the stock market continues to resist in a rather surprising way and corporate profits are on the whole rather good, despite strong tensions on employment. Yet we are in this turnaround phase.

From a macro-economic point of view, the picture is quite worrying. Firstly, the recession is well and truly underway and it is impressive because all parts of the world are in sync with the slowdown, with the exception of the Gulf States which are benefiting fully from the rise in hydrocarbon prices.

In the United States, the slowdown is linked to the rise in interest rates, a sort of technical recession that presages weak growth in 2023. In Asia, the situation is very particular because for the first time Asia is growing faster than China. China is landing on a low growth regime, 3%, because of its demography, the 0 covid policy, the real estate crack, the takeover of companies by the communist party and exports that are increasingly difficult in a world under tension.

Let's take the current situation between China and the United States; on the one hand, China is organising the shortage of rare earths necessary for the ecological transition in the West, and on the other hand, the United States has engaged in a real economic war on semi-conductors. Europe is concentrating all the shocks, while the emerging countries are facing the rise of the dollar, which poses a problem for all those who are indebted in foreign currencies, such as Turkey and Argentina, which are suffering greatly.

When we look at this picture, the world will be growing at 1 to 1.5% in 2023, which is a recessionary situation for the world economy. All the engines will suffer; the consumption engine because of inflation which is eroding purchasing power, the investment engine because of the rise in interest rates which will continue, and international trade in a world where tensions are exploding.

Behind all this lies the chain of shocks, i.e. inflation, de-globalisation, which is linked to conflict, energy, food and the shock of climate change, which we are discovering more and more each day will fuel price rises. Faced with all these shocks, the means for states to intervene are much more limited, as 20% of the GDP of developed countries was already committed in 2008 to avoid global deflation and then during the pandemic. Today, monetary tightening signals the end of free money, so interest rates are rising and will continue to do so. Central banks are not going to dump liquidity anymore because that's one of the sources of inflation.

The second phenomenon which is very interesting is that fiscal policy is also more limited. We had a textbook case with the financial panic in the UK, that is to say an unreasonable economic policy proposal accompanied by an extremely brutal market sanction, leading in a few weeks to the resignation of the Prime Minister. One of the root causes is obviously Brexit but it also shows that the major developed countries that are indebted, with the exception of the US which has the privilege of the dollar, have a financial constraint that applies again.

The last important point is that in this fragmenting world, we have more and more global problems. The 21st century remains the century of universal history with people who are interdependent. This was well illustrated with the war in Ukraine, because even if the war is localised in Ukraine, it has global consequences on energy and food. The question that arises, which we have seen emerge with the G20 and COP27, is "In this fragmenting universe, is there still a capacity to negotiate and cooperate?"

We are currently at a tipping point where for the moment companies and financial markets are holding up. The hospitality sector is very representative of this kind of divergence between the macro-economy and the micro-economy. 2022 is an exceptional year for the tourism sector with a very strong recovery that will continue because the very deep desire to travel, to discover and to reappropriate the world after the pandemic will persist. Business travel is also recovering strongly because technology has its limits.

On the other hand, there are the problems of inflation, deglobalisation and labour shortages. All of this will have a lasting impact, as the decline in purchasing power and inflation will continue. What will change, however, is the pressure on employment, because I think that unemployment will increase. On the whole, we have to take a good look at this situation because there are favourable short-term factors but with all these clouds accumulating.

France and Europe are at the heart of these shocks and there is undoubtedly a rise in the risks for France because the French model is fundamentally unsustainable since we have 1% of the world's population, 2% of world production and 15% of world social transfers. It is therefore difficult to continue like this over the long term, especially with little growth. The risks for France are going to increase, particularly the economic risks, because we are going to have barely positive growth, if not a recession, with potential growth factors that are weak, inflation that is going to be around 5-6% and unemployment that is going to rise. All of this will generate social risk because the energy tariff shield cannot be maintained forever.

There is also a financial risk, as France has a debt of 115% of GDP with a public deficit of around 6% of GDP and a trade deficit that will soon exceed 160 billion euros. This double deficit is a very important risk factor. Behind this, we have a political configuration with a relative majority where the President's capacities are limited. We have a French context that is tilting towards risk.

The situation in Europe is also very complicated as it is undoubtedly the continent most affected by the war in Ukraine. It is an economic, strategic, but also political and moral shock. Everything we tried to do after the Second World War to ensure that the return of war was not possible, unfortunately, no longer works.

When you look at the relationship with the United States, it is spectacular. Globally, the United States will benefit from this conflict because it is self-sufficient and an exporter of energy, and the food, technology and arms sectors will benefit greatly from the current world situation.

For Europe it is very different. If a ratio of 1 to 5 in energy prices between Europe and the United States is established, it is clear that we will have major shifts in activity. So there is a problem with the European model, we have lived since the beginning of the 21st century depending on Russia for abundant and cheap energy, on China for essential goods, on the United States for technology and security. The other difficulty is that we also have a Europe that is divided and fragmenting. This succession of shocks, with countries that have very different structures, leads to tensions.

2022 was a very special year thanks to the tourism sector because Southern Europe was in the recovery. Countries like France, Spain and Greece had an exceptional season. And it is the first time in a very long time that we have had better performances from Southern Europe than from part of Northern Europe, notably Germany.

If we talk in terms of structures, all the models are in great difficulty today. German mercantilism based on Russian energy and exports to the BRICS will not be able to continue, like the French model. Italy is also experiencing difficulties, particularly in terms of its industry, which was one of its main assets. We therefore have a risk of divergence, as all these models are weakened, each one tries to defend itself as best it can, which gives rise to tensions, as is the case between Germany and France in terms of energy and defence. It is a very singular moment with a choice that is ultimately very clear, a choice between change or maintaining a more viable model.

How can we see change for nations and for companies? For France, the paradox is always the same. It is a country with exceptional assets, including the hotel industry, a highly qualified workforce, talent, savings, centres of excellence, infrastructure, technology, culture and lifestyle. In France, we can do everything from industry to tourism and agriculture, but for the moment the overall performance is weak because of a dysfunctional political and social system. The difficulty is that we have to succeed in moving this model at a time of weak growth with a weakened political power whose possibilities are less than before.

Europe is also facing a moment of truth and this moment will be concentrated around two major themes: energy and defence. Europe cannot remain in a situation where energy is 5 to 6 times more expensive than anywhere else in the world, which is devastating. We have forgotten how energy is an absolutely decisive factor of competitiveness. There are possibilities for action, the main one being to regain a sense of production.

In addition, the European Union must put limits on the rise in energy prices. The second and equally important aspect is security, both internal and external. Certainly, economic development and social stability require the ability to have law and order. We cannot allow violence to take hold and proliferate.

This war in Ukraine is ultimately a kind of wake-up call for our countries, especially for the European democracies. Churchill said that you have to take the event by the hand before it grabs you by the throat, and that is what we have to do today. In this reconfiguration of globalisation, Europe must put itself in a position to be an actor in its own right by defending its ways of life and its modes of organisation.

There are positive factors, for example, we are going to see a spectacular acceleration of the climate transition with the explosion in energy prices. There is also a form of democratic awakening. Indeed, we have come from a time when democracies have been on the defensive, 70% of people now live under authoritarian regimes. One of the big lessons of late is that we thought these regimes were more effective in terms of development, social stability, security and driving expansion but now we see that China is facing major economic and social problems, Russia has embarked on a strategic disaster and Iran is facing a population revolt.

The hospitality industry is fundamentally linked to a number of the values that have made the West and democracy successful. That is, the idea of freedom with freedom of movement and freedom to discover others. We have entered a decisive decade of history where things will change a lot and those who do not adapt or refuse to question themselves will face complicated days.

The key words today are "anticipate" because we are in a world where strategy is becoming more and more important and where geopolitics has taken precedence over economics. It is therefore necessary to integrate these factors and to see far ahead, but also to be resilient as the shocks accumulate and accelerate. We also need to innovate more and more because we are witnessing the acceleration of digital technology and the ecological transition. Finally, we must know how to cooperate and be open to others.

As Thucydides said, "to rest or to be free, one must choose". In a way, it is true that our democracies and our companies have relied too much on false ideas. Today, we all need to get back to work.

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